As in all major Midwest markets, Milwaukee’s commercial real estate sector faced plenty of challenges in 2023. High interest rates led the way, slowing commercial sales and development. The city’s office market continued to struggle thanks to the number of employees who are still working from home. Then there were the struggles contractors faced with high materials costs and a tight labor market.
But 2023 is in the rearview mirror. What will 2024 hold? Richard Donner, shareholder with Milwaukee-based law firm Reinhart Boerner Van Deuren, told Midwest Real Estate News that he expects a stronger commercial real estate market in the Milwaukee area this year.
Donner said that he is optimistic that commercial sales activity will increase and that leasing demand for most commercial property types will remain steady, too.
Here is some of what Donner had to say about the state of the Milwaukee area’s commercial real estate sector.
Richard Donner (Photo courtesy Reinhart Boerner Van Deuren.)
Now that the Federal Reserve Board has stopped hiking its benchmark interest rate, do you expect commercial real estate sales in the Milwaukee market to increase?
Richard Donner: A lot of deals were waiting on interest rates. The day (Chairman of the Federal Reserve Board) Jerome Powell talked about no longer increasing the interest rates, I started getting calls from people I had not heard from in a while. There has been a lot of money on the sidelines waiting for those interest rate hikes to stop.
We have a pretty solid market in Milwaukee. Unemployment is low. In general, there has been a growing sense of confidence that we have gotten through the worst of it and rates will not spike again. There is more confidence that rates might even come down.
There was optimism that rates would come down in the third or fourth quarter of 2023. Obviously, that didn’t pan out. But more people ae confident that rates might come down in the third or fourth quarter of this year.
Will CRE sales activity increase this year in Milwaukee?
Donner: That depends. Some real estate sectors are still struggling now, office being the main one. The nice thing about the Midwest, though, is that we tend not to have the highs and lows that the coasts have. While the office market is certainly in a down cycle in Milwaukee, it is not suffering as much as it is in markets like San Francisco or New York City.
We still have the work-from-home movement here, but it is not as prevalent as it is in some markets. There is still quite a bit of value in a city the size of Milwaukee. I do think we will see more sales this year.
Commercial sales have been down drastically because of the higher interest rates. Unlike during the pandemic or other financial downturns, the interest rates today aren’t low when compared to recent history. That has turned off transactions.
Historically, though, interest rates aren’t overly high, right?
Donner: Everyone has a short memory in commercial real estate. The recent commercial market has been living on these lower interest rates, really made them part of their business plan. That makes the higher rates of today especially difficult. Even though historically rates are not high, they feel high when compared to what we saw in 2021 and 2022.
As you said earlier, certain commercial sectors are stronger than others and should see more sales activity in 2024. Are multifamily and industrial still the strong performers?
Donner: Industrial appears pretty strong. And from what I am seeing from my limited perspective, it does look like it will continue to be strong in 2024, especially in the Southeast Wisconsin area. There isn’t as much new product coming online now, so that should boost demand.
When it comes to multifamily, Southeast Wisconsin needs quite a bit more workforce and affordable housing, where people can live and work in the areas around where they are building these new industrial spaces. My multifamily clients are building again throughout the region. They had slowed down a bit in 2023, but they are moving forward again. There is still demand for apartment units.
What makes the Milwaukee area such a good location for companies looking for headquarters space, expansions or warehouse space?
Donner: The quality of life here is very high. That helps companies attract talent. At the same time, the cost of living is relatively low. It’s easier to get around here, too, than it is in a lot of other areas. Population-wise and size-wise in both the downtown and suburban areas, Milwaukee is the perfect size. You can move product and move your employees around relatively easily.
We are seeing now that a lot of the buyers who are targeting multifamily in our market are coming from out of state. They recognize the benefits of investing in the Milwaukee area. That bodes well for the future here.
Are there any positive signs in the Milwaukee office sector?
Donner: We are seeing a flight to quality. The newer or refurbished space is being leased today. Some of the older space will be converted to different uses. There is remote work here, of course. But there is still a need and demand for office space.
My impression is that both urban and suburban office properties are similarly challenged today. I am not seeing one doing better than the other. My guess would be that both are similarly experiencing the same contraction or negative absorption.
Do you expect to see much new commercial construction in Milwaukee during 2024?
Donner: There will be a lot going online if interest rates do come down. The third and fourth quarters could be busy. Milwaukee has already experienced a lot of growth during the last 20 years. We are a much more sophisticated market. With the Republican National Convention coming this summer, we expect to see a lot of attention paid to Milwaukee this year.
