A steady, growing economy and a pro-business climate continue to be a boon to Wisconsin's commercial real estate market.
Investors surveying opportunities in the state are seeing the same thing: growth and more growth. The state's vibrancy is apparent in everything from its increasing population to its expanding business base.
That activity is permeating virtually every corner of the state from the southeastern cities of Madison and Milwaukee, through the Fox Cities and Green Bay, as well as encompassing Wausau in the central part of the state and LaCrosse and Eau Claire to the west.
Another characteristic of the state's economy is stability. "It's a very conservative marketplace," says Barry Chavin, a senior vicepresident with The Mooney LeSage Group in Milwaukee. "Wisconsin has been experiencing steady growth over the past eight years, and that is not likely to change in the near future."
The Washington, D.C.-based Corporation for Enterprise Development (CFED), rated Wisconsin among the best economies in the nation in its 1997 Development Report Card of the States. Wisconsin made the CFED's honor roll for the seventh straight year, and this year the state received "A" grades for economic performance and development capacity.
That positive economic environment is reflected in a thriving market. Last year activity reached a 12-year high with $1.98 billion worth of commercial construction permits issued, according to the Associated General Contractors of Greater Milwaukee.
"I think the overall market throughout the state is extremely healthy," remarks Max Rasansky, an executive vice president with The Polacheck Co., Milwaukee. "Every indicator is that it's going to continue over the next year or so."
However, the state's increasingly tight labor market could reign in economic growth. In 1997, Wisconsin's unemployment rate was a low 3.7%. Still, some observers are confident that the supply of workers is adequate to meet business needs.
"If you're paying good wages and benefits, labor is not a problem," says Bruce Kepner, manager of economic development for Madison-based Alliant Utilities.
$60M project leads office growth Office developers are once again busy in Wisconsin. The Madison CBD has seen considerable office development over the past 12 to 18 months.
"We are seeing a substantial amount of speculative development in the suburban office market," confirms Jim Barry III, principal of James T. Barry Co. Inc./Colliers International in Milwaukee. "Nearly 2 million sq. ft. of speculative office space is under way, proposed or contemplated."
The most significant project underway in Madison is the $60 million Block 89 office/retail project on Capitol Square in downtown, which marks the largest project ever undertaken on the square.
Construction also started this spring on a new 84,000 sq. ft. American Center office building along Hwy. 151. Office rates in Madison are holding steady amid new construction. Rates start at $13 to $14 per sq. ft. net and run as high as $16.50.
The suburban Milwaukee office market is very healthy, while Milwaukee's CBD is relatively flat. Vacancies in the CBD have finally dropped below 10%, but sluggish activity in B and C buildings have pushed overall vacancies to about 17%. Vacancies within the suburban Milwaukee market average 15.9%, according to a 1998 market report conducted by The Polacheck Co. And while the suburban Milwaukee office market is strong, considerable new development may slow absorption.
Opus Corp., Told Development and Wispark have about 300,000 sq. ft. of office space under construction in Milwaukee, according to The Polacheck Co.
One major project in downtown Milwaukee will be the redevelopment of the 600,000 sq. ft. Marshall Fields building. Irgens Development Partners has teamed with private investor William Orenstein to acquire the building. The partners plan to convert the building to a multi-use project that would include office and retail space, and possibly a limited service hotel.
"The complexion of downtown Milwaukee is being transformed to more entertainment-based," explains Mark Irgens, president of Irgens Development Partners LLC, Milwaukee. "The city has made a great investment in the River Walk, as well as its new convention center, the Midwest Express Center."
The office market also remains active in outlying communities throughout the state. Appleton's West College Avenue near the airport has seen nearly 50,000 sq. ft. of new office space developed within the last year and a half, says Jim Esler, a senior vice president of brokerage at Mooney LeSage for Fox Cities and Green Bay.
The healthy office climate also is attracting investor interest. "There is a lot of sales activity taking place right now. Last year numerous institutions and private investors were looking for product from Madison to Milwaukee and the Fox Valley," explains Pat Gallagher, president of Siegel-Gallagher Inc., Milwaukee.
However, up until now buyers have been settling for individual properties because few portfolios have been on the market, but now more portfolios are coming on line. "Owners are taking advantage of the cyclical highs in the market right now," Gallagher adds.
Acquisition prices also are peaking. The 100,000 sq. ft. Deer Creek Corporate Center in Brookfield recently set a new high of $125 per sq. ft. Great Lakes REIT Inc. is another aggressive buyer that recently paid $124 per sq. ft. for the 380,000 sq. ft. Milwaukee Center. First Industrial Realty Trust, CenterPoint Properties, Liberty Property Trust and Prentiss Properties are a few of the other groups looking for acquisitions.
Big-boxes spur industrial surge "The market for industrial is very strong, and it has been for quite some time," the Mooney LeSage Group's Chavin explains. "Current occupancies in southeastern Wisconsin average 95%."
The one area that has seen a slowdown, however, is smaller unit office/warehouse space. "That is a significant change from the last several years, when demand within that market niche was at a feverish pitch," Chavin adds.
However, when the small-user market slowed down, big-box demand took off. Bulk warehouse market space is now the most active sector.
The demand for sites has pushed vacant business park land prices to a premium. Land is selling for $35,000 to $85,000 per acre for select sites. The Franklin Business Park in Milwaukee recently broke ground on the third phase of the park. The move, which is six years ahead of schedule, landed another 200 acres of land on the market.
Another Milwaukee area park, Gateway Commerce Center, is selling out at a rapid pace. The 150 acre park has two-thirds of its land under contract or sold after just two years, Chavin says.
The same phenomenon is occurring further north in Menomonee Falls, where the Silver Spring Corporate Center also sold out quickly.
"We've seen four years of very solid performance," agrees Jerry Franke, vice president of Wispark Corp. in Pleasant Prairie. Wispark has seen 3 million sq. ft. of build-to-suit activity within its seven business parks in the past four years. One of Wispark's flagship parks is Lakeview Corporate Park in the Kenosha area, which has sold 600 acres.
"The Kenosha area continues to grow because of its proximity to Chicago," Franke says. "Thirty-four of the 55 companies in Lakeview Park are from the Chicago area. Other developments have seen about half their clients coming from Illinois."
However, some industry observers expect industrial development to start slowing over the next 12 to 18 months. A tight labor market, the Asian crisis and overbuilding are factors that could slow construction over the next year.
Still, the industrial market is posting healthy numbers. Basic industrial space is selling for about $30 to $35 per sq. ft., while space that has some office build-out, expansion potential or a long-term tenant is selling for upwards of $40 per sq. ft. A 409,000 sq. ft. multitenant industrial project on Richards Street in Milwaukee sold earlier this year for $3.6 million.
Category killers enter retail market "In retail there continues to be considerable interest from big-box type tenants," says Bruce Westling, an executive vice president with Mooney LeSage.
Typically, retailers look to establish a presence in Milwaukee or Madison and then move into other markets. However, land availability is altering that plan.
"The interest is still there, but the actual expansion has slowed because the lack of available land has driven up both land prices and rental raises," Westling adds.
Retailers such as Jewel-Osco, Kohl's Food Stores, SuperSaver, Pick-N-Save, Kohl's Department Stores, Wal-Mart, Menard's and Home Depot are planning new Wisconsin stores and driving up rates. Small tenants are already paying $15 to $18 per sq. ft. on triple net leases.
Although construction activity slowed in 1997, development is picking up again this year. Approximately 137,000 sq. ft. of new retail space was developed last year, compared to the average of 538,000 sq. ft. from the previous four years, according to The Polacheck Co. The slowdown in construction has pushed occupancies higher to an overall 93%, and vacant space in prime areas is scarce. Waukesha and Dane are the two fastest growing counties in the state, and Waukesha County has nearly 493,500 sq. ft. of new retail space proposed for 1998.
Outsiders enter multifamily arena Multifamily development is picking up statewide. Opportunities for new construction exist in Milwaukee and Madison, as well as many smaller communities. "One of the main factors for that activity is that there has been very little new product built in the last 20 years, and many of those properties are in need of updating," says Peter Ogden, president of Ogden & Co. Inc. in Milwaukee.
Downtown Milwaukee has seen a boom in new multifamily development with about 600 new units proposed for development. Construction also is on the rise in Madison where a $30 million residential and commercial project has been proposed that would create 169 apartments and 120 condominiums.
Outside investors are making their mark on Milwaukee's multifamily market. Equity Residential Property Trust entered the Milwaukee market with the acquisition of four properties, including the 595-unit Harbor Pointe Apartments, which sold for $24 million.
Hotels dip while acquisitions rise According to Tenn.-based Smith Travel Research, Wisconsin's hotel occupancy rates are down 6% in 1998, with average daily room rates dipping to $58.32.
Some of the state's stronger areas are the western and northern suburbs of Milwaukee. In Madison, four new hotels added about 280 new rooms to the market in 1997.
Investors aren't having a problem finding new opportunities, however. Last year, Dallas-based Olympus Real Estate Corp. and Montclair Hotel Investors of Bannockburn, Ill., purchased two properties from Bergstrom Hotels.