The chairman and CEO of a Milwaukee-based regional real estate development and investment company, as well as a member of NAIOP’s 2016 Board of Directors, shares his insights and perspectives on the commercial real estate industry.
WANGARD PARTNERS, INC. Chairman and CEO Stewart Wangard has over 40 years of commercial real estate brokerage, leasing, development, property management and syndication experience in Wisconsin, the Midwest and on the national stage, with a deep background in office buildings. Today, the firm is deeply focused on development, property management and investments within what Wangard calls its four major “food groups”: multifamily, grocery-anchored retail, industrial properties and office buildings.
Development: Tell us about your background and about the formation of Wangard Partners, Inc.
Wangard: I started in the industry in 1976. In 1979 I joined the RE/MAX organization as regional director for Wisconsin as well as for Minnesota, North Dakota and South Dakota. From there, I went to work for a firm called Boerke that later became a Cushman & Wakefield affiliate. I worked my way up through that organization to become president.
I left the firm in 1992 to start my own company, but the trouble was, I had a 12-month non-compete agreement. I went to work for NorthMarq Capital, handling distressed real estate, a part of the business that did not compete with my old firm. Until I joined NorthMarq, I had been on the brokerage side of the business. NorthMarq afforded me a completely different view of the industry; it was the equivalent of getting my master's degree in real estate. In 1995, I started my own company, working in brokerage and development.
Development: How did the company evolve?
Wangard: In 2005, I took a NAIOP-sponsored course at the Harvard Graduate School of Design titled “How to Run a Real Estate Company.” It was an eye-opening experience. Three days into the course, I realized that I had to streamline my present company and reconfigure it, because my heart was really in the development side of the business.
Thanks to NAIOP — through both the National Forums and our local chapter — I gained a great deal of exposure to different companies that allowed me to build my current company. Today, we have 48 people; this time next year, we will have 55. We are dealing with more opportunities than we could have imagined just a few years ago.
Development: As CEO, what are your core areas of focus?
Wangard: The most important role that I play within the company is talent recruitment. The other work that I do day to day involves legal and financial issues, as well as investor relations.
Development: What qualities do you look for when hiring senior staff?
Wangard: More than anything else, honesty and integrity. Most people assume that they possess those qualities. But the test is, how do they handle problems when everything is going wrong? I need people who will say to me: "Look, I made a mistake." Then, as a group, we will work through the problem. I don't want people hiding problems, because they don't go away on their own.
We also look for people who want to put down roots in this area. Milwaukee and Wisconsin are great areas in which to live and raise a family, but we deal with a challenging climate here. In addition, we want people who can get along with others in the company, because commercial real estate, while a fun and rewarding industry, can be a high-stress business at times.
Development: What market or economic data do you review on a regular basis?
Wangard: Everything. We are numbers wonks here, and we look at everything. Real estate is, in essence, a local business. We have two researchers at the firm who look at job growth, migration to our community, construction costs and other data. Even though the Federal Reserve raised interest rates in late 2015, our research leads us to believe that 2016 will be a very stable year. For us, though, the ultimate formula for developing real estate is the intrinsic value of the real estate and the risk-adjusted return. We cannot make real estate decisions based on what is happening in the tax world or [in] Washington.
Development: Are you seeing signs of demand changing in any of the product categories in which you are involved? If so, in what locations and for what product types?
Wangard: The real estate market is shifting dramatically right now. Demand for apartments is not letting up, but the cost of construction is accelerating faster than our local rental rates. We are adjusting to this by building more projects in the first-ring suburbs and by shrinking the square footage of our apartment buildings without impacting amenities.
Grocery-anchored retail development is moving from rural to suburban and urban areas, so we have shifted our focus to more of those areas. In the industrial market, we are seeing a lot of retail users opening up regional distribution facilities. They have shrunk the square footage of their traditional retail format and are now putting more square footage into the warehouse. Office development is dramatically different than it was five years ago, with more companies wanting to be in the center of the city and first-ring suburbs.
Development: Are certain markets/submarkets being overbuilt today?
Wangard: We have a flood of out-of-state developers coming into the market to build apartments. As a result, we will have some overbuilding in 2016, but will go back to equilibrium in 2017. We will recover from this overbuilding of apartments, which is due to the job growth expected from two very large office projects underway: the 1.3 million-square-foot Northwestern Mutual Building and another 350,000-square-foot building.
shifting, while also driving demand for residential development. One mile east of my office is the sixth-largest medical complex in the U.S. The Milwaukee Regional Medical Center is a bigger driver of demand for multifamily development than any other work center in this part of the state.
Development: Over the next 18 months, what challenges/opportunities do you see for your business?
Wangard: The biggest challenge is capital. We came out of the recession with a high degree of liquidity. We are a relationship-oriented borrower, not a transaction-oriented borrower. We don't always look for the lowest cost of capital, because we are more concerned about a steady flow of capital.
Our development model is changing as well. In the past, we retained 70 to 80 percent of each project. Now, we have backed off to 40 percent of each project; in 2016-2017, that will be reduced even further, closer to 20 percent. We are more reliant on institutional lenders and high-net-worth individuals to keep our company growing than in the past.
Development: Looking out three to five years, what do you see on the horizon that will impact your business?
Wangard: Some of the older developers and owners are beginning to retire, and we see opportunities ahead to grow our property management and development business.
Development: What are you doing to prepare for the next market downturn?
Wangard: We will be liquidating a lot of real estate in 2016. Every year we sell off a certain amount of assets, but what we will do now is retain and orient the portfolio around Class A product in each product type.
There is no one real estate cycle: each of the four property areas in which we operate functions on its own cycle. Each is influenced by the cost of capital, but even when capital is more expensive, there are always office users, industrial users and retailers that want to continue to grow their businesses.
Development: How has the industry changed during your career?
Wangard: The flow of information and knowledge is dramatically different. We used to take three or four days to fly around the state looking at properties; today, we take three or four hours and "fly" around via Google Earth. Technology now enables us to be in our offices and fly around, over, on top of or through a building.
Development: What are the most valuable lessons you've learned over the course of your real estate career?
Wangard: When I was developing my business, the most important thing I learned was to spend time with the people I considered mentors. Another important lesson I've learned is to work cooperatively with competitors. If we don't have a strong state and a strong city, then my business is not sustainable no matter how good a businessperson I am.
One other key lesson I've learned is to bring a very high-value proposition to our tenants. There is always someone out there who can build a building cheaper than we can, so our company must provide greater value. We don’t just want a lease transaction with a tenant; our team wants a long-term relationship.