The Good, the Bad, and the Ugly. The classic spaghetti Western film title aptly reflects the varied state of commercial real estate markets nationally. In a interview with CNBC earlier this year, real estate investment mogul Patrick Carroll issued a dire warning about the economic outlook for the US: “It’s going to be ugly” or “going to be at least as bad” as the 2008-09 financial crisis. He cited the $1.5 trillion commercial real estate debts due in two years, higher interest rates, and office-building vacancy rates as major threats. But Carroll also found some “good” news in multifamily markets, still performing strong amid ambiguity.
Omaha real estate professionals, however, are more optimistic about the commercial market, dismissing national alarmists on the subject. Bennett Ginsberg, the managing director at commercial and real estate investment firm CBRE Group Inc., believes “crisis” seems overreactive, especially for the Omaha metro. He sees corporations shifting how they operate to accommodate workers, the cost of building materials coming down, and greater efforts to upgrade outdated environments as positive trends. The pandemic transformed the landscape, softening demand for Office B and C (generally older buildings), with many employees moving to remote and hybrid work. Companies in these spaces hope to entice workers back to the office by investing new exercise equipment, higher-end technology, and collaboration rooms, he explained.
“Employees want flexible work and amenities. They are driving [the change]. Employees’ voices are being heard,” Ginsberg said.
New construction of commercial space continues in the Omaha market, as evidenced by several noteworthy projects underway.
In January, the city broke ground on its first environmentally friendly mass timber commercial edifice, covering about 120,000 square feet, at 1501 Mike Fahey Street in Omaha’s Builder’s District. The $57-million project will house mainly offices with additional retail and restaurant options on the horizon. The development, offering fresh-air common areas, rooftop vistas, and access to a nearby urban park, demonstrates a shift toward sustainable commercial design and worker-friendly environs, post-pandemic.
Mutual of Omaha’s plans for a 677-foot tower for their headquarters, slated to finish in 2026, will add great opportunities in downtown Omaha. The impressive 800,000-square-foot tower is certain to attract workers, aesthetically speaking, but the meeting space and fitness amenities will no doubt enhance the insurance employer’s appeal as well.
“[Mutual] will change the landscape and the skyline of Omaha. It will be a positive change to that area,” said Mandi Backhaus, an associate broker with commercial real estate agency The Lerner Company. Like Ginsberg, Backhaus is cautiously optimistic about the local commercial market in the near term. “Here in Omaha, we’re fortunate to be here…it’s remained stable. We didn’t overbuild. Developers and [commercial] landlords are figuring out how to repurpose [vacant] spaces. In retail, there’s always doom and gloom about it, but folks are asking, ‘How do we pivot and get creative?’”
NAI NP, the commercial real estate division of NP Dodge, reported via CoStar data that Omaha’s 48.5 million square feet of office space had a 6.9% vacancy rate in second quarter 2023, holding steady from Q1 and posting an improvement from 2022’s fourth quarter of 7.7%. New construction continued an upward climb with 1.4 million square feet. Investors Realty Inc., a commercial real estate and property management company, relayed concerns over the sublease market in their 2022 office market report. High interest rates mean less construction of new Class A space, making space for lease harder to find. Developers continue a wait-and-see game, holding off on building new structures to observe how the industry shakes out.
The Silicon Valley Bank collapse in northern California spurred concerns about banking instability caused by commercial real estate woes, and this continues to stress the national market; however, it’s less an issue for an agriculture-heavy state like Nebraska.
“We are fortunate in our community that it’s a fairly strong economic city. Anywhere you look, there’s some development. I don’t see it stopping,” Ginsberg said.
Meanwhile, the local industrial space sector remains healthy, retaining a low vacancy rate of about 2% in the second quarter 2023, according to the NAI NP report. The pandemic brought about construction of retail fulfillment centers in eastern Nebraska, necessitated by the upsurge in online shopping, and there’s still 3.4 million square feet of new industrial construction underway. In Investors Realty Inc.’s end-of-the-year industrial report for 2022, a combined 63% of this total is derived from Amazon’s four facilities. Tech giants Facebook, Yahoo, and Google have spent big sums on construction of new data centers in the metro in recent years, and in August, Google announced plans for $1.2 billion in further invesmtent. In addition, the Nebraska Unicameral passed legislation that makes Omaha ripe for a future semiconductor plant.
In retail, the Good Life Transformational Projects Act gained traction. Heavyweights like the Nebraska Crossing Outlets in neighboring Gretna want to expand another 1,000 acres to double in size. Retail continues to expand with a low 4.7% vacancy rate in Omaha, although asking rates jumped $16.63 per square foot in the Q2 run-down from NAI NP. Developers continue to chase the population boom in newly constructed multi-housing areas. The 344,000 square feet of under-construction retail space drifted downward a notch, yet the sector continues to thrive despite an unclear future on national and local levels. Supply chain issues, inflation, and interest rates hamper production for some retailers.
“People flock to main thoroughfares for obvious reasons. It’s a little frustrating to put deals together because of the cost of construction, but it hasn’t stopped,” said Brian Farrell, principal retail and land broker with Investors Realty.
Farrell started in the company in 2005 and still remembers the dark days of the market during the Great Recession. Buildings sat empty and shuttered for sometimes years. The market hopped again in 2014 until the pandemic hit six years later.
“It’s still a weird market,” Farrell said. “Interest rates have made selling businesses harder.”
Sellers have unrealistic expectations that make them want to hold for a 4% interest rate, which won’t happen soon, Farrell said. Location becomes another hardship since a broker can’t sell on one corner, but 10 miles further west it’s hot. For example, the ground at 204th “flies off the shelves” at $18 or $20 a foot while a property at 192nd and Q streets won’t sell at a cheaper price point.
“We (far southwest Omaha) were up next, then 204th stole our thunder,” Farrell joked.
The building boom from Avenue One to 204th, north or south, just can’t be beat at the moment. Hy-Vee located its largest store, at 135,000 square feet, on the corner of 192nd and Highway 370 in Gretna. Medical centers like the newly finished 90,000-square-foot Nebraska Medicine on 175th and Burke streets and the soon-to-be-built 60,000-square-foot Children’s Hospital and Medical Center at 204th and Harrison streets will greatly impact traffic in the area.
The aftermath of the pandemic means people want more “eatertainments,” a combination of dining and entertainment, or outdoor activities to keep them moving. Chicken N Pickle, a regional chain that combines pickleball and sports bar fun, may land on the southwest corner of 120th and Fort streets. The project from Roanoke Business Park and the owners of Mulhall’s Nursery has yet to announce the name of the potential eatertainment on the 3.317-acre lot. Another fast-growing development, Heartwood Preserve, renews interest in “shopping, playing, and living” off 144th Street and West Dodge Road.
Gretna plans to open a $55-million community recreation area with activities ranging from a water park to frisbee golf. Trails could connect the sports complex to the outlet mall for easy access to shopping. And the Elkhorn Athletic Association hopes to draw in regional and national tournaments after breaking ground on their $55 million youth MD West ONE Sports Complex outside of Valley, Nebraska.
Ginsberg believes the end-of-the-year outlook seems slower, with fewer buildings to sell and banks tightening their credit. A potential slight recession could happen, he warned, increasing interest rates and delaying some projects.
Backhaus agreed with the assessment and wishes she had a crystal ball to sneak a peek at upcoming interest rates, forecasted to rise. Farrell doesn’t perceive retail tanking too much but thinks small mom-and-pop shops might have trouble with rising prices.
“For Omaha, we will continue to push forward. We are still busy leasing space and busy selling ground,” Farrell said.
Ginsberg believes in Omaha’s ability to withstand any and all economic challenges and is proud that leaders pressed forward on projects like the renovation of the Gene Leahy Mall and creation of the Kiewit Luminarium the past few years. That can-do attitude has allowed Omaha to thrive while other cities struggled during difficult times.
“We are very fortunate to live in this community that has a philanthropic heart. A lot of money has been thrown into this city,” Ginsberg said.
This article originally appeared in the October/November 2023 issue of B2B Magazine. To receive the magazine, click here to subscribe.
