Deals Still Happening: Commercial Real Estate Market Strong in OmahaJan 17, 2021 01:18PM ● By Scott Stewart
Omaha is a resilient community. Despite the upheaval of the coronavirus pandemic, the city has retained a relatively stable market over the past year, and it’s on track to have a successful 2021.
“I always like to say that we’re very fortunate to be in Omaha, in this metropolitan community, because we have just good, solid, companies,” said Bennett Ginsberg, managing director of CBRE’s Omaha office. “We have solid economics, we have good leadership, and we seem to be able to withstand a lot of the unknown.”
The community withstood the unknowns of the financial crisis of 2008 and the dot-com bubble of the late 1990s, and it has fared better than most during COVID-19—although it followed the national trend of declines in many sectors of the economy.
“We’re actually doing pretty well,” Ginsberg said.
Many major projects remain underway, and several have the potential to be transformative—such as the public-private partnership reimagining the riverfront area.
“People are really investing in nice projects, and it’s just fun to watch,” said Trenton Magid, executive vice president of NAI NP Dodge, who co-hosts Grow Omaha on KFAB. “The game has been stepped up.”
Jason Fisher, president of The Lund Company, said Omaha has had some “silver linings” during the pandemic, and investment in the community has continued.
“We’re betting on Omaha,” said Fisher, whose company plans to open a Marriott-branded hotel this March. “We’re betting on the Midwest. We’re betting on the U.S. to recover from this thing.”
Once the pandemic is over, Ginsberg said those companies that took hits won’t just look to rebuild.
“They’re reinventing themselves,” Ginsberg said. “They’re trying to figure out who they really are post-pandemic.”
In some economic sectors, change could be a matter of survival. Retailers, in particular, are experiencing a lot of change as a consequence of the pandemic.
E-commerce grew by more than 30% following the start of the pandemic, reaching a level not expected until 2022, according to the research service Insider Intelligence.
Ginsberg said that a shift to a post-pandemic new normal will take some time, with winners and losers, but that it’s too early to write an obituary for brick-and-mortar stores.
“There is still thriving retail out there,” Ginsberg said. “It will survive. It will change. There is always somebody out there doing something different and unique, so it will still be fine.”
Retailers who can offer an exceptional experience should eventually win back customers.
“The trends of people desiring experiential shopping, or experiential anything, are not going away,”
NAI NP Dodge’s analysis of the Omaha market, based on CoStar data, says that consumers are shifting from wants to needs, with an emphasis on health care and education. Most new construction is pre-leased, including 85% of the 350,000-square-feet under construction in mid-2020. At that time, vacancies were about 6% for existing retail spaces, including more than 15% vacancy in area malls.
Nebraska didn’t implement as strict of lockdowns as elsewhere, which spared some businesses the worst of the economic outcomes. But restaurants and bars have faced restrictions—so much so that Gov. Pete Ricketts has promoted “Takeout Tuesday” to rally consumers to continue spending to support that sector of the economy.
“People were supportive of takeout here in the region,” Fisher said.
Many landlords have helped with lease amendments, but some restaurants have still had to close their doors permanently.
Magid said that from a real estate perspective, many restaurateurs and new-to-market eateries are looking for space. It’s expensive to build a commercial kitchen, so failed restaurants can be hot commodities—even amid a pandemic.
“Decent locations get snapped up pretty quickly,” Magid said.
Besides restaurants and physical stores, the hospitality industry has been among the hardest hit by the pandemic, as tourism dried up and most major events were canceled.
“Hospitality has been severely damaged across the country as business travel and most leisure travel came to a halt,” Fisher said.
Air travel was still down about 65% by Thanksgiving, and hotel occupancy was below 50% nationally. Fisher said he expects some hotels that were doing OK before the pandemic won’t survive, but Omaha occupancy rates had climbed 100% over their low—a hopeful sign that the market is starting to recover.
Three new boutique hotels—The Cottonwood, The Peregrine, and The Farnam—also are counting on the fact that Omaha will continue to have a robust market in the future.
When normalcy is restored, those prime locations will draw guests traveling for business, to catch a College World Series game, or attend Berkshire Hathaway’s annual investors meeting. After all, it’s still true that the “three most important factors in real estate are location, location, location.”
Precisely which locations are most desirable, though, changes over time. Commercial offices, for example, used to congregate downtown, but they’ve shifted away over the past decade.
Going into the pandemic, the downtown office market was already in “a little bit of a precarious condition,” Fisher said. Commute times and other factors have pushed most new projects to suburban communities or to western points along the Dodge Street corridor.
Additionally, the pandemic promoted significant growth in remote work, and some Omaha employers don’t plan to have employees return to their offices until the summer.
Office vacancy climbed from about 6% at the end of 2019 to nearly 9% at the start of the fourth quarter of 2020, according to a report by Colliers International that predicts Omaha’s office slump will be temporary. As of last October, there were nearly 1.3 million square feet of office space under construction, and nearly 80% of that was leased, build-to-suit space.
“While it’s unknown as to how quickly people will return to the office, Colliers | Omaha is confident that they will,” the report states.
The Omaha CBRE office has been requiring employees to go through a health checkpoint and limiting capacity to 50%, Ginsberg said. It was among the company’s first branches to reopen.
Going forward, another pandemic will be a factor that companies consider when building an office—just as they already do for fires, floods, and tornados.
“You have to be able to be flexible,” Ginsberg said. “I just don’t think that chapter has been written.”
Nevertheless, Fisher expects that working virtually won’t be normal forever.
“There are too many negative repercussions, in my mind, long term, with deciding to place a heavy emphasis on virtual officing,” he said. “We’re just social beings. We innovate, we collaborate, and we accomplish more when we are seeing each other face-to-face.”
Where work-from-home will be a factor is in the competition for highly talented workers, who may demand more flexibility. Fisher said companies that choose to reduce their footprint or cut the hours employees spend at the office will want to maximize the time they are at work—making each square foot more important, and likely more expensive.
“Leaders are going to place a bigger emphasis on their physical environment,” Fisher said. “Even if they subscribe to the philosophy that they can shrink their footprint, I think they’re going to spend more money within that footprint.”
While some companies have extended leases and are waiting to see what happens, other firms are already working on building new space, Magid said. He said that makes the outlook for offices in Omaha “pretty positive” overall.
Growth in the single-family residential space is positive, too, especially as more people look to add home offices and other additions to their living environment. New subdivisions can be expected as Omaha continues to grow, along with more multifamily residential complexes.
Pandemic-related job loss has fueled worry over evictions, which could still become a dire crisis in Omaha. As the city’s grown, though, the market for multifamily residential projects has remained strong and, as of late 2020, was weathering the pandemic.
Last fall, about 2,400 apartment units were under construction, according to research from CoStar, well over twice the historical average. Vacancy remained stable, hovering around 6% in October, although asking rent—which had been increasing—leveled off after the pandemic.
“The rent growth did not stay,” said Fisher, whose firm manages more than 13,000 apartment units in the Midwest. “The trends did not continue, but we didn’t see a rent reduction. We didn’t see a regression.”
Omaha continues to have a demand for more multifamily units, although NAI NP Dodge is forecasting vacancies will approach 7.5% in 2021 before leveling off over the next few years.
Demand also remains extremely high for industrial sites in Omaha, which has capitalized on the growth of e-commerce during the pandemic.
“The industrial segment of our market was hot pre-COVID and only accelerating post-COVID,” Fisher said. “The timing was great for us, for our communities, because we had recognized the pent-up demand and the new demand that was coming.”
Amazon announced a 700,000-square-foot robotic fulfillment center slated for Papillion near Highway 50 and Highway 370, bringing an estimated 600 workers and more than $200 million in economic impact, according to an analysis by Greater Omaha Chamber.
Fisher sees similar industrial projects coming to the Omaha metro area, as well as continued growth in the data center sector.
“That industrial market is just revved up,” Fisher said. “This is just such a robust, hot market. I don’t see that slowing down.”
The only problem might be running out of sites. Magid said the industrial market has been tight, and “rental rates are as high as they’ve ever been” for new construction.
Omaha also lacks any megasites—contiguous tracts of land, often shovel-ready with connected infrastructure, that are optimal for large industrial operations—which could mean missing out on potential opportunities, Fisher said.
Large projects such as Amazon’s bring a network of smaller projects to support its operations, and Ginsberg said he expects those wins to bleed over to the rest of the industrial market. It’s not a coincidence that Omaha Box Co. moved its operations to western Sarpy County.
Vacancies have remained low—1.8% for manufacturing, 3.1% for warehousing, as of late 2020—and more than 420,000 square feet of industrial property was under construction, according to Colliers International.
“The explosion of e-commerce, somewhat due to the ongoing global pandemic, has kept industrial product in high demand,” Colliers stated in an Omaha market report.
Another trend that’s expected to continue unabated is the rise of mixed-use development.
Among the new mixed-use projects underway are The Crossroads at 72nd and Dodge streets, Heartwood Preserve at 144th and Pacific streets, La Vista City Centre in La Vista, and River’s Edge in Council Bluffs. While it takes years for such developments to reach maturity, as Aksarben Village and Midtown Crossing have done, they continue to be popular options.
“I think the model is absolutely great,” said Ginsberg, whose company is involved with Heartwood Preserve. “The developers of Applied Underwriters are really making a statement out there with the financial support that they’ve put into that development.”
Fisher said mixed-used projects appeal to workers and residents because they bring energy to a place, making it somewhere people want to be. He said he expects offices to flock to mixed-use developments after the pandemic, because they will help draw employees back to work
Omaha has always appreciated its villages within the city—such as the Old Market, Dundee, Benson, and Blackstone. Mixed-use developments offer the same advantages, mixing places to live, work, and play together into one larger space.
“People do like to be able to stay within their community,” Ginsberg said.
For the time being, some of the hallmarks of such developments remain somewhat stymied by the pandemic. Amphitheaters, communal space, and events will eventually return, though.
Real estate professionals are hoping for less uncertainty in 2021, but they expect growth to continue in the economy, Ginsberg said.
“I’m pretty optimistic that we’ll get through this,” Ginsberg said. “It’ll be a different change, but we’ll get back at it.”
That change, hopefully, includes lessons learned from the pandemic.
Ginberg said one key takeaway is that technology is still a key differentiator for businesses, and providing reliable connectivity is a strategic advantage. That connectivity, in turn, depends on infrastructure and, as anyone with a smartphone knows, infrastructure varies by location.
“Technology is just going to continue to go through the roof,” Ginsberg said.
Density will remain popular with developers, Magid said, and vertical construction will continue, especially on the eastern side of the city. Look for Metro Transit’s new ORBT rapid transit bus to further solidify the importance of the Dodge Street corridor.
Joe Biden’s presidency could be another factor to watch, Magid said, especially if the government looked at eliminating or changing Section 1031 of the Internal Revenue Code, which governs swapping investment properties, allowing a deferment on capital gains.
“If the government eliminates that, then there’s going to be less sellers,” Magid said.
Biden has also expressed an interest in expanding Section 8 housing vouchers, which could create a change in the multifamily housing sector if enacted.
A change in tax-increment financing approved by Nebraska voters last November could also spur development, including in areas in North and South Omaha where incentives and public-private partnerships often drive investment.
Such policies, though, aren’t likely to make a transformative impact on Omaha. Fisher said the city is among the most segregated in the country, and it will take a broader transportation and community development strategy that go beyond real estate to address that reality.
More incentives for developers would help, Fisher said.
“Omaha definitely needs some more development tools and incentives in our war chest,” Fisher said. “We are lagging behind many other markets—not just aspirational ones, but our peer and
Even so, money is available for promising projects. Lending rates should remain low for the foreseeable future, and Magid said the Omaha market has more investors than investments.
“What we don’t have enough of is good investment properties,” Magid said. “Sometimes, we’ve got to get creative or find properties that aren’t actively being marketed.”
That makes things difficult for those looking to buy commercial real estate.
“There’s more money chasing deals than there are deals,” Magid said. “It’s a good time to sell properties if you have somewhere to repurpose your money.”
This article was first published in the February/March 2021 issue of B2B.