Like in all major cities, Milwaukee’s commercial real estate investors, developers and owners have faced challenges in 2023. And the big one? Rising interest rates. It’s resulted in a slowdown in new developments, leases and sales throughout the Milwaukee market.
This slowdown has even hit the area’s two strongest commercial sectors, industrial and multifamily.
There is good news, though. Two commercial real estate experts in the Milwaukee market told Midwest Real Estate News that though sales and development in the multifamily and industrial sectors have slowed, they haven’t come to a halt. These sectors remain resilient, they say, even as the country works through the uncertainty caused by higher interest rates.
Here, then, is a closer look at how Milwaukee’s multifamily and industrial sectors are faring today in a challenging economic environment.
Cooling off in the multifamily sector
A modest cooling. That’s how Katherine Bills, shareholder in the Milwaukee office of Reinhart Boerner Van Deuren, describes the impact that higher interest rates have had on commercial real estate sales and development in the Milwaukee market.
“I still see the market as a strong one, even with the hike in interest rates and the pace at which those hikes have occurred,” Bills said. “I’d say we are seeing a cooling of activity, not a slowdown.”
As Bills says, when sales, lease and development activity go up, they must eventually come down, too, at least slightly. During the last two years, the Milwaukee commercial real estate market saw a steep rise in activity, not unlike most major markets across the country.
That level of activity was enjoyable, but it wasn’t sustainable.
“We have had an extraordinarily hot market for certain sectors,” Bills said. “I would say we are now seeing a cooling of that very hot market. There is still demand in Milwaukee, though, for commercial real estate sales and leases. There are still transactions taking place.”
As in most other markets, the greatest demand from investors and buyers in the Milwaukee area? It’s for multifamily and industrial product.
Multifamily has been strong for a particularly long period. Bills pointed to several macro factors that help explain why there has been so much demand for new multifamily product and why investors are still so interested in sinking their dollars into apartment properties.
First, there is still more demand for multifamily than there is product available.
“It’s not just in Milwaukee, but nationally we have a housing shortage,” Bills said. “Even in single-family homes, not just in multifamily, there aren’t enough homes for the demand.”
Rising interest rates are also pushing some potential homebuyers to multifamily. Buyers who might have been able to afford a monthly payment when mortgage loans came with interest rates of 3.5% can’t make these payments when rates are up to 6.5% or higher.
Then there is the growing desire of many to live in a dense, urban environment. These buyers are interested in multifamily buildings that are located within walking distance of restaurants, stores, nightlife and public transportation. They also don’t want to deal with the maintenance demands that come with owning a single-family home.
“We are seeing a strong demand for multifamily in both our urban areas and in the suburbs,” Bills said. “Milwaukee’s mayor has made a strong push to address the housing needs in the city. During the pandemic, there was a lot of migration from larger cities to smaller cities in the United States. There was some migration to the suburbs, too. Now, though, we are seeing people who want to live in both suburban and urban multifamily. There is a bit of a rebalancing occurring.”
Office still in limbo?
While certain sectors are thriving in the Milwaukee area, the city isn’t unusual in seeing an office sector that is still somewhat in limbo.
Many employers in the Milwaukee area are still working to bring many of their employees back to the office. Others are working on hybrid schedules and trying to determine how much office space they’ll need.
“The word ‘limbo’ is the perfect way to describe office right now,” Bills said. “We are still waiting to see where things will settle. Some predicted that at the end of last year, there’d be a big push to get people back into the office and that the office sector would bounce back strong. I don’t think we’ve seen that yet.”
Bills said that employers are finding it difficult to convince workers to come back to the office five days a week. And this, Bills said, will change the future office space needs of companies.
The challenge for office owners is that so many companies are still struggling to determine what their space needs are. That leaves the office sector with plenty of uncertainty.
“Do companies need co-working space? Do they still need dedicated office space? Or are they looking for dedicated office space but with employees who have the flexibility to work from home when that makes more sense?” Bills asked. “It is some mix of those options. As a result, I don’t think we’ve seen in Milwaukee the office sector rebound in the way some people predicted. It is yet to be determined how that will play out.”
Despite the challenges of an uncertain economy, high interest rates and post-pandemic sluggishness, Milwaukee remains a strong market for companies, investors and owners, Bills said.
Why? First, the cost of commercial real estate development is lower in the Milwaukee area. But even with these lower costs, companies and owners have easy access to the major transportation hubs in Chicago.
Companies know, too, that they can access a strong labor force, drawing employees both from the Chicago area and from Southeast Wisconsin. Many of the municipalities in the Milwaukee area are pro-development, too, Bills said.
“They want to be partners with developers and help build their communities and attract more improvement and jobs,” Bills said. “There are so many great developments taking place in the Milwaukee market today. It makes me excited to be a member of this community.”
Plenty of new development is taking place in the Deer District, home to the Fiserv Forum where the NBA’s Milwaukee Bucks play. There’s also the new 8,000-seat soccer stadium being built in the Iron District MKE, an 11-acre sports and entertainment development rising along the southern edge of downtown. In addition to a new professional soccer team, the stadium will be the home of Marquette University’s soccer and lacrosse teams.
“That is going to be another development that is going to create a new place for people to gather,” Bills said. “The way that the Deer District has become a destination, this project has the potential to have the same type of energy.”
The resilient industrial market
As with the multifamily market, the industrial sector in Milwaukee is proving resilient, too, even with today’s higher interest rates. That doesn’t mean that this sector isn’t seeing a cooling-off period, too.
Chad Navis, vice president of Zilber Property Group in Milwaukee, said that industrial leasing activity remains strong in the local market. That’s largely because there isn’t enough industrial space in the Milwaukee area to meet the demand from tenants.
But industrial sales activity has slowed, Navis said. As in the multifamily market, this is largely because buyers and sellers are still trying to work out the right pricing for industrial assets.
As interest rates have risen, buyers want to spend less to purchase industrial properties. The owners of these properties, though, still want to sell at prices near what they would have fetched in 2022.
“There are few available opportunities as the investment market is on a vaulation transition period,” he said. “Buyers and sellers are still sorting out price discovery in 2023 from early 2022 pricing.”
This pricing uncertainty has favored the suburban markets of Milwaukee when it comes to industrial activity, Navis said. The availability of land in suburban areas also makes it easier to build spec or build-to-suit projects outside of Milwaukee’s urban slices.
“Given the land area needed for industrial projects, it’s naturally easier to find speed-to-market fits in suburban vs. urban areas,” Navis said. “Given the state of the financing environment, more complicated urban redevelopment projects just became more complicated.”
Navis said that the higher interest rates of today have slowed the development of new industrial properties. And until stability returns to the interest-rate environment, Navis said, he doesn’t expect this to change.
“In addition to demand, the low cost of capital was one of the fuels that kept the industrial development fires burning hot even during the skyrocketing construction costs we have expericend the last couple of years,” Navis said. “Now that the low-capital-cost leg of the stool has been kicked out from underneath developers, industrial development is predictably slowing in a significant way.”
The only way to change this is for the Fed to stop hiking interest rates, giving developers the stability they crave, Navis said. Hopefully, once the Fed stops tinkering, interest rates will slowly start to fall again, though it’s unlikely they’ll ever fall to the lows that the industry saw in 2021 and the start of 2022.
Navis said that the smarter providers of debt will use this period of slowing deals to gain market share by providing reasonable debt terms to leveraged investors.
Mlwaukee is fortunate in that it boasts some advantages to help its industrial market work through these challenging times. Navis pointed to the area’s skilled workforce and the continual investments in public and private infrastructure from developers and government bodies.
Investors and businesses also like Milwaukee because of its lower taxes and active development agencies, Navis said.
Zilber is a good example. Yes, these are more challenging times to develop commercial real estate. But the developer is remaining active in the Milwaukee market.
Navis said that, pending final government approvals, Zilber’s 2023 speculative industrial developments will total about 600,000 square feet across three building projects. This includes the launch of the 90-acre Caledonia Corporate Park on the northern end of the Interstate-94 corridor.
“Despite all the cost challenges with industrial development, Zilber Property Group is committed to making available new industrial space in the metro Milwaukee market,” Navis said.
