An adjustment period. That’s what the Milwaukee commercial real estate market is going through today.
But fortunately for the developers and brokers who work in this market, Milwaukee remains a favored destination for companies seeking headquarters and regional offices in the Midwest. The region remains popular, too, with residents, who seek out the area’s low cost of living, entertainment and night-life options, ample green space and affordable housing.
So even as the Milwaukee commercial real estate market faces the same issues the industry faces in other major cities – high interest rates, a shortage of skilled labor and persistently costly construction materials – Wisconsin’s largest city continues to see major new developments, the addition of new-to-the-market retailers and a downtown resurgence that is still gaining momentum.
What’s behind the success of Milwaukee’s commercial real estate business? It all comes down to the city’s business-friendly environment, strong labor force, ideal location near Chicago and the investment dollars that have flowed into Milwaukee’s thriving downtown.
An adjustment period
As it did in most cities, the industrial market boomed in Milwaukee during the earlier years of the COVID-19 pandemic. Developers flocked to Southeast Wisconsin to build new distribution centers and warehouse space. The goal was to deliver products to consumers as quickly as possible.
And this new industrial space filled up quickly as companies gobbled up whatever square footage they could find.
Today? This has changed. New industrial starts have slowed in the Milwaukee region – as they have across the country – as vacancy rates in this sector slowly rise.
Tomás Clasen, an attorney with the real estate practice in the Milwaukee office of law firm Reinhart, said that Milwaukee’s industrial market isn’t struggling. Instead, it’s adjusting.
And it’s not just industrial. Demand patterns are changing for all Milwaukee’s commercial asset classes, Clasen said. The common denominator? Quality commercial spaces – whether in the industrial, retail or office sectors – are seeing more interest from tenants. Lower-quality, outdated spaces? They are seeing higher vacancy rates.
“There is still demand for higher-end product and the newer product coming into the market,” Clasen said. “But with respect to industrial, demand has cooled off somewhat. You could say the same thing across different types of asset classes. There is demand for higher-end commercial spaces, especially higher-end spaces located in or near downtown. At the same time, lower-quality product, in all asset classes, is seeing a higher vacancy rate.”
One asset class that is performing especially well in Milwaukee? Mixed-use developments, often in the form of buildings with retail on their first floors and apartment units above.
Clasen said that mixed-use developments are popular not just in Milwaukee but across the country. In Milwaukee, though, these developments are especially important today. The city’s mayor, Cavalier Johnson, has set a goal to push Milwaukee’s population to 1 million residents. One way to do this? Build denser housing. Mixed-use developments with several apartment units are an example.
“You need a combination of higher-density and lower-density housing,” Clasen said. “There is a desire to be creative in how to use the type of space we already have and in integrating complementary uses together. A mixed-use development is popular to both the people who live in such developments and the retailers who locate on these development’s first floors.”
Clasen predicts that as more residents seek housing in and around downtown Milwaukee, that more mixed-use developments will pop up.
But what about the one commercial sector that is struggling the most across the country, office? How is this sector performing in Milwaukee?
Not surprisingly, the Milwaukee office sector faces challenges. The continuing work-from-home movement means that companies don’t need as much office space. That has left higher vacancy rates in Milwaukee’s office sector, especially in older, outdated office buildings.
What is surprising here, though, is that Milwaukee’s downtown office market is performing well today. Yes, it, too, faces challenges. But Clasen said that many companies are moving into downtown office space today.
Clasen said that employers such as Pfizer are moving some of their central headquarters into the city and away from the suburbs. Kohl’s, too, is moving many employees into city offices, Clasen said.
The goal of these companies is to attract the best talent, Clasen said. Offering quality office space in the heart of downtown Milwaukee helps companies do this.
“There is a desire among companies to move some office jobs back to downtown to retain and attract talent,” Clasen said.
Clasen said that the office picture will become clearer as more employers determine their ideal return-to-work arrangements. For many companies, this will be a hybrid working arrangement in which their employees work part of the time in the office and the rest of the time remotely. Other employers, especially those in the professional services industries such as legal and financial companies, might require their workers to return to the office on a nearly full-time basis.
“Not every industry is the same,” Clasen said. “Everyone is still trying to figure it out.”
Investment sales activity has slowed throughout Milwaukee, too. This isn’t unusual. As the Federal Reserve Board continued to boost its benchmark interest rate, investment sales of commercial assets dried up. The higher interest rates simply made these sales too expensive.
Now that the Fed has indicated that it will no longer increase its benchmark rate, observers are waiting to see if the financial body will cut this rate. If it does, that could provide a boost to today’s sluggish investment sales activity.
No one knows if a rate cut is coming. Clasen, though, says that that stability that came with the Fed’s decision to halt its rate increases will help increase investment sales activity.
“It being an election year, I would be surprised if rates went down before the end of 2024,” Clasen said. “But I do think people across the real estate market are optimistic that rates have stabilized. I think they have a positive view that they will go down in the future. Folks are preparing to jump back into an active market when the rates do go down.”
What issues concern Clasen’s real estate clients? He said that any are trying to determine how to structure deals from a financial perspective to make transactions work. Developer clients are interested in TIF deals or in earning municipal grants to help make their projects happen.
“They are doing their best to take advantage of the opportunities that will help them get their deals off the ground,” Clasen said. “This is a challenging time that folks are working through.”
Clasen also takes on plenty of work earning entitlements for his clients, guiding these clients through the municipal, state and county approval processes,
He is also keeping a close eye on the new developments taking place across the Milwaukee market, of which there are many. These new developments, he said, provide him with plenty of optimism regarding the future of the Milwaukee CRE market.
“There is a lot of growth everywhere you look,” Clasen said. “There are so many projects coming online over the last six years. It’s almost difficult to keep track of them all.”
An industrial space that remains healthy
Todd Battle, director of industrial investments with Milwaukee’s Zilber Property Group, said that while it’s true that there has been some softening in the Southeast Wisconsin industrial market thanks to higher interest rates and construction costs, this sector remains healthy and robust.
“During COVID, we saw record year after record year,” Battle said. “We saw records in industrial sales, leasing and development. We are now a little bit off from those years. But those were record-setting years. Our industrial market is still a healthy and dynamic one today. It just feels a little different from those record-setting years.”
The Southeast Wisconsin market had seen a surge of new industrial space during the pandemic years. New construction has slowed throughout late 2023, though. Developers aren’t adding spec industrial space to the market today. This makes it a bit more challenging for end users to find industrial space in the Milwaukee region today, Battle said.
Supply is most constrained in the 200,000-square-foot to 250,000-square-foot end of the market, Battle said. Vacancy rates in these smaller facilities are in the low single digits, Battle said, because there simply isn’t enough space to meet demand.
“You can find those spaces,” Battle said. “We do build spec industrial. As they say, ‘Build it and they will come.’ We also do a fair amount of build-to-suit work where we have a tenant in hand and are building a specific industrial property to suit that tenant’s needs. You can do build-to-suits all day long in this market. There is a balance that needs to be struck. There has to be enough product in the market to meet tenant demand. When the amount of product starts getting constrained, the industrial development industry will respond. They will start to build more.”
Battle said that he expects this to happen shortly. End users seeking small to mid-size industrial properties are struggling to find existing spaces to fit their needs. There just isn’t as much new supply of these smaller facilities coming online.
Battle said that during the next one to two years, developers will respond to this by building again.
“This always goes in cycles,” Battle said. “We were coming off a series of record years. It reached the point at which development and new construction got a little bit ahead of user demand. When that happens, construction slows, demand catches up with supply and then the market switches to one in which developers are encouraged to add more supply.”
Investment sales have slowed in the Milwaukee industrial market, too, thanks to higher interest rates. Battle, though, says that he expects sales activity in this sector to rise now that there is more certainty with rates.
Battle said that while falling interest rates would help unclog investment sales activity, certainty about how high rates can go is just as important.
“I think people feel that we have probably hit the ceiling on rates,” Battle said. “Once people get even more certainty with that feeling, you will start to see more transactions. Once people know that this is as high as rates are going to be, you’ll see more trades, more activity, more investment sales. If rates go down? That will only help because that will enhance investors’ ability to make deals.”
What about amenities? What features are tenants looking for when searching for modern industrial space today?
Battle said that tenants still want industrial buildings that boast easy access to highways and roadway infrastructure. Tenants are also increasingly looking for buildings that are energy-efficient, well-maintained and modern. High clear heights are critical. Industrial spaces that also offer quality office areas are in demand, too.
There is more of a focus today on providing amenities that enhance the quality of life of employees, Battle said. For industrial, that could mean buildings that are located close to health clubs, daycare centers, restaurants, grocery stores and quality housing. It might mean outdoor areas and walking trails. Some industrial facilities offer higher-quality cafeteria areas or indoor gathering spaces for employees who are on breaks.
“Because there is such a tight labor force, companies want to be able to offer employees a nice place to work. It makes it easier to attract talent,” Battle said. “Is it easy to get to the facility? Are there amenities in and around the business park? Is there a healthcare center nearby or daycare? A lot of these factors influence tenants’ decisions on the industrial space they will lease out.”
