CRE c Nebraska

Slow commercial sectors? They're rare in Omaha

Slow commercial sectors? Not in Omaha,ph01
Marriott Capital District Hotel

by Dan Rafter
Ed Fleming, executive vice president with the Omaha office of Colliers International, pointed to the numbers to show just how strong the Omaha market is today.

In 2017, the Omaha market saw a total commercial real estate sales volume of $2.1 billion. That is not just a small increase from 2016, but a rather astounding jump of 57 percent. The volume was largely driven by the $776 million sales of the Horseshoe Casino and Harrah’s Casino, both in Council Bluffs, Iowa, part of the Omaha market. Without those deals, the Omaha 2017 commercial market was still strong, of course, but closer in volume to what the region saw in 2016.

“Investor appetite across all product types is strong,” Fleming said. “Similar to other areas, the apartment market commands the lowest capitalization rates, in part driven by attractive financing available through Fannie Mae and Freddie Mac.”

Fleming isn’t alone in this opinion. The brokers doing business across this market say that Omaha’s commercial real estate sectors are strong, and that they’re only getting stronger.

Omaha is, simply, an attractive market today. Fleming said that new investors are steadily entering the Omaha market in search of deals. Many of these new investors have provided a positive boost to the Omaha commercial real estate market, especially in the apartment sector, Fleming said.

“Much of that is fueled by capitalization rates, as yield-hungry investors continue to look to secondary and tertiary markets for higher yields,” he said. “These yields remain much higher in Omaha and the Midwest than in the coasts.”

The lower construction and labor costs in the Omaha market are also attractive to investors, Fleming said. This doesn’t mean, though, that all construction is priced at more affordable levels today.

Fleming said that the outlier today remains single-tenant retail deals. In such deals, the value of the in-place lease coupled with a strong location will often drive the pricing-per-square-foot higher, he said.

Overall, though, the Omaha market remains a strong draw for investors, both local and from other parts of the country. Fleming said that Omaha’s population is expected to grow 1.1 percent annually during the next five years, in line with Omaha’s 10-year historical growth rate of 1.3 percent.

On the labor front, Omaha’s unemployment rate in January stood at a low 3.2 percent, significantly below the national rate of 4.1 percent. The numbers, then, indicate that Omaha remains a solid, steady market.

A booming industrial market

Kevin Stratman, industrial specialist with Omaha-based Investors Realty, said that the last several years have been a period of steady expansion for the city’s thriving industrial market. As Stratman says, new industrial parks are currently under development, construction in this sector is robust and both local and regional users are making their own expansion plans.

“However, what is most impressive is not what happened in 2017, but what lies ahead in 2018 and beyond,” Stratman said.

Investors Realty has tracked more than 625 acres of undeveloped ground that has sold in the Omaha market for new industrial development. This is a strong number, and ranks far higher than in most other periods in the city’s history.

Sarpy County is seeing most of the new industrial development thanks to its large amount of available land, Stratman said. But the entire Omaha market is active in this sector. Investors Realty said that the industrial market saw 951,387 square feet of new construction deliveries in 2017 alone.

Some big deals included Oxbow Animal Health moving into a new 247,000-square-foot manufacturing facility and warehouse at 150th and Schram. R&R Realty’s R&R Commercial Park, at Highway 50 and Highway 370, broke ground in 2017 and will have plenty of industrial space available later this year.

The I-80 Logistics Hub at 132nd and Cornhusker Drive will break ground this year, adding more industrial space to the busy market here.

“What’s important is that for the first time in arguably decades, the market has multiple developments in the pipeline at the same time,” Stratman said. “This will continue to meet some of the growing demand for industrial space going into 2019 and beyond.”

A retail market that is adapting

Across the country, physical retailers have struggled with the disruption brought on by online retailers. And the same trend is playing out in Omaha.

Sara Hanke, associate broker with Omaha’s The Lerner Company, said that online retailers have put pressure on brick-and-mortar competitors throughout the region. At the same time, consumers here continue to push for convenience.

These two factors mean one thing: This year will be a year of change for physical retailers, in Omaha and across the country, Hanke said.

“This year is going to be more about right-sizing, redeveloping and convenience,” Hanke said.

Some of the bigger retail success stories in the Omaha market today involve former big-box stores that have been redeveloped into smaller, multi-tenant retail spaces, Hanke said. She pointed to the assistance The Lerner Company provided with the conversion of the former Kmart in Omaha’s Eagle Run Shoping Center. That space has now been converted into a T.J. Maxx, Sierra Tradiing Post and Burlington, all of which are performing well.

“You’ve heard all over the news about these large retailers closing,” Hanke said. “Now you will start hearing about the new stores opening and breathing life into these large vacancies. Now the consumer can go to one center and have three options, providing them the convenience and variety that they desire.”

Omaha’s retail market is also getting a boost from mixed-use developments. Hanke pointed to the West Farm Development as a prime example. But there’s also the Capital District in downtown Omaha, an entertainment district that is also home to a 218-unit apartment building and the Marriott Capital District Hotel. The Lerner Company is leasing the 90,000 square feet of retail space at the district.

Hanke does say that retailers with older, less desirable locations will face challenges in 2018 and beyond. Many of these retailers are trying to attract consumers by offering free shipping or easy pick-up services, a way to compete with online retailers.

“The consumers’ push for convenience is driving the Omaha market,” Hanke said. “Overall, the state of the retail market in the Omaha MSA is healthy. If retailers are listening to their consumers and adapting accordingly, they will continue to be successful.”

Marc Siemers, executive vice president with Omaha’s OMNE Partners, said that the Omaha office market remained a competitive one throughout the first quarter of 2018. And the market is showing few signs of slowing, as developers are now building more than 1 million square feet of office space.

The biggest challenge for users? It’s not easy to find modern Class-A space in certain parts of the city, Siemers said.

“A flight to quality by end users has driven the demand for new Class-A construction,” Siemers said.

The overall office vacancy rate continues to hover around 7 percent in the Omaha market. Siemers, though, said these rates are expected to increase as the Omaha market has experienced negative office absorption during the last two quarters. Positive absorption is expected throughout the rest of the year, Siemers said.

Big office news? Kiewit Corp. has announced that it will move its headquarters to the North Downtown market. This, Siemers said, is good news for this particular neighborhood.

“This is exciting news,” he said. “It will certainly help revitalize the ‘NoDo’ submarket.”

The development – which calls for 175,000 square feet of office space and a 650-stall parking garage – will serve as a link to Creighton University, TD Ameritrade Park and the North Downtown neighborhood, Siemers said.