Market wide, relatively low vacancy rates, steady rents and the resumption of job growth will bolster apartment investments over the next several months. In-state buyers will likely continue to target operationally sound properties in the near-in City East submarket and affluent areas in suburban Waukesha County. A handful of

distressed properties will trade, though these assets typically contain 30 units or fewer and are priced between $35,000 and $45,000 per unit, compared to the overall median of almost $50,000 per unit.

Through the most recent economic downturn, the local office sector experienced the sharpest increase in vacancy of the core commercial property types, and it now accounts for the second-largest share of distressed dollar volume in the marketplace. Since late 2007, office vacancy has spiked 660 bps to 19.7%. While asking rents declined by only 2% over the same period, concessions have skyrocketed, resulting in an 11 % drop in effective rates.

Despite this weakening, overall distressed office dollar volume, in absolute terms, remains somewhat limited in Milwaukee when compared to other major markets across the nation. Furthermore, the local CMBS office delinquency rate currently stands at less than 3.5%, well below the national rate of 6.6%, suggesting REO activity will remain minimal over the near term. There have been owners who ran into challenges in recent years due to softening fundamentals, but only a few have resulted in reported distressed property sales. It also remains unlikely that distressed office sales will claim a significant share of velocity over the next year, though a few medium-sized deals could emerge based on the roster of troubled assets. As of the third quarter, most of the properties considered distressed ranged in size from 100,000 to 300,000 square feet, while those already reclaimed by banks were much smaller, at around 50,000 square feet or less.

After climbing in 2008 and early 2009, retail vacancy has held relatively stable over the past 18 months, hovering around 15%. Rents have continued to decline, however, and effective rates in the market currently fall 7% below their most recent cyclical peak of a few years ago. Nonetheless, distress remains minimal in the Milwaukee retail market, and the majority of trouble can be associated with maturing debt as opposed to operational issues.

Within the CMBS sector, just one loan is in foreclosure, and only one Milwaukee property has been reclaimed by its lender. Another two loans have fallen behind by 90-plus days, while three loans have encountered problems due to balloon payments that became due upon maturity. While distressed retail property sales remain few and far between, multi-tenant sales velocity has surged in 2010 after stalling for much of last year. More buyers have emerged to acquire well-located shopping centers anchored by grocers or dining establishments with guaranteed leases, both at cap rates above 8%. Meanwhile, the lack of REO properties has encouraged more aggressive multi-tenant investors to take on high-vacancy listings, where buyers with management and leasing capabilities can achieve double-digit first-year yields. Single-tenant investors are seeking properties with slightly elevated risk and cap rates, targeting assets occupied by top-notch, national-level tenants in secondary and tertiary submarkets, as initial yields in these areas currently average around 7.75%,50 bps to 60 points higher than those for similar infill product.

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