CRE v Wisconsin

Three questions with ... Marcus & Millichap's Engle, Stephenson

Kenosha, a key city in Southeast Wisconsin, is attracting plenty of CRE activity. Kenosha, a key city in Southeast Wisconsin, is attracting plenty of CRE activity.
Ryan Engle Ryan Engle
Tim Stephenson Tim Stephenson

Investors are flocking to Southeast Wisconsin, the booming submarket between Chicago and Milwaukee. What’s behind this? We asked Ryan Engle, senior managing director of investments, and Timothy Stephenson, associate, of the Marcus & Millichap office in the Chicago suburb of Oak Brook. These two CRE pros have crafted busy careers assisting investors in the purchase and sale of multifamily properties in both Illinois and Wisconsin.

Here are the three big questions we asked Engle and Stephenson about the Southeast Wisconsin market and what they had to say about the CRE activity in the region.

Why is the Southeast Wisconsin market so attractive for companies today?

Ryan Engle: One of its biggest attractions is a great location. Because it’s located halfway between Chicago and Milwaukee, the area can draw talent from two major population centers. It’s not uncommon for people to commute there from Chicago or Milwaukee. Simultaneously, firms can tout the region’s lower cost of living, which prompts many employees to relocate from Chicago and Milwaukee to the area. Its proximity to Lake Michigan and comparatively cheap water also make it a popular choice for food and beverage companies. And we can’t forget the tax benefits. Wisconsin has lower taxes than Illinois, plus it offers manufacturing credits and some local credits.

The area’s strong job and company growth have strengthened other sectors, too, such as multifamily rentals. Lately, we’ve seen prices averaging around $75,000 per door, compared with prices five years ago averaging roughly $45,000 per door.

How strong is the industrial market in Southeast Wisconsin, and why do you think it is doing as well as it has for so long?

Tim Stephenson: Southeast Wisconsin has historically been a manufacturing hub – it was built on manufacturing. It goes back to location. The in-place infrastructure combined with the factors mentioned above continue to make this area a draw.

Recently, trade uncertainty has made some employers pump the brakes a bit on new hiring. Foxconn’s plans have been a little uncertain over the past year. But Amazon completed a 1.5-million-square-foot fulfillment center in Kenosha. Uline is proposing to expand with a 1-million-square-foot distribution center and additional 200,000 square feet of office. And there are a whole host of other companies in the area, such as Kenall Manufacturing, InSinkErator, Niagara Bottling and Haribo of America.

Engle: A byproduct of the area’s strong industrial market has been a rise in household formation. Multifamily vacancy rates are averaging about 4 to 5 percent. Closer to Milwaukee, by way of comparison, they were 1 percent in Franklin/Oak Creek at the beginning of the year; many other Milwaukee metro area submarkets have compressed vacancies, leading to new construction trying to catch up.

All of this is attracting multifamily investor money from everywhere, including the coasts. These investors look at the major markets in Illinois and Wisconsin and then find Kenosha, which offers better yields than Milwaukee proper or Chicago proper. Cap rates average about 5 to 6 percent for Chicago, 6.5 to 7 percent in Milwaukee and 7 to 8 percent in Southeast Wisconsin.

On the flip side, what are the biggest challenges you see in the Southeast Wisconsin commercial real estate market?

Stephenson: Growth is a double-edged sword. Because of the area’s rapid job growth from a strong industrial market, demand is rising for single- and multifamily housing, and new construction is not keeping pace. As a result, apartment rents were up 4 percent year-over-year in 2019, according to Marcus & Millichap research. Over time, if that drives up the cost of living too much, it will start to reduce that benefit.

Having enough employees can be an issue. Unemployment has been as low as 3 percent, although it’s a bit higher now. If you need to fill certain positions, like a forklift driver, not everyone has that certification.

All that said, we believe the fundamentals for this region will remain strong in 2020 and encourage investors to check it out. As with many secondary or tertiary Midwest markets today, opportunities are plentiful and well worth a look.