100 East foreclosure, COVID-19 not dampening office deals
With one of Milwaukee's biggest office towers in foreclosure, and the COVID-19 delta variant raising questions about the future of the workplace, you might think the downtown office market is in trouble.
But businesses, including some new players, continue to lease downtown office space.
And that's happening even as downtown Milwaukee added two new major office buildings over the past year.
Most other larger downtown buildings have vacancy rates that are well below the half-empty status of 100 East, which is being taken over by lenders after defaulting on its debt.
Meanwhile, another property with a high vacancy rate, the 310W Building, was purchased at a much lower cost than 100 East — greatly reducing the likelihood that it will fail to make debt payments.
The downtown office market is “weathering the storm fairly well,” said Lyle Landowski, chief operating officer at commercial real estate services firm Colliers | Wisconsin.
The pending foreclosure of 100 East “is really the only casualty that's happened downtown through COVID,” said Andrew Jensen, a principal at Cushman & Wakefield | Boerke real estate firm.
Milwaukee's central business district, an area that includes downtown, the Historic Third Ward and Walker's Point, posted a 17.6% vacancy rate at the end of the 2021 second quarter on June 30.
That's according to the latest quarterly survey released by the Commercial Association of Realtors-Wisconsin.
That compares with an 18.5% vacancy rate at the end of the first quarter on March 31.
The overall office vacancy rate for the three-county Milwaukee area was 15.8% on June 30, and 16.7% on March 31.
Leasing activity is up
Leasing activity improved during the second quarter, said Marianne Burish, executive vice president of Transwestern, a real estate firm.
“Once COVID is squarely in the rearview mirror, new leasing activity with a return to longer lease terms will experience a notable pick up,” Burish said in a statement released with the latest Realtors association survey in July.
“While there is still a great deal of uncertainty regarding what the future of the office market will look like, the fact that we are seeing increased leasing activity and absorption is a good portent that the office market is coming back,” said Jim Barry, president of Barry Co., a real estate firm, in a statement.
The new companies coming into downtown are led by Milwaukee Tool, which is redeveloping an empty office building at 501 W. Michigan St. into its newest facility. The company also operates its Brookfield headquarters and a growing office presence in Menomonee Falls.
Other companies entering downtown include Good Karma Brands LLC, which is moving WTMJ-AM and other operations to The Avenue, 275 W. Wisconsin Ave.; American Family Insurance Co., which plans to redevelop a historic building at 1311-1325 N. King Drive, and Church Mutual Insurance Co., which is opening an office at 833 East, 833 E. Michigan St.
So, given the growing strength of the Milwaukee-area office market, including downtown, why did the 35-story 100 East, 100 E. Wisconsin Ave., end up in foreclosure?
Some of the answer comes from the timing of the office tower’s sale — and its price.
100 East was bought by an affiliate of Santa Monica, California-based Hertz Investment Group in 2016 — during a peak period for office building sales, according to Jensen.
The purchase price was $78 million, or around $179 per square foot.
Another older downtown office tower, the 411 East Wisconsin Center, 411 E. Wisconsin Ave., was sold in 2017 for $124.6 million. That’s around $180 per square foot.
Yet, 411 East Wisconsin Center appears to be in sound financial shape, according to market sources.
The difference is tied in part to the physical condition of each office tower.
411 East was sold to an affiliate of Middleton Partners, a private real estate investment firm based in Northbrook, Illinois, by a group owned by Stamford, Connecticut-based Five Mile Capital Partners LLC.
Five Mile’s Riverview Realty Partners bought 411 East in 2014 for $74.3 million — a price that in part reflected its 77% occupancy rate.
That occupancy rate was higher than 89% when the 30-story tower was sold three years later.
Riverview Realty drew tenants to 411 East after investing $17.3 million to improve the building.
That included renovations and upgrades to the lobby, atrium, cafe, business center, elevators, parking garage, and heating, air conditioning and ventilation system.
Hertz Investment executives discussed improvement plans for 100 East, which was completed in 1989.
But except for an upgraded conference room and some minor lobby improvements, most of those renovations didn’t materialize, Landowski said.
That lack of improvements, along with relatively small floors and a parking structure that is difficult to maneuver, hurt 100 East in competing with newer buildings, said Mark Irgens, chief executive officer of Irgens Partners LLC.
Irgens has developed several downtown and suburban office buildings, including the 18-story 833 East in 2016 and the 25-story BMO Tower, 790 N. Water St., in 2020.
BMO Tower’s second-largest tenant is the Michael Best & Friedrich law firm — which announced in 2016 it would be moving there from 100 East. That news came just three months after the building was sold to Hertz.
Michael Best said the new tower could accommodate more shared workspace and other features that would be difficult to create at 100 East.
Also, BMO Tower’s larger floors, and improvements in construction and energy technologies, provide more efficient offices, Irgens said.
That allowed Michael Best to reduce its space by about 30% after moving to BMO Tower last year.
Meanwhile, 100 East in 2016 also lost accounting and business consulting firm PricewaterhouseCoopers LLP.
The firm moved to 833 East, with the new location’s larger floors allowing it to consolidate all its operations on one floor, compared to operating on several floors at 100 East.
To be sure, 100 East isn’t the only older downtown office tower facing challenges.
The 14-story 310W Building, 310 W. Wisconsin Ave., has a 35% occupancy rate, said Brad Gordon, acquisitions head for New York-based Time Equities Inc., which operates the property.
He said Time Equities has made improvements to the building’s parking structure, as well as upgraded highspeed elevators and new artwork, flooring and furniture on the mezzanine level, since buying it in 2017 for $19.5 million.
Time Equities is completing plans for additional improvements, Gordon said, including the replacement of the atrium escalator with a grand stairway, installation of glass on the mezzanine level surrounding the atrium and upgrades to the main entrance and lobby.
That work is to be done by early 2022. Time Equities carries a much lower debt level from its purchase compared with what Hertz carried for 100 East.
Time paid around $34 per square foot — about 19% of what Hertz paid on a per-square-foot basis for 100 East.
Other older downtown office buildings undergoing improvements include Associated Bank River Center, 111 E. Kilbourn Ave.
Green Bay-based Associated Bank, which bought the 28-story tower in 2016 for $60.5 million, is adding a secondfloor balcony and roof to provide outdoor dining space overlooking the Milwaukee River, as well as a conference center and fitness facility.
Also, Schlitz Park’s new owners are finishing up renovations at the business park.
Meanwhile, other downtown office buildings continue to sell.
That includes the 14-story 330 Kilbourn, 330 E. Kilbourn Ave., acquired in March by New York-based Group RMC for an undisclosed price.
And that’s happening even as downtown adds more office space with both redeveloped buildings such as The Avenue and HUB640, 640 N. Phillips Ave., as well as new properties that include BMO Tower and the Huron Building, 511 N. Broadway.
The 11-story Huron Building, which opened last fall, is anchored by the Husch Blackwell law firm.
Husch Blackwell moved there from Cathedral Place, 555 E. Wells St., which is backfilling much of that space with Johnson Financial Group Inc.’s relocation from two downtown sites — including 100 East.
Those “musical chairs” maneuvers, with large tenants shifting among different downtown office buildings, are why city officials in recent years have generally declined to provide tax incremental financing for multi-tenant properties.
That makes sense, said Irgens, who tried unsuccessfully to obtain tax financing help for developing 833 East.
Such tax financing cash was used frequently in the 1980s, during Mayor Henry Maier’s administration, to help develop such office buildings as 100 East, 1000 North Water, Milwaukee Center, now known as Associated Bank Center, and Reuss Federal Plaza, since renamed the 310W Building.
More than 30 years later, 100 East faces some uncertainty.
Executives from Hertz and the building’s court-appointed receiver, Friedman Real Estate Management, haven’t responded to the Journal Sentinel’s questions about the building’s ownership status.
While some older downtown offices are converted into apartments and higher-end hotels — a possible fate for the Johnson Controls downtown complex — real estate industry sources say 100 East remains a viable office site because of its strong location.
It will just require some big improvements, they said.
“The building will be successful again,” Landowski said.