Market Data

Twin Cities Turnover/Making Over Milwaukee

High-profile properties boost the Minneapolis-St. Paul office market.ge.

By Carolyn Bilsky |

In the first half of 2004, the commercial real estate market in Minneapolis has shown marked improvements from its three-year slump. Absorption of 1.4 million square feet in the industrial market and the addition of 730,000 sf of new retail space, reported in the United Properties July 2004 Twin Cities Outlook, are just two signs that a sustained recovery is taking hold.

High-Profile Office Vacancies
High vacancy rates and negative absorption in downtown office buildings may not seem anything to cheer about, but it hasn't dampened investors' enthusiasm for office product. A number of Twin Cities central business district high-rises have recently been put up for sale.

At the end of the second quarter, the Minneapolis-St. Paul total office vacancy rate increased a point over the first quarter to 18.35 percent, according to CB Richard Ellis' Q2 report. Retaining tenants is a challenge landlords continue to face, especially in class B and C buildings.

However, even some of Minneapolis' most prominent CBD properties experienced first- and second-quarter tenant losses; as of June the office vacancy rate was 20.2 percent and 22.5 percent with subleases, according to United Properties. The International Centre-Kinnard Financial Complex reported 65 percent vacancy in late July.

Despite high vacancies, several of these high-profile properties were put on the market during the first half of 2004 and sold with hefty price tags. For example, Welsh Cos. purchased the 610,000-sf International Centre-Kinnard Financial Complex for nearly $40 million in late July from Chicago-based Zeller Realty.

In addition, Minneapolis' tallest and best-known property, the IDS Center, is on the auction block. The building, which includes 1.2 million-sf of office space and 166,000-sf of retail space and is about 80 percent leased, is expected to sell for well over $200 million.

New owners of high-profile buildings are making an opportunitstic move hoping to increase value and occupancy as the economic recovery takes hold, according to Jim Durda, general manager of the IDS Center. For example, Welsh Cos. plans to ?aggressively pursue new tenants to fill the 65 percent of available space? in the International Centre, according to a company press release.

Retail Remodeling
The Twin Cities' retail growth throughout the first half of 2004 was primarily limited to suburban areas, according to CB Richard Ellis. In these submarkets, where population and affluence continue to increase, big-box retailers dominate. Stores such as Wal-Mart, Kohl's, and SuperTarget expanded to meet the needs of the growing populations.

Minneapolis, as a whole, experienced a drop in absorption in the retail sector during the second quarter, compared to second quarter 2003. But new construction continued to be strong, and asking lease rates increased from $17.84 to $19.83 per square foot.

Minneapolis-based Target Corp. attracted attention in mid-year when it sold off two subsidiaries, Marshall Fields Co. and Mervyn's. The sale of Mervyn's came with the announcement that the nine Mervyn's locations within the Minneapolis area would close, freeing up retail space in several regional malls. CB Richard Ellis predicts these spaces will be backfilled with national entertainment and restaurant tenants, following the successful retenanting formula used by Southdale and Eden Prairie Centers.

Mixed-Use: Dean Lakes
Construction has begun on a large mixed-use development southwest of Minneapolis. Dean Lakes is being developed in suburban Shakopee, Minn., by Minneapolis-based Ryan Cos. The project includes 42 acres of residential space, 44 acres of retail, and 90 acres of industrial and office space. The 273-acre development also will include 84 acres of parks and wetlands. United Properties will handle the sales and leasing of all commercial property. The project will have 350,000 sf of retail, including big-box space, and should be ready for occupancy by spring 2006.

Industrial Recovering
Minneapolis' industrial sector is chugging along toward improvement as well. CB Richard Ellis reports that 7.2 million sf in industrial projects are slated to be completed by year-end. The number of industrial projects in the pipeline is up from 2003.

Second quarter 2004 was the fourth straight quarter of positive absorption for the industrial sector.

Additionally, asking lease rates are up from 2003 levels, rising to $4.15 psf in the second quarter. Most industrial growth has been due to warehouse needs. Smaller lease activity, including properties between 5,000 and 20,000 sf, is up as well, reports CB Richard Ellis.

Mirroring the office market, industrial properties have shown an increase in sales and prices, particularly to owner-users.

Making Over Milwaukee
Downtown redevelopment determines a new direction.

Efforts in the past few years to make Milwaukee more aesthetic and tourist-friendly have led to economic success. Tourism has blossomed to a $2 billion industry and created an increasing number of jobs.

Demand for Multifamily
The new developments in Milwaukee's downtown area in the past few years have led to demand in the multifamily market. Approximately 40 building complexes worth more than $530 million in investments and representing nearly 2,500 apartments were constructed in the downtown area in the past three years, according to Milwaukeedowntown.com.

Submarket growth also appears to be a promising sector for multifamily development in the second half of the year. According to Marcus & Millichap's June 2004 Apartment Research Report, the expansion of large companies in suburban areas, such as Waukesha County and Wauwatosa, will draw potential tenants to these markets. While some local companies are expected to make cuts this year, others in the professional and business services sectors are expected to add 4,000 jobs, according to M&M, leading to an increase in multifamily housing demand.

An improved economy throughout the Milwaukee area leads industry watchers to predict a rise in apartment's net operating incomes and asking rents. Midyear asking rents were $702 per month, a $9 rise from 2003's $693 per month, according to M&M.

Condominium construction continues to saturate the downtown market, but an influx of loft-style apartments are cropping up in urban areas as well. Converted apartments are especially prevalent in the city's third ward. This historic district was home to warehouses and manufacturing facilities at the turn of the century. Today, art galleries, restaurants, and new condominiums flourish in the area.

Industrial Valley Renewal
The redevelopment of the Menomonee River Valley is the biggest news in Milwaukee's industrial market, according to Kenneth R. Braden, CCIM, SIOR, of James T. Barry Co./Colliers International. Located south of downtown, the valley was once the industrial center of the city, employing more than 50,000 people in the 1920s. After falling into ruin, the district now is being rehabilitated with the help of the Menomonee Valley Partners, a group of private-sector organizations working with city and state to redevelop the valley. Goals include the new construction of industrial facilities with environmentally sound practices and the revival of the area's culture and economy. The partially city- and state-funded project will take approximately 10 years and will contain around 3 million sf of new construction.

Overall, industrial ?leasing activity is improving,? Braden says. ?Deals that have been pending have finally gone together. Brenntag signed a 100,000-sf lease with CenterPoint, Bentley signed a 127,000-sf lease for Forest Hill Investors. Rates are about the same but more TI dollars or free rent are being offered,? he says.

Regarding sales activity, ?prices remain stable, but have been moving up with increased land prices and construction costs,? Braden says. ?There is more demand for net leased investment properties with higher prices and lower cap rates.?

CBD and Suburban Office
Office vacancy rates in Milwaukee's downtown area continue to increase, reaching 16.8 percent and accounting for more than 1 million sf in class A and B office properties. This is the highest level of office vacancy Milwaukee has seen in more than a decade and is an approximately 1 percent increase from year-end 2003.

Most of the vacancies are due to tenant relocations to newer buildings, according to an RFP Commercial office market report. Two new buildings, 875 E. Wisconsin Ave. and 555 E. Wells, have attracted tenants.

Negative absorption rates are not limited to the downtown area; submarkets are also experiencing the increase, according to the RFP report. As of June, Brookfield had 666,000 sf of empty office space accounting for 14.5 percent of the market. The Mayfair/Wauwatoosa office market reported a 14.4 percent office vacancy rate over the 9.5 percent vacancy it experienced at year-end 2002.

Pabst Farms Provides Retail
Lifestyle centers are now the most popular type of new U.S. retail construction, according to Colliers International. Milwaukee's retail environment was slow to adapt to this model, but a new development at the former site of Pabst Farms will include a lifestyle center.

The Pabst Farms development, built on former farm land in the Oconomowoc submarket, is well located at the intersection of Interstate 94 and Highway 67, about 40 minutes from downtown Milwaukee. Currently under construction, the development includes two retail areas with combined space between 700,000 and 800,000 sf, according to the development's press release. The Pabst Town Center is strategically located among several affluent suburbs and is expected to do well, according to M&M. The retail space is part of a 150-acre development that includes residences, a 200-acre commerce centre, a 250-acre research technology park, and additional wetlands and wooded areas.

The submarket is not the only retail environment that is expected to grow during the second half of 2004; M&M predicts that 2004 completions will more than double completions made in 2003.