Twin Cities Turnover/Making Over Milwaukee
High-profile properties boost the Minneapolis-St. Paul office market.ge.
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.
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
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.
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.
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.
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.
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.
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.
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
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
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.
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.
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.
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
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.
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.
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.
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.
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.
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.
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.
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.