New Industrial Supply Struggles to Keep Pace With Absorption in Milwaukee
Metro Milwaukee’s industrial market continued to be a strong performer in 2016, and this strength should continue for the foreseeable future.
We’re now seeing a healthy uptick in new industrial development, and even speculative development in select submarkets. While the demand for industrial space has continued to increase, the new supply has failed to keep pace.
Sustained quarterly absorption without a sufficient corresponding increase in new product coming to market continues to keep vacancy rates hovering around 4 percent, near the record lows, according to Xceligent and CoStar.
The new industrial construction that is occurring continues to be driven by users expanding, relocating or consolidating their existing facilities and by limited build-to-suit developments undertaking Milwaukee-based firms such as Wangard Partners Inc., Phoenix Investors LLC and Briohn Building Corp.
Spec building returns
Speculative development is still relatively rare, but developers such as Zilber, HSA Development and Interstate Partners are all venturing into the speculative realm and with favorable results so far.
HSA, for example, recently completed a 214,000-square-foot speculative building in Waukesha, and Zilber continues to build and fill buildings in the I-94 South corridor. In late 2016, Zilber unveiled plans for a 163,716-square-foot facility in Franklin and a 72,324-square-foot facility in Pleasant Prairie.
In addition, large national and regional developers such as Liberty Property Trust, Ryan Cos. and Opus have all become more active in the Milwaukee industrial development market. Due to Milwaukee’s strong recession-proof fundamentals, there should be more interest in Milwaukee from non-Milwaukee developers and investors in the future.
With the relative lack of new industrial product in the Milwaukee market and historically low vacancy rates, the market for existing buildings both for sale and lease has remained quite strong. The number of industrial sales and leasing transactions has remained steady.
Scarcity of product
There continues to be a shortage of available properties both in certain size categories and in various submarkets. Buildings over 100,000 square feet are particularly in short supply, as are buildings in most size categories in the Waukesha County and North I-41 submarkets.
During 2016, this constricted supply exerted continued upward pressure on both lease rates and the sales price per square foot. Buyers and tenants are now feeling measurable increases in both prices and lease rates.
Among recent high-profile industrial deals in the Milwaukee market:
- Kem Krest, a supply chain and fulfillment services provider, leased 277,454 square feet at Liberty Properties’ warehouse in Pleasant Prairie;
- Ariens, which manufactures snow blowers and lawn tractors for commercial and high-end consumer markets, leased 601,439 square feet at First Industrial Realty Trust’s development in Kenosha;
- Bentley World Packaging repurchased its 261,560-square-foot facility in Glendale and subsequently entered into a sale-leaseback;
- Lindner Logistics purchased a 190,000-square-foot distribution building in Pewaukee.
The limited availability of quality land sites continues to be an issue for users and developers of industrial space in the Milwaukee market. There are business parkland sites readily available along the southern border of Milwaukee County near I-94, but most other available industrial land sites tend to be located on the periphery of the market or infill sites.
The City of Milwaukee has undertaken an ambitious industrial infill project called Century City. This project consists of 45 acres of developable land. The first 53,000-square-foot speculative building has already been constructed.
Rizzo Development has targeted an infill site along West Capitol Drive in Waukesha County for a multi-building park. Meanwhile, Mortara Instrument purchased and tore down an existing building in order to construct its new headquarters on the northwest side of Milwaukee. Projects such as these will continue to be announced as market fundamentals remain strong and land supply remains tight.
Cap rate advantage
Investors in industrial properties showed continued interest in the metro Milwaukee market in 2016, as was evident in the sale-leaseback of Bentley World Packaging’s Glendale facility to RCM Funds and Phoenix Investors’ purchase of numerous industrial properties throughout 2016. While large national and regional investors have yet to return in force, there should be more attention paid to Milwaukee by such investors in 2017.
Milwaukee remains an attractive market for investors interested in competitively priced industrial product. What’s more, investors who had been focusing on other markets until they became overpriced are rediscovering Milwaukee.
The industrial vacancy rate is low, absorption has remained strong, and there is a stable, diversified economic base. Perhaps most importantly, cap rates average 100 to 150 basis points above those found in primary markets such as Chicago. 2017 should see more investors looking seriously at the Milwaukee market and more large industrial investment deals getting done.
In sum, 2017 will likely be another good year across the board for the Milwaukee industrial real estate market. The fundamentals are in place for more speculative development, albeit at a measured pace. Existing industrial property owners should continue to see their properties increase in value, and rents will see steady upward pressure.
Investors will continue to increasingly take note of the fact that they can achieve greater returns, without taking greater risk, by investing in the Milwaukee industrial real estate market.
-By James T. Barry III, CCIM, President, The Barry Co. This article first appeared in the March 2017 issue of Heartland Real Estate Business magazine.