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 Lower-quality, outdated spaces?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.”
Ready for better times in the office sector
As an office specialist, John Davis, with Milwaukee’s Founders 3 Real Estate Services, understands the struggles that the office sector is experiencing today.
But as a broker working in the Milwaukee market? He also knows that his local office market is performing better than many others across the country.
He knows, too, that Class-A office space loaded with amenities is outperforming other office types, both in Milwaukee and across the United States.
“The flight to quality is 100% still happening,” Davis said. “In our latest quarterly report, we reported that Class-B office properties are seeing vacancies at an all-time high rate. But the Class-A vacancy rate is much lower, at about 14%.”
Class-A office space has become so popular that there are no large blocks of this type of space available in the Milwaukee market today, Davis said. In normal times? Developers would add new Class-A space to the market.
These, though, are not normal times. Though the demand for new Class-A space is high, developers, still wary of high interest rates and the continuing appeal of the work-from-home movement, are hesitant to add new office space to the market.
“There are tenants who want to get out of their Class-B office space,” Davis said. “But they don’t have options for Class-A space. New Class-A office space will be coming down the pike eventually. We need construction prices to get a little lower before that happens. Unfortunately, no one is sure when that will happen.”
When tenants do lease new office space, they are often leasing less space at a higher cost-per-square-foot. Davis, though, said that companies are not going too small with their new office space.
That’s because most companies and employees do not enjoy the concept of hoteling, where employees sign up for desk space on the days on which they come into the office. Most would prefer that employees have their own assigned desks.
Davis has seen this firsthand. Founders 3 moved to a new office space last year and polled its employees. Only one person was OK with hoteling, Davis said.
This tells Davis that while, yes, many companies will lease a smaller footprint, they still need enough office space to keep their employees happy. This is especially true considering that employers increasingly want their workers in the office at least on a hybrid basis so that they can collaborate and brainstorm with their fellow co-workers.
“You see it with young people who started working at companies during the pandemic. If they work at home all the time, they don’t succeed in their company,” Davis said. “They don’t learn from their peers. They are not right there talking with their peers, gaining tidbits of information and collaborating. Collaboration and mentorship is important. You can’t get that when working from home.”
When companies are looking for new office space, are they looking in downtown Milwaukee or in the suburbs? Davis said that Founders 3 research shows that downtown Milwaukee is outperforming the suburbs today.
This shocks people, Davis said. It’s easier to park in the suburbs. It’s less stressful to get to suburban office buildings. But many employees live in or near downtown Milwaukee. They want a quick commute to their offices. Companies realize that they need a presence in downtown Milwaukee if they want to attract and retain the best talent.
“Employers are looking to hire the best talent, and that best talent is often located downtown,” Davis said. “That is a big factor in why the downtown Milwaukee office market is so resilient today.”
There has been plenty of talk of turning outmoded office space into other uses, such as multifamily properties or hotels. Davis said that this is happening in Milwaukee with a limited number of office properties. But a conversion requires the right property and the right site. Finding that combination can be difficult.
Because of this, it’s not correct to say that conversions will save the struggling office sector.
“It requires the right floor plate and the right location,” Davis said. “A traditional office building doesn’t usually lend itself to a multifamily conversion. Some properties will work in this market. But conversions are not quite as common as some seem to think.”
A bright future
Rebecca Gries, vice president of corporate attraction and expansion for Milwaukee 7, is optimistic that Milwaukee and Southeast Wisconsin will remain a draw for companies looking for pro-business governments, lower taxes, a high quality of life and a lower cost of living.
Milwaukee 7 is an economic development corporation serving the seven counties of southeastern Wisconsin: Kenosha, Milwaukee, Ozaukee, Racine, Walworth, Waukesha and Washington. Gries said that businesses are interested in each of these counties.
“We have seen so much growth in the Milwaukee area during the last decade, especially in the Interstate-94 corridor between Milwaukee and the Illinois border,” Gries said. “Corporations like our favorable business climate and the lower cost of doing business here. And we offer that proximity to Chicago. It’s a strong combination for corporations looking to expand.”
A good example? HARIBO of America Manufacturing. The maker of gummy bears opened 500,000-square-foot manufacturing facility in Pleasant Prairie, Wisconsin. Eli Lilly earlier this year purchased a manufacturing facility in the same business park from Nexus. Lily estimates that production at this facility could begin by the end of 2025.
WestRock Company announced at the beginning of this year that it will build a corrugated-box manufacturing plant also in Pleasant Prairie. Construction of this facility is expected to cost $140 million.
In perhaps the biggest news of all? Microsoft announced that it will build the country’s first manufacturing-focused AI co-innovation lab in Mount Pleasant, Wisconsin.
Microsoft announced, too, that it will invest $3.3 billion between now and the end of 2025 to expand its cloud and AI infrastructure capacity with the development of a data center campus in Mount Pleasant.
This project is expected to bring 2,300 union construction jobs and provide long-term employment opportunities. Microsoft is also partnering with Gateway Technical College to build a Data Center Academy to train and certify more than 1,000 students to work in the new data center and in IT-sector jobs in the area.
“These are exciting times for Southeast Wisconsin,” Gries said. “We have quite a few companies that are looking to invest across the entire region. It’s not just that I-94 corridor. Companies are looking at Waukesha and Walorth counties. As soon as an industrial building goes on the market in Waukesha, it’s sold.”
Southeast Wisconsin has also attracted the attention of foreign companies, Gries said. That has continued to provide a boost to the industrial sector as these overseas companies look for manufacturing and warehouse spaces of varying sizes.
Not all commercial sectors are created equally, though. As Gries says, the office sector continues to face challenges. The good news? This sector, even with these challenges, continues to be resilient in Southeast Wisconsin, especially in downtown Milwaukee.
A good example? Milwaukee Tool has moved into new office space at 551 N. 5th St. in downtown Milwaukee, the former Assurant building. Earlier this year, financial services company Fiserv moved its global headquarters from Brookfield, Wisconsin, to downtown Milwaukee. The 170,000-square-foot building sits on the corner of Vel R. Phillips Avenue and Michigan Street.
And Northwestern Mutual is investing $500 million into its downtown campus to modernize the facility.
“There was more activity in the office sector pre-COVID, that is true,” Gries said. “But we have seen some of that activity come back. It’s not necessarily back to pre-COVID times, but it has picked up.”
Gries points to a study released by the University of Toronto in 2023. That study shows that downtown Milwaukee’s recovery in foot traffic since the beginning of the COVID-19 pandemic ranks second in the nation, behind only Columbus, Ohio.
“Our downtown has been recovering quickly from COVID,” Gries said. “We have seen a lot of activity downtown. Companies are investing in office space in downtown Milwaukee. We have amenities like The Avenue with its food hall. That is always busy. The rejuvenation of our downtown has been exciting to see. There is so much going on.”
The future? Gries expects it to be a bright one. As she says, not only does the Southeast Wisconsin region boast low taxes and governments willing to work with businesses, it also features a deep and talented labor pool. Area schools work hard to make sure that there is plenty of well-trained talent ready to step into quality jobs throughout the region.
And one more benefit of doing business in Southeast Wisconsin? There aren’t many natural disasters here. Gries says that this always gets a laugh from companies considering a move to the area. But when Gries shows businesses a map listing recent natural disasters? It’s clear that very few of them happen in Wisconsin.
So, yes, that’s one more reason why the future looks so bright for Southeast Wisconsin’s business -retention and -attraction efforts.
