Milwaukee isn’t different from most Midwest cities: The COVID-19 pandemic has upended life here, with kids attending school remotely, businesses working under capacity restrictions and municipal leaders trying to coordinate the distribution of vaccines to a population hungry for normalcy.
And the commercial real estate market here? It’s changed, too, during the last 13 months. But the good news is that Milwaukee and its suburbs have proven resilient during these challenging times. Yes, leasing activity has slowed. Retailers have struggled. And offices in the city’s CBD largely remain quiet.
But the real estate pros working this market say that the market has survived. And the rest of the year looks brighter.
Tom Irgens, executive vice president with the Milwaukee office of developer, investor and property management firm Irgens, said that the pandemic has hit downtown Milwaukee harder than it has the suburbs and surrounding neighborhoods. This is most evident in the office market, with leasing activity having fallen significantly in Milwaukee’s CBD during the last 12 months.
The suburbs, though, have been resilient. Irgens said that suburban office leasing activity remains strong and is almost at pre-pandemic levels in terms of showing volume and requests for proposals.
Irgens said that Milwaukee has fared about as well as any major city during the last 12 months. Part of the reason? Milwaukee doesn’t rely on public transportation like some other big urban areas. Today, that’s a plus as many people are still hesitant to crowd into trains and subway cars.
“We are not dependent on mass transportation like the Chicagos or New York Citys of the world,” Irgens said. “We are a car-centric marketplace. Getting to and from work has not been an issue here.”
Milwaukee’s commercial real estate market has benefitted, too, from the fact that there aren’t many speculative buildings going up. That means there aren’t too many nearly empty buildings dotting the Milwaukee market.
“The market fundamentals in Milwaukee are sound,” Irgens said. “Once businesses are ready to start making long-term commitments again, the market will do well.”
Keeping the momentum going
Jerome Janzer, shareholder with the Milwaukee office of law firm Reinhart Boerner Van Deuren, said that Milwaukee was in the middle of a resurgence, one that it had been enjoying for the last decade, before the pandemic hit. This was especially true in the city’s downtown.
And today? Yes, the pandemic has slowed commercial real estate activity throughout Milwaukee. Most office workers are still working from home, leaving downtown Milwaukee far quieter during the day. Many restaurants in the metropolitan area are operating with limited service hours. And tourist traffic has slowed, hurting the hotel industry.
But even with these challenges, Janzer sees a bright future for the Milwaukee CRE market. As life slowly returns to normal, and the promise of a busier summer beckons, he sees busy times for the city’s commercial real estate industry.
“We came into 2020 on a really strong wave,” Janzer said. “And remarkably, although there has definitely been an impact from the pandemic, the commercial real estate industry has been resilient across most market categories. And in some, like multifamily and industrial, we have held up really well.”
That isn’t to say that 2020 wasn’t a challenging year for Milwaukee. The city was supposed to host the Democratic National Convention last year. That didn’t happen, of course, with the convention instead being held virtually. And nearby Kohler, Wisconsin, was scheduled to host golf’s Ryder Cup. That event, too, didn’t happen, being rescheduled instead for 2021.
“Everyone thought 2020 was going to be a terrific year for this area,” Irgens said. “The pandemic threw a wrench in those plans. Hotel rooms were booked across the city, even into the northern suburbs of Chicago and west to Madison. There were going to be thousands and thousands of people who were coming to that event. The cancellation was a big blow to hotel owners and the event spaces. It hurt bars and restaurants that were going to do well that weekend.”
The fate of the office market
The office market remains the key for downtown Milwaukee. Until workers come back in full force, the city’s center will be quieter.
Janzer said that the Milwaukee office market today is experiencing a slower pace of absorption. Part of that is because of significant new construction. Irgens developed the BMO Tower in downtown Milwaukee, which opened in April of this year. The Huron Building brought 163,000 square feet of new office space to the Milwaukee market in 2019. Then there’s Michels’ Corp.’s $100 million mixed-use R1VER development in Milwaukee’s Harbor District. That project includes an eight-story office building.
“On a short-term basis, it will take some time to absorb this new office space,” Janzer said. “I do think we will see less office activity in the near future.”
Janzer said that the post-pandemic office market will also look different in Milwaukee, as it will across the country. It’s not certain how many employees will return full-time to their offices or how many will work partly from home, only going into the office for meetings or collaborative work.
A smaller flow of employees heading into office buildings each day might cause some companies to reduce their office footprint.
“The world has changed,” Janzer said. “Now that companies realize that their employees can work remotely, and that a lot of employees enjoy that, I see a far greater percentage of people working from home at least part of the time. I don’t think the office market is going away. There are a lot of things about people being together that are important. You can’t replicate that feeling of collaboration and company culture by working remotely.”
Still, office space is a big expense for companies. Those that can get away with leasing less of it might take that opportunity, Janzer said.
“Companies don’t want to pay for air,” Janzer said. “They don’t want to pay for a space that is sitting empty. I do think this pandemic will ultimately lead to less demand for office space, including in Milwaukee.”
But are employees returning to the office now? That depends largely on the size of particular companies, Irgens said. Smaller, more entrepreneurial firms currently have more employees working from their offices. Larger businesses, though, have been more cautious throughout the pandemic and still have the vast majority of their employees working from home, Irgens said.
“The larger the organization and the larger footprint they have, the more conservative they have been about their return-to-work plans,” Irgens said. “The return to the office will happen incrementally. Companies might start by bringing 10 percent of their members back. Then they’ll ramp up over time.”
Office plans might experience a shift from what the industry has seen during the last 10 years, Irgens said. The trend had been to densify workspaces, with companies investing in less square feet for each employee. That, Irgens said, will be revisited moving forward. After all, how do you provide six feet of distancing in a denser office space?
Companies will also take a closer look at common spaces such as kitchens and conference rooms.
“I don’t see many businesses just pulling out of the central office space completely,” Irgens said. “The physical workspace will still exist. I do think people will look at it differently, though. They will take the steps necessary to make them enticing. They want their team members to feel safe and comfortable when they come back to the office.”
The pandemic has also changed what tenants are looking for in office space, Irgens said. Air quality, open space and air flow have all become more important in the last 12 months, he said.
The work Irgens has done in its office portfolio is a good example. Irgens has installed MERV 13 filters in its office buildings and has increased the frequency of filter changes. The company has also focused on creating a limited-touch experience at building entrances, common areas and restrooms. In Irgens’ recently opened BMO Tower project in downtown Milwaukee, for example, employees waive their hands across a sensor to open the entrance doors.
Restrooms at Irgens’ office buildings have been retrofitted with hands-free faucets, soap dispensers and paper towel dispensers. HVAC procedures have been modified to increase outside air changes and bring a greater amount of outside air into office buildings.
Industrial, multifamily still strong
Other commercial sectors have remained hot during the pandemic, most notably multifamily and industrial. Janzer said that Milwaukee’s industrial market has been strong for a long time, with vacancy rates currently under 5 percent. Amazon, of course, remains a major presence in the industrial market here. Janzer said that the industrial market’s momentum has not slowed at all.
Multifamily remains strong, too. Janzer pointed to the recently opened 7SEVENTY7 project, a 35-story high-end apartment tower in downtown. That building proved that tenants are willing to rent more expensive units in the city. Developers have taken notice, and are planning additional high-end apartments. Ascent by New Land Enterprises is now under construction. This development will bring 259 luxury apartments to downtown.
“I am very bullish on the multifamily market in Milwaukee,” Janzer said.
Janzer sees a bright future for the apartment market in downtown Milwaukee, too. Before the pandemic, downtown cores were seeing a steady influx of new renters, people who wanted to live close to the action of city centers. During the pandemic, this demand has slowed. City life isn’t quite as attractive when live shows, theater, sporting events and other attractions are shut down.
But as life slowly returns to normal, Janzer said, the renters will return to downtown Milwaukee.
“My belief is that the younger, recent graduates, even if they are not going to be working fulltime in downtown office buildings, will return to downtown,” Janzer said. “The pandemic certainly affected that last year. But I think downtown living is going to come back. People, younger people especially, like to be in a vibrant area like a downtown urban environment. They want to be connected to the festivals, the arts and sports.”
Ready for a strong second half of 2021
Chad Navis, director of industrial investments with Milwaukee’s Zilber Property Group, said that the city’s CRE market is now set for a strong second half of 2021. That’s partly because the market has been so resilient even during the height of the pandemic.
“As an industrial investor and landlord in southeast Wisconsin, we were well-positioned and fortunate to weather the unforeseen disruptions of 2020,” Navis said.
Part of Zilber’s success can be traced to the efforts the company’s CRE professionals took, Navis said. Company pros worked closely with their clients to help boost the odds that they’d survive any pandemic-related slowdowns.
“We took a structured, proactive approach to portfolio management from the onset of the pandemic, working with our tenants on merit-based assistance requests,” Navis said. “Governmental assistance and stimulus programs, coupled with many of our industrial clients being deemed essential businesses, kept the vast majority of our tenant base within our industrial portfolio operational and their employees safely working.”
That doesn’t mean that challenges don’t lie ahead. Navis pointed to a variety of drivers of inflation, including those associated with supply chain issues centered around raw materials and manufacturing components, as posing a new challenge to the users of industrial space.
But like other CRE professionals across the Midwest, Navis is predicting a strong second remainder of 2021.
“Our team experienced nearly a typical year’s worth of leasing activity in our southern Wisconsin properties portfolio during the last quarter of 2020,” Navis said. “This was likely driven by a pent-up demand dynamic early on in the pandemic as users were either focused on operational issues or were being naturally cautious about expansion and new investment plans. The Zilber team is optimistic those strong industrial tailwinds will carry forward into the 2021 development season.”
To meet that anticipated demand, Zilber Property Group is in the process of developing about 1.1 million square feet of projects throughout the southeastern Wisconsin market.
One sector that has been especially hard hit by the pandemic has been retail. But Janzer said that retail was struggling before COVID-19 started making headlines.
He pointed to suburban shopping malls that have been working to reinvent themselves, adding entertainment and recreation offerings to their rosters. He pointed, too, at big-box stores, which were struggling long before the pandemic hit the country.
“Retail will still face challenges even after the pandemic,” Janzer said.
Downtown Milwaukee does need more retail offerings, Janzer said. Most of the retailers in the Milwaukee area operate from suburban locations. Downtown Milwaukee still lacks the basic retail amenities, such as enough grocery stores for the peopel who live in the center of the city.
“We need those retailers to make downtown even more livable,” Janzer said.
Even during the worst days of the pandemic, Irgens has remained busy. The company preleased two office buildings at The Corridor in Brookfield, Wisconsin, last year and began construction on them in the fall. One was a 45,000-square-foot build-to-suit and lease for Hydrite Chemical Company. Irgens also signed a lease with Milliman, Inc. for 118,000 square feet to build a six-story, 186,000-square-foot office building.
Irgens also completed the 25-story BMO Tower in downtown Milwaukee in April in the middle of the pandemic.
“The Milwaukee market continues to be resilient through the pandemic,” Irgens said. “We are seeing users come back out to market. Many users did short-term extensions in 2020 and will be out looking for space during the next six to 24 months. I expect there to be a flight to quality.”
And the rest of this year? Irgens expects it to be a busy one for commercial real estate. He also expects companies to slowly begin the return to the office.
Irgens himself is looking forward to the day when his company’s offices are again filled with busy employees.
“My personal experience with working from home was not a positive, and I found my productivity diminished,” Irgens said. “Virtual meetings will never replace in-person collaboration and relationship-building, which drives an organization like Irgens. We have many younger team members who grow based on the experience and interaction with Irgens’ more seasoned team members.”
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