The Outlook on Local Real Estate

Optimism and confidence are up but a few concerns linger

(page 3 of 3)

On The Horizon

Several factors are changing the demand for real estate, including demographics, regional economic conditions, regional supply of real estate and unemployment levels, Machotka indicates. “Real estate located in areas where baby boomers are retiring, the economy is improving and jobs are being created, like in the states of Texas and North Dakota, will recover sooner and faster.”

Jesse foresees a continuation of current trends as the year goes on. “A general perception of modest improvements in the economy should translate to people having increased confidence in the market,” he says. “Lenders have money for real estate deals, and will have continued loan workout transactions and distressed properties, but we hope the ratio of distressed to typical transactions improves.”

Cegelski is seeing positive signs of what he believes will be a slow and steady recovery of the commercial real estate market in Dane County. “There are large projects on the drawing board, like UW Hospital’s new clinic and several projects on city property on East Washington,” he says.

Most construction activity in Madison will be tied to government or university projects, Hagen predicts. “If you drive through the Isthmus and look for the cranes, most are around campus.”

Apartment construction is very active, too, because of population growth in the slow housing market. “I’m actually concerned the apartment market is getting oversupplied,” says Hagen. “I see a lot of projects in predevelopment stage, and if they all get built, vacancy would increase and exacerbate problems with the housing market returning to normal.”

Blitz expects to see continued right-sizing of office space. “Some people have too much space, some have too little,” he says. “Or they have enough but are using it inefficiently. A professional might be able to help them grow within the same space, get the rent lowered or move to space that better fits their needs.  

“Office users are taking advantage of advancements in mobility technology, cloud computing, systems furniture, video conferencing and collaborative work environments,” he adds “That will have a very real impact on the amount of space companies require.”

Many consumers are downshifting to smaller, more efficient homes, Sprinkman finds. “There’s less desire for McMansions and people want to be closer to the center of Madison, where they can walk to stores and restaurants,” she says. “There’s a strong community orientation, with more people moving back into established neighborhoods from the suburbs.”

Dines foresees another surge in downtown interest as people make the move from home to condo. “We’re also seeing very high demand for luxury rental properties in the downtown area,” she says. “I’m currently listing a Lake Monona-facing development site on Wilson Street, two blocks from the Square, which would be a perfect candidate for a luxury condo or apartment development.”

Financing might be a challenge, Hagen notes. “Existing condos are mostly rented out or sold, but we’re not seeing new construction. “If someone came to us with a proposed condo project, it would be a pretty tough sell unless they had it pre-rented.”

Schwartz believes interest rates will likely stay favorable a while longer. “Everyone should be taking advantage of this,” he says. “We’ve been refinancing our buildings at interest rates that will further solidify the success of our investments. And if your bank won’t refinance, consider moving your loan to another one.”

Herl is concerned about nonrecourse loans (loans secured by the property, where if the buyer defaults, the lender’s recovery is limited to seizing the property). “A lot of them are coming due and banks are getting ready,” he says. “On the other hand, we have cash buyers lined up out the door and they’re pretty savvy. They know they can play a waiting game and get prices knocked down further.”

Companies are challenging themselves to do more with less, and real estate professionals can help. “They’re looking for ways to reduce expenses without interrupting efficiencies,” says Blitz. “Oftentimes, decision makers aren’t aware of available opportunities with regard to their commercial leases. Hiring a real estate professional like Cresa can offer significant financial benefits with no out of pocket expense.

And finally, Schwartz offers a few thoughts on how certain trends affect real estate:

• The inflation we expect to see will create a drive toward physical assets, so investment in real estate will act as a hedge against rising prices.

• Rising commodity prices increase construction costs, so building new becomes more expensive and buying used buildings becomes more attractive.

• There has been very little private sector development since 2008, so as the economy recovers, there will be a fight for existing space from both tenants and from buyers.

- Judy Dahl


The Rise of the Entrepreneur

Because the economic downturn has lasted so long, businesses have learned to do tremendously more with less. “They use technology and staff more efficiently, and that is likely to continue,” says Blake George, principal at commercial real estate firm Lee & Associates. “The sad thing is that some people who have lost jobs won’t get back to work as quickly. It’s part of the reason we’re not seeing as much recovery on the jobs side as on the profit side. The exciting thing is that entrepreneurs, particularly in Dane County, are
opening businesses that hopefully in 10 years will be the next Epics.” People have spent the last two or three years dreaming and wanting to go into business, agrees Mike Herl, partner and vice president of broker services at Inland Companies. “Now they’re saying, ‘Let’s do this.’” “Much of my business is mom-and-pop startups,” he adds. “Nationally, they’re taking advantage of the market right now and we’re working with many companies looking for five- or 10-year leases. I haven’t seen this level of startups in six or seven years.”

A Recession-Spawned Start-Up launched January 4, 2012, to meet a distinct market need. “I started the business because banks had inventories of foreclosed homes, and they’re so expensive to maintain and heat,” says founder Kim Machotka. “There isn’t another business like this. It’s a marketplace that gives consumers one place to go to find everything owned by banks.”

The website had over 140,000 hits in its first two months and inquiries from roughly 15 countries. “Banks want to liquidate their inventories, so they list them on our site and consumers can negotiate directly with the banks or their brokers,” Machotka explains. “I don’t have anything to do with the negotiations. It’s a clearinghouse. Banks become members and purchase listing packages, and then renew monthly. Consumers get free access and can check in on our recent listings tab.”

She’s marketing in Wisconsin and then plans to expand state by state. She also advertises on Google. “If someone searches ‘foreclosure,’ our business comes up,” she says. “ offers the public free and direct access to bank-owned property listings including real estate, cars, trucks, equipment, watercraft and more.”

Green is still the word

In building, green has gone from fad to reality. “Green building has gotten affordable enough that people who want to make a statement can do it,” says Blake George, principal at commercial real estate firm Lee & Associates. “Some paybacks are still 30, 40 or 50 years, but people are attuned enough to want to do it even without an immediate payback. It’s a stewardship thing. We see it with our clients.”

Sustainability is always part of the conversation, agrees Clinton Krell, P.E., a sales representative at Spancrete, , innovator of precast building solutions. “People are building wiser and integrating sustainable practices in the designs of buildings,” he says.

“There are more opportunities for design/build partnerships, and that philosophy expedites the time to design a structure and get it constructed,” he continues. “More people are realizing the advantages of the process.”

Building owners are realizing cost savings as compared to the traditional process of completing a design and then getting bids for builders. “For instance, if you don’t get a precast concrete manufacturer involved up front, you lose project efficiency and add time. When we’re involved early, we can compress the timeframe of a project, design for optimal building performance, and ultimately it allows the owner to take control of the building sooner, resulting in substantial cost savings.”

Krell’s product is sustainable. “It has excellent performance over the lifecycle of a structure,” he says. “It’s very durable and performs well in environments with seasonal fluctuations and daily temperature changes. It contains some recycled materials and as a company we’ve been improving our sustainable operational practices for over five years. Our commitment to sustainability and lean production practices can be seen in everything we do.”

- JD


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