The southeastern Wisconsin industrial real estate market had a banner year in 2019 and remains strong. According to Catalyst, the industrial market in southeastern Wisconsin had a vacancy rate of approximately 4 percent at the end of 2019 and that rate has moved down slightly to 3.9 percent during the first quarter of 2020. This rate is well below the historical vacancy rate in southeastern Wisconsin, which averages between 7 and 9 percent.
Several submarkets are significantly lower than the southeastern Wisconsin average: Racine, where the massive Foxconn project is underway, has a 3.8 percent vacancy rate; the large Waukesha submarket, which has nearly 83 million square feet of inventory, has a vacancy rate of 1.9 percent; and the Sheboygan submarket, which has about 27 million square feet of industrial space, has an astonishing 0.1 percent vacancy rate.
These extraordinarily low vacancy rates suggest that demand for industrial space in southeastern Wisconsin remains very robust and that, particularly in certain submarkets, supply has not been able to keep up with demand. While lease rates have remained fairly steady throughout the last year, upward pressure on such rates continues to build. Nevertheless, there are some signs of the market taking a bit of a pause. In the first quarter of 2020, it appears that the absorption of industrial space is trending down from the astronomical 1.5 million square feet that were absorbed during the fourth quarter of 2019. However, absorption for 2020 is still on track to remain strongly positive.
South I-94 corridor
Large industrial developments continue to drive metropolitan Milwaukee’s strong industrial market, particularly along the south I-94 corridor. Major developments include a massive 2.6 million-square-foot distribution center for Amazon in Oak Creek, a 300,000-square-foot warehouse development being completed by Hillwood in Mount Pleasant, and well over 1 million square feet of new development being completed by Logistics Property Co. in Kenosha along I-94.
Other industrial developers who continue to be active in the south I-94 market include Zilber Property Group, Venture One Real Estate, Ashley Capital, First Industrial Realty Trust, Ridge Development and Stag Industrial.
In addition, large companies such as Uline are rolling out new 1 million-square-foot-plus buildings. And, just recently, Blackstone Group purchased 11 large industrial buildings totaling 2.7 million square feet along the south 1-94 corridor from CenterPoint Properties. In short, the industrial corridor extending south from Milwaukee is expanding rapidly and will continue to do so in the foreseeable future.
Other hot submarkets
In addition to the south I-94 submarket, there continues to be substantial development and transaction activity throughout metro Milwaukee. One of the strongest submarkets remains Waukesha County, where developers such as Briohn Building, Interstate and Westminster continue to have success with newly developed industrial buildings. These buildings tend to be smaller than the massive distribution centers in Racine and Kenosha, but, due to very limited developable land and strong demand, these building have filled up fast.
Another submarket that has seen rapid industrial development is the Germantown submarket in Washington County. Zilber recently completed a 700,000-square-foot distribution center for Briggs & Stratton at Highway 167 and I-41 in Germantown, and that development immediately sparked several additional industrial developments in that quadrant. An area that was a series of farm fields only a year ago will be the home to several million square feet of new industrial product by the end of 2020.
One consequence of the strength of the industrial market, both in metro Milwaukee and nationally, is that investors have become desperate to buy industrial properties and are willing to pay for them. One example of this was the recent sale-leaseback of the 170,000-square-foot Harken industrial property in Waukesha County. Harken, one of the world’s largest manufacturers of marine hardware and accessories, sold and leased back its property for $15 million to a private investor, a price over 50 percent higher than the assessed value of the property and an historically low cap rate.
National and regional investors such as Stag, Brennan Investment Group, James Campbell Co., Phoenix Investors and SARA Investments have all been very active buying industrial investment properties in the Milwaukee market in recent months.
Concerns on the horizon
Real estate is a cyclical business, and the industrial market in southeastern Wisconsin has been on an up cycle since the aftermath of the Great Recession. The question is how long this up cycle can continue to run. While the fundamentals of the market appear very strong, macroeconomic factors — such as the effect of the coronavirus pandemic — can quickly take the air of the industrial market’s sails. The effect of this pandemic remains to be seen.
For now, though, the Milwaukee industrial market stands on a very solid foundation. Even if the current vacancy rate doubled, we would merely be back to historical averages. And Milwaukee’s highly diversified economy and frugal, conservative culture has historically withstood economic shocks with far more resilience than other metro areas. I am cautiously optimistic that the Milwaukee industrial market will remain strong well into the future.
— By James Barry III, President, The Barry Co. This article was originally written for the May 2020 issue of Heartland Real Estate Business magazine.