CRE v Wisconsin

Few signs that Milwaukee's commercial roll is about to slow

Few signs that Milwaukee's commercial roll is about to slow,ph01
The Muir Woods Research & Technology Center in the Milwaukee County Research Park in Wauwatosa is an example of a suburban office project that is attracting considerable attention.

How long can Milwaukee’s commercial real estate surge continue? There’s no clear answer to that, but two key CRE professionals working in the city say they expect the good times in Milwaukee to continue at least throughout much of 2019

And after that? There might be a slowdown. But don’t expect a commercial real estate crash. Milwaukee’s strengths are too attractive to developers and investors for the CRE market to completely tank here, these CRE experts say.

Consider how busy developer Irgens has been. The company is taking on several high-profile projects in Milwaukee and its suburbs.

And Tom Irgens, vice president at Irgens, doesn’t expect this to change anytime soon. He said that the Milwaukee commercial real estate market is an especially vibrant one today. This is reflected in the high-profile projects that developer Irgens is taking on.

The biggest project that Irgens is bringing to downtown Milwaukee is the BMO Tower, a 25-story, Class-A office tower at 790 N. Water St. in the heart of the city. That project is now under construction and is expected to open near the end of this year. Anchor tenants so far include BMO Harris Bank, Michael Best & Friedrich and Heartland Advisors. As of early this year, about 160,000 rentable square feet of office space and 12,000 square feet of retail space were available for lease.

Irgens said that this project should spur even more commercial construction in the area.

“I believe this project will have a significant impact on the area,” Irgens said. “It’s an urban in-fill site, and it will definitely change the feel of that part of downtown. BMO wanted to make a statement with this building. This venture will really help the surrounding area. There has always been a strong office presence in this part of downtown. This project will drive even more users to this portion of downtown Milwaukee.”

What’s especially interesting about this project is that Irgens is actually developing two new buildings here. BMO Harris will move its headquarters into the new building at 790 N. Water St. when it is completed. But this means it is leaving behind a building next store, a 20-story tower at 770 N. Water St.

Irgens will begin redeveloping that building once BMO leaves it. Irgens bought the property from BMO Harris for $7.1 million.

What eventually fills the redeveloped space is not yet certain. Irgens said that his company is contemplating several uses. A portion of the building might become a hotel. That would leave about 130,000 square feet of office space for the upper floors. The renovated building might include a residential portion, too, Irgens said.

Irgens said that the building would be an attractive one for office users.

“The office market would support this opportunity. It would be unique, too, for a large office user to occupy those floors,” he said. “You’d have high visibility on the building signages at a competitive rental rate and be in the heart of Milwaukee’s central business district.”

Irgens said that these types of projects have become possible because downtown Milwaukee is seeing a boom today. Developers have poured millions of dollars of new development into Milwaukee’s central business district and surrounding areas since the end of the recession, Irgens said.

It’s not just office, either, that has hit downtown Milwaukee. Irgens said that the addition of several multifamily projects has boosted the city’s downtown, too.

“There are numerous hotels and multifamily projects being planned for the urban center of Milwaukee,” Irgens said. “We are seeing other office users coming to the area and moving into existing buildings that have been repurposed. We see a flock of suburban users coming to downtown Milwaukee.”

That doesn’t mean that the Milwaukee suburbs aren’t seeing activity of their own. Irgens is seeing a high level of demand for office and apartment projects in the first-ring suburban areas of Milwaukee. These new projects include plenty of amenities of their own to make them attractive to companies and renters, Irgens said. Suburbs like Wauwatosa and Brookfield are seeing their own construction booms, Irgens said.

As an example, Irgens points to his company’s own Muir Woods Research & Technology Center in the Milwaukee County Research Park in Wauwatosa. The 85,000-square-foot office building will be built on the last developable site in the park and should be completed in the late spring of this year.

“Certain suburban locations are more successful than others for office development,” Irgens said. “It has to do with the overall geographic location. You need ease of access. That is a big driver for companies. The tenant occupants will look at different heat maps of their team member’s zip codes. They will look at what is most convenient for most of their workforce. Wauwatosa is one of those desirable suburbs. Its location allows employers to draw from all parts of our metro region. It has been a successful location for us.”

Other features that make suburban office parks desirable even though they’re not in the heart of downtown Milwaukee? It comes down to urbanization. Employees increasingly want to work in office settings that feel like urban ones, even if they’re in the suburbs.

Employees want to be able to walk to restaurants or parks. They want nearby retail options.

“It’s more about developing experiential real estate,” Irgens said. “You need the fundamentals of good buildings with good floorplates where tenants can realize efficiencies. But also, what is outside of those four walls matters, too. The amenities in the surrounding areas are important to driving employers to office buildings.”

Irgens said that his company’s new office buildings offer specific amenities today. They provide fitness centers, showers and locker rooms. Irgens often arranges for food trucks to park outside their office buildings.

“With new product, we have seen a flight to quality,” Irgens said. “Tenants are willing to pay for new amenities or floor-to-ceiling glass, natural light. They are willing to pay more for layouts that allow for the flexibility of open office spaces or a combination of private and open spaces. They will spend a little more to locate in a building that has amenities on site.”

Deborah Tomczyk, chair of the real estate department at the Milwaukee office of law firm Reinhart Boerner Van Deuren, pointed to the strong economy in much of Wisconsin as one of the reasons for the strong real estate activity in Milwaukee.

“Our economy is doing really well,” Tomczyk said. “There are a lot of jobs here. In fact, one of our problems is that we do not have enough people to fill the jobs that we do have. We have a lack of skilled labor.”

At the same time, Milwaukee is a more affordable market for real estate investors and developers, Tomczyk said. It does cost more to build or invest in the city than it once did, but Milwaukee is still less expensive than markets such as Chicago, Tomczyk said.

Milwaukee’s strengths are now drawing investors from a wider swath of the country. Tomczyk said that outside investors in Milwaukee used to be concentrated in Chicago. Now a growing number of them are based in the coasts.

“People have cash to invest,” Tomczyk said. “There are not a lot of other great investments that have the returns and stability that we can offer. There is a lot of cash out there and people are trying to deploy it in a productive way. There is opportunity in commercial real estate for people to invest their cash.”

How long will Milwaukee’s commercial real estate market continue this growth? Tomczyk said that she thinks the market here is nearing a plateau where growth will slow. She pointed to a small rise in skepticism in the market following the 2018 elections and the change in the governorship in Wisconsin.

There is also the fear of interest-rate creep, Tomczyk said, which could slow some of the growth the Milwaukee market has seen.

This isn’t to say, though, that Milwaukee’s CRE market is headed for a plunge. Tomczyk said she expects the market to remain strong. She just doesn’t see as much growth in the future as the city has seen in the last two years.

The multifamily market here remains especially strong, Tomczyk said. She pointed to the challenges buyers are facing in the single-family market. The housing market in Milwaukee remains seller-friendly today, with limited inventory in the $150,000 to $300,000 price point. Tomczyk says that houses priced in this range often sell before they even hit the market.

Because of this limited availability, many people are renting apartments when they would otherwise have bought a home, providing an additional boost to the multifamily sector.

“We continue to see growth in the number of households overall. They have to live somewhere,” Tomczyk said.

Then there are those people who can buy but choose to rent. Tomczyk said this slice of the multifamily market is growing, too. And it’s not just 20-year-olds and other young adults who are choosing to rent. Empty-nesters who don’t want to deal with the upkeep of single-family homes are also moving into apartments, often in Milwaukee’s urban core.

Industrial remains a strong sector in the Milwaukee area, too, Tomczyk said. The Amazons and Wayfairs of the world need more warehouse space and fulfillment centers to deliver their products as quickly as possible to consumers.

These facilities must be immediately adjacent to freeways and strong transportation options, Tomczyk said.

“They are building where the people are,” Tomczyk said. “They are building in places where they can get to the people very quickly. Our area offers them that opportunity.”

The future for CRE in Milwaukee? Tomczyk said that it looks positive. Just don’t be surprised to see at least a bit of a slowdown.

“I don’t think we’ll see a lot of change in the next six months,” Tomczyk said. “I think the strength will continue. But looking further down the road? I keep expecting that a year or further down the road that it has to slow down at least somewhat. The growth we’ve had so far seems unsustainable.”