The biggest problem in the the Milwaukee industrial market? It’s not vacancy rates. Those are low. And it’s not net absorption, either. That’s high. And rents? Those are on the rise here, too.
No, the big problem facing developers and end users in this area’s industrial market? It’s not easy finding good sites close to the freeway on which to build.
Just ask veteran commercial real estate pro Michael Kleber, director of industrial leasing for Milwaukee-based Zilber Property Group. He says that the industrial market in the Milwaukee area has remained consistently steady from 2016 through the second quarter of this year. There might be small ticks up or down, but demand for industrial space here has remained solid, he said.
The problem, though, is finding space, Kleber said.
“The metropolitan Milwaukee area has not seen the amount of spec development as you’ve seen in the I-94 corridor and in the Kenosha or Pleasant Prairie markets,” Kleber said. “Because we don’t have an overabundance of supply, you continue to see low vacancy rates here. You are starting to see some rent increases. The user demand is still there. It’s just a matter of finding good sites for new industrial space.”
This isn’t a new problem. Developers have been struggling for several years to find good, developable sites for industrial in the Milwaukee area. Kleber says that this is one reason why developers are turning to the village of Germantown, Wisconsin, today. This village is located about 22 miles from Milwaukee. But it’s one of the city’s surrounding areas that does offer developable land for industrial users and developers.
Zilber in June announced that it was developing two speculative industrial facilities in the newly developed Germantown Gateway Corporate Park. The two facilities will each total about 200,000 square feet.
“That challenge of finding developable sites for industrial has us looking into areas that we haven’t looked at in the past,” Kleber said. “That remains the biggest problem in this sector, finding pad-ready sites in desirable locations.”
The latest numbers from JLL confirm that Milwaukee’s industrial market remains a solid one, even if it’s not exactly booming and even if the market suffered an absorption hiccup during the second quarter.
According to JLL’s second quarter report, the Milwaukee-area industrial market saw 84,779 square feet of net absorption in 2019 as of the end of the second quarter. Also, 894,500 square feet of industrial space was under construction in the Milwaukee area as of the end of the quarter, according to JLL.
The industrial vacancy rate here stood at just 3.7 percent as of the end of the quarter, while average asking rents hit $4.29 a square foot.
The second quarter did see a blip when it came to absorption. JLL reported that in this quarter, the Milwaukee industrial market saw 33,000 square feet of negative absorption. JLL points to the addition of nearly 160,000 square feet of new warehouse space in the Waukesha market as a possible reason for this negative absorption.
The negative absorption, though, doesn’t look to be a trend. Demand is still strong for industrial in the Milwaukee aera. JLL reported that buildings under construction in the quarter include 6051 S. Moorland Road with 192,800 square feet and 5201 International Drive with 153,000 square feet. There’s also 102 W. Oakview Parkway with 132,000 square feet.
Big deals in the second quarter include Jeff’s Fast Freight leasing nearly 73,000 square feet in Northwest Milwaukee and WorldPac leasing more than 23,000 square feet in West Allis.
That negative absorption in the second quarter notwithstanding, the Milwaukee-area industrial market remains healthy. Why has this sector been so solid here for so long?
Kebler points first to the national economy. It’s been strong for a long time, too, and that’s only benefitted the industrial market across the nation.
Locally, though, the relative lack of spec industrial construction has kept demand high in the Milwaukee area, Kleber said.
“For a long time, very few spec buildings were going up in Milwaukee,” he said. “Traditionally, Milwaukee is fiscally conservative when it comes to development. We don’t get a glut of new product coming onto the market. Now that the demand is there, we might still be a little behind on the supply side. That has resulted in a strong market.”
When new industrial buildings do go up, what do end users want to see in these spaces? Kebler said that on the manufacturing end of the business, proximity to a solid workforce is key.
“Employers are competing for quality employees,” Kebler said. “That is the biggest challenge these users face today. Having a building located near the workforce is huge.”
When it comes to distribution centers and warehouses, proximity to a major interstate is key, Kebler said.
“Transportation costs continue to rise,” he said. “You need to be located somewhere close to a big highway. It’s all about driving down the operational costs.”
In many markets, last-mile facilities are becoming an important part of the industrial landscape. Companies need to ship their products to as many people as quickly as possible. Being located closer to urban areas is a key way for them to meet this goal.
Kebler said that last-mile industrial space isn’t being built quite as quickly in Milwaukee as it is in other markets. This doesn’t mean, though, that last-mile facilities won’t become important here in the near future.
“The idea is starting to take shape in Milwaukee,” he said. “There is definitely an opportunity here with the number of older, fourth-generation warehouses that are already located in close proximity to the urban center.”
Of course, these older facilities won’t work for today’s end users. That’s why companies and developers will either have to extensively renovate them or demolish them and build new.
“Last-mile distribution is becoming more important here,” Kebler said. “And when you build close to the urban center, you get the added bonus of having a facility that is in close proximity to your potential workforce. You are covering both ends of the spectrum when it comes to what tenants need. So, yes, last-mile is definitely on our radar in this market.”
And the future of this market? Kleber said he expects Milwaukee’s industrial sector to remain strong throughout the rest of 2019 and into 2020. He said, too, that he expects to see the trend of building distribution centers and warehouses closer to the urban center of Milwaukee to only gain strength.
“Whether it’s last-mile facilities or companies chasing the body heat of employees, that will continue,” Kleber said. “That will be the trend that helps define this sector in 2020 and 2021.”