Milwaukee Industrial MarketYear in Review 2010

By: Todd J. Delahunt

Appraisal Institute – Wisconsin ChapterNovember 11, 2010

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Industrial Market Discussion Outline

• Market Conditions

• Cap Rate Analysis

• Sale Transaction Activity

• Regression Analysis – Physical Adjustments– Back by Popular Demand– Added “Recession Sales” to the Data Set

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Market Conditions3Q 2009 vs. 3Q 2010

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Vacancy Rates3Q 2009 vs. 3Q 2010

County/SubmarketVacancy Q3

2009 (%)Vacancy Q3

2010 (%)

Milwaukee

Downtown 13.0% 13.6%

North Central 9.6% 11.6%

North Shore 12.6% 15.4%

Northwest 9.0% 10.1%

South 8.0% 13.0%

South Central 10.1% 9.6%

West 10.7% 12.8%

Milwaukee Total 10.0% 12.2%

Waukesha

Northeast 6.7% 7.0%

Northwest 7.0% 7.8%

Southeast 5.6% 6.6%

Southwest 2.5% 4.7%

Waukesha Total 5.6% 6.6%

Ozaukee 9.9% 10.9%

Racine 5.6% 7.0%

Sheboygan 2.6% 4.2%

Kenosha 9.7% 11.0%

Walworth 7.8% 7.4%

Washington 7.7% 7.3%

Grand Total 7.7% 9.1%

Market Conditions by TypeWarehouse & Flex

• Warehouse vacancy up (8.2% vs. 7.2% in 3Q 2009)– Driven by negative absorption

• Flex vacancy flat (4.5% vs. 4.2% in 3Q 2009)– Small businesses are continuing to lease rather than buy.

• Market uncertainty• Tight credit markets

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Historical Rental Rates

• Asking rental rates have remained relatively flat over the past several years.

• Rental market being propped up by landlord concessions– Tenant’s Market

– Receptive to short term deals

– Free rent prevalent in the market (1 month free per year of lease term)

– Higher TI Allowance (Landlord’s that can afford it)

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CAP RatesNational Investor Survey

• CAP rates increased dramatically between Q4 2008 and Q1 2010 (8.28% to 10.98%).

• Participants were not pursuing non-institutional investments in Q4 2009.

• CAP Rates have dropped slightly in the last 6 months.– Back to Q3 2009 Levels.

• Expect CAP Rates to decrease slightly into 2011.

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SURVEY CAPITALIZATION RATESNational Warehouse

Time Period Institutional Change in BPS (1)

Non-Institutional

Change in BPS (1)

Q3, 2010 8.38% -22 10.63% -22

Q2, 2010 8.60% -13 10.85% -13

Q1, 2010 8.73% -7 10.98% N/Ap

Q4, 2009 8.80% 34 See(2) N/Ap

Q3, 2009 8.46% 53 10.79% 56

Q2, 2009 7.93% 80 10.23% 139

Q1, 2009 7.13% 40 8.84% 56

Q4, 2008 6.73% 10 8.28% 25

Q3, 2008 6.63% 7 8.03% -2

Q2, 2008 6.56% - 8.05% -

Total BPS Change 182 239

(1) Over previously listed time period; BPS = Basis Points(2) Participants were not pursuing non-institutional investments at this time.

Source: PriceWaterhouseCoopers

Transaction Activity(10,000+ Sq. Ft. Buildings)

• Slight decrease in industrial sales activity in 2010.

• Average sale price about the same.

• +/- 10% increase in average sale price per square foot.

• Increase in days on market.

• Slight decrease in price to asking ratio.

Source: CoStar

-81.53%-Price to Asking Ratio

1,1403421Days on Market

$233.33$26.26$1.59Price PSF

2,200,00071,37610,000GBA

$270,255,414174$17,616,000$2,012,024$127,000Sale Price

Total Sales Volume

Total # of

SalesHighAverageLow

2009 SALES

-80.32%-Price to Asking Ratio

1,72244075Days on Market

$88.82$28.90$2.25Price PSF

1,120,03579,38610,000GBA

$181,888,225109$38,500,000$1,974,211$120,000Sale Price

Total Sales Volume

Total # of

SalesHighAverageLow

2010 SALES (1/1/2010 – 10/22/2010)

Source: CoStar

-81.53%-Price to Asking Ratio

1,1403421Days on Market

$233.33$26.26$1.59Price PSF

2,200,00071,37610,000GBA

$270,255,414174$17,616,000$2,012,024$127,000Sale Price

Total Sales Volume

Total # of

SalesHighAverageLow

2009 SALES

-80.32%-Price to Asking Ratio

1,72244075Days on Market

$88.82$28.90$2.25Price PSF

1,120,03579,38610,000GBA

$181,888,225109$38,500,000$1,974,211$120,000Sale Price

Total Sales Volume

Total # of

SalesHighAverageLow

2010 SALES (1/1/2010 – 10/22/2010)

Regression AnalysisBuilding Age Adjustment

Average  

# ofSales $/SF

BuildingSize

ClearHeight

YearBuilt

%Office   % Change/Yr.

All Sales 214 $33.86 50,417 17 1971 14%  

50+ yrs. Old 55 $24.30 50,197 14 1939 10%

40-49 yrs. Old 24 $28.75 19,783 14 1964 13% 1.5%

30-39 yrs. Old 45 $30.50 67,837 17 1975 19% 0.6%

20-29 yrs. Old 39 $35.17 50,042 17 1984 15% 1.3%

10-19 yrs. Old 43 $45.96 47,967 20 1994 15% 2.3%

1998-Present 8 $62.44 60,846 26 2000 15% 2.6%

• Building age adjustment of 1.5% per year is appropriate.– All else being equal, a building constructed in 1989 will sell for +/- 1.5%

less than a building constructed in 1990.

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Regression AnalysisClear Height Adjustment

  Average  

# ofSales $/SF

BuildingSize

ClearHeight

YearBuilt

% Office % Change

All Sales 214 $33.86 50,417 17 1971 14%  

< 16 ft. 93 $29.57 27,250 13 1956 14%  

16-18 ft. 59 $36.71 37,436 17 1980 15% 19.5%

19-21 ft. 27 $36.20 60,369 20 1984 17% -1.4%

22-24 ft. 15 $37.01 117,913 22 1986 16% 2.2%

25-28 ft. 9 $39.91 140,393 27 1987 11% 7.3%

29+ ft. 11 $39.94 125,826 32 1979 8% 0.1%

• Market doesn’t pay more for clear heights greater than 28 feet.– Incurable functional obsolescence.

• Heavy discount for clear heights less than 16 feet.– Only older buildings have clear heights less than 16 feet.

• Larger buildings tend to have higher clear heights.

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Regression AnalysisOffice Space Adjustment

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Average

 

# of

Sales $/SFBuilding

SizeClearHeight

YearBuilt

%Office

% Change/ Add. %

All Sales 192 $33.66 49,720 17 1972 13%  

0-5% Office 35 $21.43 90,456 17 1959 3%  

6-10% Office 59 $28.10 47,032 17 1970 8% 4.7%

11-15% Office 44 $38.26 35,263 17 1978 13% 5.3%

16-20% Office 21 $42.98 28,802 16 1972 18% 2.2%

21-25% Office 17 $44.42 40,760 17 1979 23% 0.6%

26-40% Office 16 $44.63 47,249 18 1980 32% 0.1%

Note: Excluded sales with >40% Office Space  

• Market does not pay more for office space beyond 25% of the GBA.

• Large increase in value for office space between 6% and 15%.– Typical user requires office space in that range.

• Older buildings tend to have less office space.

Regression AnalysisExterior Wall Type Adjustment

Average

WallType

# of Sales $/SF

Building Size

ClearHeight

Year Built

%Office % Change

Block 115 $37.48 42,684 17 1974 14%  

Metal 49 $33.32 48,352 19 1984 10% -12.5%

Note: Excluded sales with other wall types (brick, etc.)

• All else being equal, buildings with concrete block exterior walls sell for 10% to 15% more than buildings with metal exterior walls.

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Contact Information

Todd J. DelahuntSenior Appraiser

The Nicholson Group, LLC555 S. Industrial Drive

Suite 207Hartland, WI 53029

(262) 369-5400 ext. 22tdelahunt@nicholson-group.com

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