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Steve Chiotakis: Just as the economy nears the end of recession, a worsening commercial real estate market threatens to bump the recovery off track. The National Association of Realtors reported recently that rentals of office and retail space fell to their lowest level in 15 years. The downturn is hitting some downtowns especially hard. From station WUWM in Milwaukee, Erin Toner reports.
Erin Toner: I’m up on the 32nd floor of Milwaukee’s tallest building to meet real estate broker Bill Bonifas. We’re looking out over the heart of downtown and the Lake Michigan shoreline just a few blocks away.
Bill Bonifas: Which is very pretty today. We have Northwestern Mutual’s headquarters right in front of us . . .
Bonifas is executive vice president of the local CB Richard Ellis branch. He’s watched Milwaukee’s downtown take shape.
Bonifas: Most of what you see has been developed since 1979, when I started in this business.
He says there have been good and bad times over those 30 years, and this is one of the bad ones. Commercial vacancy rates in many Midwest cities are as high as 15 percent. But in Milwaukee, 1 in every 5 offices is empty. The result is a renter’s market.
Bonifas says many of the tenants he represents are going after so-called “blend and extend” deals.
Bonifas: Where they say, “Mr. Landlord, our lease is coming up in two or three years, we’re willing to add five years to our lease now, we need very little tenant improvement work, perhaps, but what we want . . . we want a substantial reduction in our rent today.”
This is far from what city planners had hoped for earlier this decade. A lot of money had been pumped into redeveloping crumbling urban cores that gave the Rust Belt its name once manufacturing jobs vanished.
While skylines have transformed, there’s worry the rust could return. Many landlords are in danger of defaulting on their buildings because property values are falling, they’re losing tenants and they can’t refinance their loans.
Bob Bach is chief economist for Grubb & Ellis:
Bob Bach: The amount of distress out there is increasing very rapidly. About $108 billion worth of properties were classified as distressed as of mid-year. Investors are generally waiting, I think there’s a feeling that there’s going to be this wave of distressed properties coming back to market.
One bright spot is that historic structures are doing better than newer ones. One Milwaukee developer is refurbishing the Pabst Brewery complex downtown. Most of it was built in the 1800’s. He’s already sold six buildings on the 20-acre site. And this has to be a good sign: the old boiler building now accommodates a commercial real estate firm.
In Milwaukee, I’m Erin Toner for Marketplace.