These aren’t easy times for developers and commercial real estate investors. Interest rates remain high, and the Federal Reserve Board has shown little inclination to stop boosting its benchmark rate higher. That makes it more challenging for developers to build and investors to close CRE deals.
But certain markets are working through these challenges better than are others. One of those? Omaha.
This Nebraska city has long boasted a resilient commercial real estate market. Commercial real estate deals and development, for instance, continued throughout even the dreariest days of the COVID-19 pandemic. And while today’s higher interest rates might have slowed activity in this Midwest city, they haven’t brought it close to a standstill.
What is Omaha’s secret? Why is its commercial real estate market so steady? The CRE professionals working here point to the presence of Fortune 500 companies, a government willing to work with developers, the city’s conservative approach to new development and the desire of Omaha’s leaders to make this city the best it can possibly be.
A model of resiliency
Amy Lawrenson, partner at Omaha’s Baird Holm, said that Omaha’s commercial real estate market still boasts its famed resiliency. That doesn’t mean, though, that the real estate market here is immune to the cooling impact of rising interest rates.
Commercial sales have slowed here as the Fed continues to boost its benchmark rate.
“We have seen a difference in activity once rates started to rise,” Lawrenson said. “But we’re not like much of the rest of the nation. We are not seeing as severe a slowdown in activity as other markets are seeing.”
What’s behind this resiliency? Lawrenson points to the more conservative approach Omaha developers have taken. There isn’t as much spec space delivered in the Omaha market each year as there is in other markets. This means that demand for commercial space tends to remain high, something that has keep sales and leasing activity steady despite higher rates.
Omaha also has a strong roster of Fortune 500 companies with a presence in the city. These strong businesses have the resources to withstand temporary slowdowns.
Lawrenson also cites the philanthropic nature of Omaha’s business and civic leaders. Leaders here are not shy about pumping their money into new development and improvement projects throughout the Omaha market, Lawrenson said.
“Our government bodies are supportive of the business community,” Lawrenson said. “They are good partners to our developers.”
In little surprise, the industrial sector continues to thrive in the Omaha market. This sector, of course, has been booming throughout the country, even as interest rates rise.
Lawrenson said that the industrial vacancy rate in the Omaha market is near 2%, incredibly low.
“The demand for industrial space just outpaces how much we can build,” she said. “We in Omaha are very underbuilt when it comes to industrial. The actual construction numbers are deceptive because we have built so much data center space. Those numbers make you think we have plenty of industrial space. But we don’t have as much warehouse and distribution space as we need.”
What the Omaha market does have is a shortage of buildable land for industrial projects, Lawrenson said. Industrial development today is being pushed out to agriculture land further from the city. That land isn’t yet ready to be developed, Lawrenson said. It needs utilities and roads, and those costs have to be added to the cost of development.
Lawrenson said that she has clients who have been looking for years to get into suitable industrial space in the Omaha market. Finding land that is ready for development, though, remains a challenge.
“If they can’t wait for the right piece of land, they are going to have to pay and pay dearly,” Lawrenson said. “They effectively end up developing the land as they go through the process. They might even sell off outlots after they develop what they need. That’s hard for a lot of companies to do. They are running large companies already. They are not wanting to play developer.”
Big developments
The Omaha market is fortunate to be home to several major developments that are expected to bring even more new business to this city.
Mutual of Omaha, for example, is building a new skyscraper at 1614 Dodge St. in downtown Omaha. The expected completion of this project is 2026. It shows a commitment to the Omaha office sector that is impressive today.
Another major project in Omaha is the Builder’s District, being developed by busy Omaha-based developer Noddle Companies.
Kiewit, when it moved its headquarters to 15th and Mike Fahey streets in Omaha, provided the impetus for this project. The goal here is to populate the area surrounding this building with multifamily units, office space, retail and an urban park.
The project will cover about six city blocks and will include a 130,000-square-foot office building made primarily of timber. Noddle says that the project will include sports courts, giving people space to play volleyball and pickleball.
“The Builder’s District will fill a hole in that part of downtown,” Lawrenson said. “Noddle knows what it is doing there. That will be a good support for the central business district and should improve the area around Creighton University.”
Heartwood Preserve is another major development that is boosting the entire Omaha commercial real estate market. This 500-acre mixed-use project in west Omaha features, or will feature, seniors housing, multifamily, single-family homes, retail and office uses. Open green space will also be a key at this development located on the former Boys Town site in Omaha.
Another boost might be coming soon to downtown Omaha, a new streetcar.
The Omaha Streetcar Authority has proposed a 3-mile streetcar route serving downtown Omaha, running from Cass to Farnam on South 10th Street, Farnam west to 42nd Street and back to 10th Street on Harney. The streetcar will be free for all riders.
The authority says that the streetcar will be built, operated and maintained without an increase in property or sales taxes. Instead, taxes paid by new or redeveloped income-producing commercial and multifamily buildings will pay for the cost of building the streetcar system.
The streetcar is still being explored by Omaha’s city government. Its price tag is expected to be $306 million. In a March presentation, though, the Omaha Streetcar Authority said that it estimates that the streetcar will lead to $3.2 billion in new downtown development over 15 years.
The schedule now calls for the preliminary design of the streetcar project to be completed in 2023, with final design and vehicle procurements also completed this year. If the system is approved, construction of the main line is scheduled to begin in 2024 and end in 2026, with the streetcars going into service later in 2026.
Proponents of the streetcar say that it will lessen the need for more parking in downtown Omaha and reduce the amount of new parking spaces developers will have to provide for their new projects. The streetcar will also free land for billions of dollars in new development, according to the streetcar authority.
Count Jay Noddle, president and chief executive officer of Omaha developer Noddle Companies, as a fan of the new streetcar. He’s also working hard to make the system a reality, serving as president of the Omaha Streetcar Authority.
Noddle said that Mutual of Omaha’s decision to build its skyscraper at what could be the eastern end of the streetcar line has been one impetus for pushing the streetcar project forward.
Mutual of Omaha’s new building will move about 4,000 jobs in the Omaha area two miles to the east, Noddle said. That creates what Noddle calls an eastern employment anchor in the city’s downtown area.
Mutual of Omaha’s new building will join the offices of First National Bank and Union Pacific at the western end of the Gene Leahy Mall, a 9.6-acre park located in Omaha’s The RiverFront, a recreational area of downtown that combines three parks into one space.
“We can now connect the new development on the east side of downtown with the Medical Center neighborhood on the west in our urban core,” Noddle said. “We have to deliver this streetcar to make this happen.”
Mutual of Omaha is relying on the streetcar. The plan is for the company’s employees to ride the streetcar to get from Mutual of Omaha’s parking location to the new tower.
“The streetcar route will connect the convention center and our baseball field, Charles Schwab Field, with the rest of downtown,” Noddle said. “There is a lot of available land and under-utilized buildings along the route. To say that this streetcar will be a shot in the arm for the urban core is an understatement.”
Solid performance from the retail market
Adam Maurer. Associate broker with the Lerner Company, sums up the Omaha commercial real estate market with one phrase, “limited supply.”
Maurer, a retail specialist, said that the Omaha retail market has seen a dip in new deliveries for the last five years. That has brought about vacancy rates in this sector that have dipped to their lowest levels in five years.
That has led to an increase in asking rents throughout Omaha’s retail sector, Maurer said. In fact, high retailer demand combined with a low supply has boosted the average asking rates across the Omaha metropolitan area by 5.8%.
These higher rates, though, haven’t been enough to slow retail leasing, Maurer said. He pointed to Omaha’s busy Capitol District, a mixed-use entertainment district downtown. The district will soon welcome three new tenants, two regional bar concepts and local favorite Frank’s Pizzeria. And two new-to-market concepts, Walk On’s Sports Bistreaux and YETI, have announced that they will be opening locations in the Nebraska Crossing Outlet Mall.
The Omaha retail sector isn’t immune to the impact of rising interest rates, though, with the higher rates slowing the influx of investor dollars.
“We are still seeing activity in the investment market, but rising interest rates are forcing investors to be more stringent in their underwriting and take a closer look at where and how they choose to invest,” Maurer said. “Sellers are beginning to realize that it’s not the same market it was six to eight months ago, and pricing expectations must follow suit.”
There are new retail developments coming to the Omaha market, though, that should ease the demand for retail space among the restaurants, entertainment centers, brand-name retailers and local businesses that are hoping to enter the Omaha market or expand their locations in it.
Notable new retail developments include projects by Hy-Vee, Menards and Fleet Farm, all of which are coming to the Highway-370 corridor. Across the river in Council Bluffs, Iowa, part of the Omaha market, Menards is preparing to open its new flagship store at the former Mall of the Bluffs. Redevelopment plans are underway for Menard’s former site at Lake Manawa Power Center.
This activity is more proof, if anyone needed it, that Omaha’s resiliency is unmatched across the Midwest. The market has handled all challenges that come its way, including today’s higher interest rates and the lingering impact of the pandemic.
“Omaha’s conservative mentality yet again proved vital in withstanding the ups and downs of the COVID-19 pandemic, and this attitude will be key in weathering market volatility in 2023,” Maurer said.
A steadier office sector?
The office sector has struggled in markets across the country as companies work to determine how much space they will need in the future. With so many employees working on a hybrid schedule, a growing number of companies are opting for less office space but at a higher quality level.
Lawrenson said that Omaha’s office market is working through this uncertainty, too. But this sector, struggling so much in other markets, is showing resiliency in Omaha, she said.
“The office sector is one of the areas where Omaha is unique when compared to what other places in the nation are seeing,” Lawrenson said. “By and large, companies in Omaha still want office space. They are approaching it differently. They are trying to stay nimble. If they are decreasing their footprints, they are doing so with focused intent on how they are improving the office situation for their employees.”
Lawrenson said that many employers in Omaha are focusing on the amenities and flexibilities that they hope will encourage workers to come back to the office on their own volition.
This means offering hybrid work options and giving workers the flexibility to work from home when they are tackling heads-down busy work throughout their days, but asking them to come into the office when they need to meet with clients or work in teams.
What amenities are office users focusing on to encourage their workers to return? Lawrenson said that owners are putting more thought into appealing common areas where workers can gather to work or socialize. Others are looking for higher-quality gyms. Companies might offer on-site daycare to bring working parents back to the office.
Some are even pumping white noise throughout their office space as a way to muffle the traditional noise of an office, Lawrenson said. Employees who worked from home for nearly three years might have gotten used to quieter working conditions. The white noise helps them concentrate while in the office, she said.
On the leasing side of the office sector, companies and owners are putting more thought into how they structure lease terms, Lawrenson said.
Building owners might offer shorter lease terms to give tenants more flexibility in case they need to reduce the amount of space they need. Other leases might give large tenants the option to off-load a floor at a certain point in their contract if they no longer need that space.
“The ability to grow or shrink as they see fit is important for office tenants today,” Lawrenson said. “That nimbleness of being able to grow or reduce their size is coming up more often today when tenants are negotiating office leases. They want to be able to react more quickly to the ebbs and flows of their workforce.”
“Our employers recognize that they still need that work-culture interaction,” Lawrenson said. “They know that they need to offer employees flexibility if they want to retain their best workers. But they still want to bring them into the office when it makes sense.”
Partly because of this more measured approach, Lawrenson said, Omaha hasn’t seen as dramatic of an increase in office vacancy rates. There has been a jump in the amount of sublease activity in this sector, though, she said.