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Office Space Market Update

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Recently our Local Rep in Milwaukee gave a speech for the Milwaukee Institute of Real Estate Managers chapter providing them an update on the current office space conditions in the area. While reading it over I realized that Milwaukee office space market is pretty typical of the office market in general everywhere.  Here is the shortened text version of presentation.

The total office market is just under 28,000,000 square feet of class A and B space.   Of that just under 5,000,000 square feet or 17% is vacant

In 1981 net rents were $10 per square foot for suburban Milwaukee class A office space.

In January of 2001 we said in our annual report to the market:

“Rents are at or above their last peak in the mid-80’s, but they are real rents, not laced with large concession packages.  Rents continue to show steady growth”  In 2001 suburban class A rents averaged $14/SF NNN.   

And what happened in 2008?  Real net rents dropped.  With inflation those rents should now be $19.50/SF NNN.   But they are not.  And that is really good news for tenants.

Net rents today, for suburban class A office space are on average

$13/SF  which is $1/SF lower than they were in 2001.   Class B space in recently renovated buildings is an even better deal.

This is a great time for tenants.   Landlords are giving significant concessions to new tenants and to tenants who are renewing their leases early.  Tenants can get free rent or above standard concessions in exchange for a lease commitment.

Among the best news for tenants in 2009 is the amount of sublease space that will be added to the market. Chase, Wachovia, and other financial firms have recently announced layoffs. Citibank is selling Smith Barney to Morgan Stanley    That means that these companies will put their excess office space on the market.  Whether or not they find tenants for that space, the mere fact that the space is available will have a negative impact on lease rates for the market in general.   In some cases these subleases will create interesting and financially advantageous situations for tenants who have some flexibility.  Given this, I think net rents will continue to decline through out 2009  

Tenant Improvements

In the old days, Landlords could borrow the money for Tenant Improvements and either include the payback in the tenants lease rate or amortize the TI dollars over the term of the lease. Now, Tenant Improvement dollars can be difficult for landlords to obtain or borrow.  Sometimes the term of the loan is shorter than the term of the lease.  This is a problem for landlords and it is a problem for tenants.

In a turn around from the old days when tenants were the only ones who had to prove they were credit worthy tenant rep brokers are now asking landlords to provide proof to the tenants in advance that they as landlords have the financial resources to complete tenant improvements and this is before the tenant will even look at their building. 

Milwaukee office submarkets overview

Downtown East is still a strong submarket attractive to many tenants.   Several new Class A buildings are proposed and there are 3 or 4 large Class A tenants looking for space in the next three years.  Normally this would mean we could expect to see a new tower being built in downtown Milwaukee.   But, right now – nothing is normal.  In the short term vacancy rates will rise, absorption will be negative, but I do not think that lease rates will change in 2009.

The real excitement in Downtown Milwaukee in 2008 was west of the river.   And I cannot tell you how many years I have been waiting to say that.F ederal Plaza, Schlitz Park and The Brewery all signed new tenants, all of those tenants are new to this submarket.   The result was 200,000 square feet of positive absorption in 2008.   

Brookfield.  This market was built to accommodate the expansion of office tenants from the relocation and the inner suburbs in the 1970’s and 1980’s.   Although many buildings are well maintained they are starting to show their age.  A careful review of the market will help tenants find hidden gems with quality management and very attractive lease rates.

Mayfair.  This is a market with 2,500,000 square feet of space and a 17% vacancy rate.   The Forum building was taken back by the lender and I think this will mean some very aggressive lease rates in the short term.   

The North Shore.   Just under 2,000,000 square feet of space.  The good news is that office tenants are finally finding their way to Bayshore and they are getting attractive lease packages.   

Park Place.    This is a market that caters to tenants who occupy large blocks of space.   The vacancy rate is just under 16%

The South side, West Allis and the airport. This is a market that is looking for respect.   There is no question that 2009 will show increased vacancy and lower lease rates.

The Third Ward and Walker’s Point.   I think that the numbers for this market are deceiving.  Because there is only 1.4 million square feet of space even a gain or loss of 20,000 square feet appears to be more dramatic than it is. There have been new tenants moving in, existing tenants moving around and a significant trend towards tenants becoming owners of office condo’s.  This market is going to continue to be a generator of economic activity and that it will remain attractive to tenants as well as companies who want to own their own space.

Outlook for the future.

There is no question that lease rates will stay flat or decrease. I also expect landlord concessions, including free rent to increase

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