Late to the Economic Recovery, Madison’s Office Sector is Now in a Growth Mode

The Madison office market finally emerged from its post-recession stupor in 2015 and chalked up its best performance since the early 2000s. The 430,000 square feet of positive net absorption recorded last year exceeded the combined total of the previous three years.

This strong trend continues in 2016. Nearly 150,000 square feet of office space was leased during the first quarter, driving the vacancy rate down to 10.2 percent.

The Madison office market was slow to recover from the Great Recession. As recently as 2014, office vacancies increased, and only 67,000 square feet of net positive absorption was tallied that year.

As the state capital and home to the University of Wisconsin, the local economy depends on government and education as base industries — sectors where employment and spending had been retreating until recently.

Insurance, financial services, medical services, research, information technology and software development are also important and growing sectors in Madison, accounting for a lot of new office leasing activity.

Who’s taking space? 

Rob Helm,

Rob Helm, Helm Commercial Real Estate

Among the large lease deals in recent months: Arrowhead Research  inked a deal to occupy 68,000 square feet in University Research Park; M3 Insurance completed and moved into its building at 828 John Nolen Drive; Mead & Hunt acquired a 60,000-square-foot building in Middleton; American Family Insurance leased 51,000 square feet at 345 Coyier Lane; and the Wisconsin Department of Health Services leased 52,000 square feet at Washington Square.

Recent sales of larger office properties could be described as the final house cleaning of the area’s distressed real estate. The Bank of New York Mellon Trust Co. sold 25-49 Kessel Court in February to a local health service organization. The 77,000-square-foot, three-building office park sold for $30 per square foot. 

Meanwhile, Flad Development & Investment Corp. acquired the 81,000-square-foot Pyare Square building for $47 per square foot. And the 63,000-square-foot former Mead & Hunt building at 6501 Watts Road sold for $840,000.

The largest office sale recorded in Madison over the last couple years was the 203,000-square-foot High Point Office Park, part of the Vanta Commercial Properties’ portfolio. Arthur Goldner & Associates Inc. of Northbrook, Ill., purchased the property in April for $12.6 million.

Construction accelerates

Commercial development in the last several years has been dominated by multifamily projects. Eighty percent of the major development projects approved and built in the City of Madison over the last two years included apartments. The top 50 of those contained almost 6,000 units, setting a new benchmark for apartment development.     

Mixed-use has been a common formula for delivering large multifamily projects, especially to the downtown. The concept of live-work-play in the same location is very popular with urban planners and millennials who envision dense urban environments with more activity, walkable neighborhoods and less auto traffic. It’s a formula that’s earning market acceptance and delivering a lot of new commercial space in addition to apartments.

Those top 50 projects also contained almost 500,000 square feet of office and retail space. There is no better example than Gebhardt Development’s redevelopment of the 700-800 block of East Washington Avenue. Phase I, completed in 2014 and known as the Constellation, features 220 apartments and 32,000 square feet of commercial space — now home to Google.

Phase II of the development, known as the Galaxie, will contain more apartments and a Festival Foods grocery store set to open this year. Gebhardt’s Phase III calls for a 150,000-square-foot office component and a 35,000-square-foot performing arts center.

Another noteworthy downtown mixed-use project is the 12-story Ovation 309, located at 309 W. Johnson St. Hovde Properties combined 248 apartments with 60,000 square feet of office and retail space.

Epic real estate impact

Epic Systems Corp., a developer of medical records software, now employs 9,500 people and continues without pause to expand its campus in Verona, a Madison suburb. The company occupies numerous buildings on its 540-acre campus, many imbued with fantasy or historic elements, giving the facility a theme park ambiance. 

Epic is a big factor in the regional economic picture, driving employment growth by creating 3,000 new jobs in the last two years. The company is also serving as a springboard for local entrepreneurs and high-tech startups and is helping fill a lot of new apartments.   

Promega Corp., a Fitchburg company that creates products for genetics research, expanded its campus in 2015 with the 126,000-square-foot
Kepler Center. Promega created Fitchburg’s first business development, Fitchburg Center, in 1987. Since then, the suburb has approved three additional business parks and is well stocked with shovel-ready sites.     

The City of Middleton, a suburb with a population of 25,000, listed on Money magazine’s best places to live four times in the last 10 years, has been a very active player in office and commercial development.  In recent years, extensive use of tax incremental financing enabled Middleton to entice a Costco store, Spectrum Brands’ 206,000-square-foot office headquarters and the Mead & Hunt building.

Other new projects include the $21 million Pharmaceutical Product Development building; the American headquarters for Fiskars Corp., the Finnish consumer products company; and a 40,000-square-foot, multi-tenant building at 2501 Parmenter St., which was completed and fully occupied in the fourth quarter of 2015.

Terrence Wall broke ground in May on redevelopment of the Old Middleton Centre, six office and retail buildings constructed in the late 1970s and early 1980s in downtown Middleton. The developer will ultimately construct seven buildings, 206 apartments, 66,000 square feet of office and retail space, along with structured parking. 

The City of Middleton is fostering the transition with financial assistance. According to the Wisconsin State Journal, Wall plans to replace the existing six buildings’ combined 53,000 square feet of retail and office space with 30,500 square feet of retail, 36,000 square feet of office space and 206 apartments across seven buildings on a three-acre site. Hopefully, this project, which will be completed in three phases, will result in a livelier street scene.

Given such a healthy volume of activity on the leasing and development front, it’s hard to argue with the conclusion that the Madison office sector, both CBD and suburbs, is riding a wave of momentum in 2016. 

— By Rob Helm, founder, principal broker, Helm Commercial Real Estate. This article originally appeared in the July 2016 issue of Heartland Real Estate Business.

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