Real Estate: Brokers expect 2010 to be another tough year

Office market

The highest vacancy rates are in the office market. The metro Milwaukee area has a 19.66 percent vacancy rate and in 2009 had negative absorption of 894,293 square feet of space, according to statistics presented at the event.

“2010 will be a hairy year for landlords,” said Dan Jessup, president of Grubb & Ellis|Apex Commercial in Brookfield. “How do we fix this? Jobs. We need to elect pro-business leaders at every level of government.”

The central submarket (central Milwaukee County) has an office space vacancy rate of 21.49 percent, up from 19.41 percent in 2008. The western submarket (most of Waukesha County) has an office space vacancy rate of 15.22 percent, up from 14.66 in 2008. The northern submarket (Ozaukee County and parts of Washington, Milwaukee and Waukesha counties) has an office space vacancy rate of 21.37 percent, up from 17.42 percent in 2008. The southern submarket (southern Milwaukee County and northern Racine County) has an office space vacancy rate of 16.64 percent, up from 12.66 percent in 2008.

The downtown Milwaukee office market is bipolar, according to Dan Wroblewski, vice president of Milwaukee-based Inland Companies. The downtown class A office market is fairly healthy with a 10.46 percent vacancy rate, but the downtown class B office market has a vacancy rate of 26.5 percent, a difference that Wroblewski described as “staggering.”

During the Great Recession rental rates for downtown class A office space were reduced and class A buildings were able to take tenants away from class B buildings, he said.

There will be several major office space leases that will expire during the next 12 to 36 months and will provide opportunities for existing downtown class A office buildings or for developers that want to build a new office building downtown, Wroblewski said. One of those tenants is Von Briesen & Roper S.C., currently located at 411 E. Wisconsin Ave., Milwaukee, which is in the market for 75,000 square feet of office space.

“There is pent up demand for a new class A tower downtown,” Wroblewski said. “As crazy as it sounds, I think we will see one come out of the ground in the very near future.”

However, the capital markets are so tight right now many developers are struggling to obtain financing to build a new building.

While the Waukesha County office submarket has the lowest vacancy rate in the region, the northern submarket is becoming more attractive to office tenants, especially with Bayshore Town Center, Wroblewski said. Many executives live in the area and some businesses are looking for lower costs and do not need a downtown office, he said.

“We’re starting to see downtown office tenants look at the north shore more than they did in the past,” Wrobleski said.

The office market will hit bottom in 2010, and begin to improve by the end of the year, Wroblewski said.

“Banks need to begin lending again,” he said. “And we need aggressive development leadership in our local government.”

Industrial

The Milwaukee area’s industrial real estate market has an 11.48 percent vacancy rate and had negative absorption of 2.065 million square feet of space, according to data presented at the event.

The submarket with the highest vacancy rate is the central area with 17.35 percent vacancy, up from 15.45 percent in 2008.

Industrial space users were pushed north, south and west in 2009 by concerns about a sick leave mandate in the city of Milwaukee, high taxes and a limited supply of high-quality space, said Jim Young of Milwaukee-based Colliers Barry. In 2010, expect more industrial space users to move from the city to the suburbs, he said.

The most stable industrial space submarket in the Milwaukee area is the western submarket, which has a vacancy rate of 6.99 percent, up from 6.02 percent in 2008, but lower than the submarket’s vacancy rates of 2005-07. However, Young said the vacancy rate could rise to 8-9 percent in the western submarket in 2010.

The northern submarket has an industrial space vacancy rate of 11.1 percent, up from 8.1 percent in 2008. The southern submarket has an industrial space vacancy rate of 12.1 percent, down from 12.46 percent in 2008. The Kenosha submarket (Kenosha County and southern Racine County) has an industrial space vacancy rate of 14.8 percent.

“The huge increase in vacancy is a buy-product of what was an extremely challenging year for all of us,” said Barry Chavin, principal of Brookfield-based NAI MLG Commercial.

The highlight of 2009 is, “it’s over,” Chavin said.

2010 will remain a tenants/buyers market, he said.

“It will be a much better year for us brokers, but not necessarily for owners of real estate and bankers,” he said.

Retail

The Milwaukee area has a retail space vacancy rate of 11.2 percent, said Michele Dugan of Mid-America Real Estate.

Retail building owners are struggling to attract tenants because consumers have cut back on spending during the Great Recession, hurting retailer performance, and few retailers are in the market for space, she said. Store openings are down and closings are up.

“There are not enough tenants looking to expand or relocate,” she said. “Overall, we are seeing retailers focus on improving the performance of their existing stores, and not on expansion.”

There will be little to no shopping center development in 2010, there will be more store closings and vacancy rates will rise, she said.

Only a few retailers are growing and expanding including grocery stores, food service stores, health stores, discount retailers and quick service restaurants, Dugan said. Other retailers, including department stores, are shrinking.

The lack of retailers in the real estate market is forcing some owners of vacant big box and medium box spaces to convert them to other uses such as medical office space, Dugan said.