Pandemics, soaring inflation and rising interest rates. Omaha’s commercial real estate market has remained resilient during all of them.
Why? What makes Omaha’s commercial real estate market such a strong one? Why has demand for multifamily, industrial and retail properties in this city remained so high for investors? Why has leasing and sales activity remained so strong throughout most of Omaha’s commercial sectors?
The commercial pros working this market point to a pro-business government that encourages development and entices companies to open national or regional headquarters here. They also cite the strong workforce in Omaha and the commitment city leaders have to constantly improving the neighborhoods that make up Omaha.
That last point is especially important today. Several high-profile commercial developments are springing up across Omaha and its suburbs. These new office towers, mixed-use developments and multifamily properties are pumping new dollars into the city. And they are attracting new residents and companies.
So even though the national economy is far from stable today, Omaha’s commercial real estate market is showing few signs of slowing.
A solid office sector
The performance of Omaha’s office sector is a prime example of the strength of the city’s CRE market.
Sam Noddle with Omaha’s Noddle Companies said that the office market in Omaha is busy today, with leasing activity high all the way from downtown Omaha to the urban core neighborhoods to the suburbs.
And if that sector, which is struggling so much across the country, is holding its own? That’s a sure sign that Omaha’s entire CRE market is performing well.
“I would say that we are shocked at how busy the office market is in Omaha,” Noddle said. “All of our office space is leasing. Like with all markets, we are seeing companies looking for more valuable tenant improvement packages. And the cost of construction has gone up so much. But we are seeing activity in our office market that is much stronger than I think anyone could have expected.”
Noddle points to the thriving Aksarben Village mixed-use development, of which Noddle Companies has played a key role in developing and managing. Toast, a merchant processor for food and beverage companies, recently signed a 50,000-square-foot lease in the village. This lease means that for the first time all the office space in Aksarben Village is fully leased.
“What we have noticed is that a lot of officer users still want office space, and for the most part they still want the same amount of space,” Noddle said. “They need a place for their team to huddle and work. But they are designing the space differently. They want more collaborative space. Workstations are designed for three- and four-day workweeks. But they still need that office space.”
Amenities matter, too, as companies look for anything they can offer to entice their employees back to the office. That’s a positive for Omaha developments like Askarben Village, Noddle said. The village, for instance, offers a food hall with a wide variety of vendors. There’s a dog park with a bar that operates out of an old Airstream trailer.
The retailers that occupy Aksarben Village give office workers plenty of options, too. Noddle points to the yoga studio that holds outdoor classes, the running shop, bookstore and flower shop.
“All of these retailers and amenities have made it so easy to lease office space in Aksarben Village,” Noddle said. “Office workers want to be around this kind of atmosphere.”
Noddle said that Omaha’s retail market has remained solid, too. Again, he pointed to Aksarben Village. There is only about 5,000 square feet of space left to lease there, all of it retail. Noddle said that this space probably could have been leased, but that Noddle is waiting for the right retail for this location.
Noddle said that this space doesn’t need more restaurants. Instead, Noddle is looking for something different, preferably a fashion-based retail use, something that is missing from the village now.
The goal, Noddle said, is to bring in retailers that provide excitement to the community. The fact that Noddle can be so selective? That, too, speaks to the strength of the commercial real estate market in Omaha.
“People are more excited about being out there right now,” Noddle said. “Since the COVID restrictions have been lifted, sales in our food hall have grown tremendously. They are up about 40% year-to-date. The bar that we opened last year is extremely busy. We have noticed a lot more excitement in the air. People are eager to get out there and be social again.”
Another major project in Omaha is the Builder’s District, also being developed by 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.
Noddle expects to break ground on the project early next year.
“I am cautiously optimistic when it comes to the commercial real estate market here,” Noddle said.
Noddle did say that the cost of construction and materials remains a challenge for companies like Noddle Companies. The long lead times between ordering materials and receiving them is a problem, too.
“It doesn’t matter what it is, a heat pump, an electrical panel or even a door,” Noddle said. “There was a door system we were going to buy. The price was crazy and it had a 16-week lead time. That has certainly changed the way we are thinking about deals. The costs of construction and lead times are definitely impacting this business.”
Not enough product out there?
Brian Kuehl, a broker with Omaha’s Investors Realty, agreed that the retail market in the city and suburbs has been resilient. He pointed to the steady absorption levels in this sector during the last two years.
Kuehl said that the retail vacancy rate throughout the Omaha market is about 5%. At the same time, retail asking rents are on the rise.
“There is actually a bit of a lack of product out there to lease,” Kuehl said. “There is some pent-up demand from businesses that are frankly running out of space.”
Part of this can be traced to the pandemic. Construction stopped during the earlier days of COVID. Then supply shortages hit. The cost to deliver new construction is now high. This has resulted in a slowdown in the amount of new retail space being built throughout the Omaha market, Kuehl said.
And Kuehl hasn’t seen many signs that supply chain issues are easing. He said that the bids that Investors Realty solicits for general contractors are about 20% to 30% higher than they historically have been.
“I don’t see a real softening,” Kuehl said. “You hear chatter that the supply chain situation has gotten a little bit better. But that has not tricked down to Main Street yet.”
Even with these challenges, though, the retail sector has remained solid throughout the Omaha market, Kuehl said, with plenty of demand for retail space.
Kuehl said that the most successful of retailers have embraced the omnichannel approach, relying on both their websites and brick-and-mortar locations to keep sales strong. Retailers have also embraced many of the conveniences they launched during the pandemic, including curbside and in-store pick-up options and enhanced delivery.
What has changed today is that shoppers, even though they can buy plenty of goods online, are also eager to get into physical stores and socialize again. That has led to a growth in experiential retail in the Omaha market, with concepts like pickleball venues, indoor mini golf and high-end bowling alleys rising in popularity.
“People want to be entertained,” Kuehl said. “They want an experience. We are seeing people come back out. People are shopping in person again.”
Earlier this year, Omaha officials approved the initial route for a new downtown streetcar that will travel from the city’s riverfront to 42nd Street. The route will also travel along Farnam Street with loops around the city’s Chi Health Center.
Kuehl said that the streetcar system will provide another boost to Omaha’s retail sector. He says to expect new mixed-use development along the streetcar route.
Heartwood Preserve is another major development that is boosting the entire Omaha commercial real estate market, Kuehl said. 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.
Then there is Mutual of Omaha, which is building a new skyscraper at 1614 Dodge St. in downtown Omaha. The expected completion of this project is 2026.
“There is a little bit of everything out there,” Kuehl said. “The market seems pretty darn strong.”
Kuehl credits much of the success of Omaha’s retail sector to the desirability of the city itself. Plenty of people have moved into Omaha and its suburbs in recent years. And as more people arrive, they need more restaurants and shops to serve them.
“The residential market has been very strong, very robust here,” Kuehl said. “As the number of rooftops expands, you need neighborhood and service retail. Our residential market might slow down a bit because of the change in interest rates and construction costs. But it has been so strong for so long.”
Kuehl is seeing positives in the downtown retail market, too. As in most cities, Omaha’s downtown was hit harder than other areas of the market during the pandemic. But many employers have started bringing people back to the office. While foot traffic in downtown Omaha is not back to normal levels yet, Kuehl said, more people are visiting downtown again.
That is good news for retailers, he said.
“We were different than a lot of other states,” Kuehl said. “Nebraska kind of kept going even during COVID. We were not quite as stringent with our shutdowns or lockdowns as some other states were. We were not shut down as long as other parts of the country. I think that has helped our downtown a bit. We are seeing traffic rebounding in downtown.”
No slowdown in industrial
As it is in most markets across the country, the industrial sector is booming in Omaha and its surrounding communities. And also as in most markets, there is little indication that the sector is heading for a slowdown in the near future.
Denny Sciscoe, director of industrial services at Cushman & Wakefield/The Lund Company, said that demand for industrial space in the Omaha market is just as high this year as it was last year, and 2021 was a banner year.
This is no surprise. Sciscoe said that the industrial market in Omaha has been on a hot streak since 2017. Demand for industrial space among end users and investors has only grown since the start of COVID, he said.
Part of the reason for this strong sector? Supply. There isn’t enough industrial space in the Omaha market to meet the demand for it.
“Back in 2017, 2018 and 2019, we had hardly any new industrial development going on,” Sciscoe said. “This year, we are developing about 2 million square feet of industrial space. We are trying to catch up, but we are still behind. People come through the chamber of commerce and are told that the space they are looking for doesn’t exist. When we do add the supply, that only increases the demand, believe it or not, because it is actually available, it is property that people can lease.”
Sciscoe says that the Omaha market has never seen as much spec industrial construction as it is seeing now. But no one is worried about filling this space, he said, as most new buildings are leased before construction is finished.
“We are in uncharted territory,” Sciscoe said.
Much of the demand for new industrial space is fueled by the growth in ecommerce, of course. But the onshoring movement has helped, too. During COVID, many companies realized that they could no longer rely on the “just-in-time” model of shipping products. They needed more warehouse space and manufacturing facilities in the United States.
When companies bring manufacturing facilities back to the United States, they gain more control over their supply chain, Sciscoe said.
The future looks bright for Omaha’s industrial market, Sciscoe said. The growth in ecommerce that was happening before the pandemic only accelerated during COVID, he said. Consumers today are comfortable ordering anything online, and this trend is not going to change.
“It seems like we experienced about five years of expected ecommerce growth in just 12 months,” Sciscoe said. “The pandemic accelerated the growth of ecommerce more than anyone expected.”
Omaha also boasts several advantages that make it a strong market for industrial end users. As Sciscoe says, the city’s population continues to grow, and companies like to locate their distribution centers and warehouses near growing population centers.
Omaha benefits, too, from a strong highway system, with busy Interstate-80 running through it. Land prices aren’t overly expensive here and the labor pool is deep and strong.
“It’s also about timing,” Sciscoe said. “All the primary markets were first when companies were looking for warehouse and distribution center space. Then the secondary markets got filled in, places like St. Louis and Louisville. Now it is the tertiary markets’ turn in this cycle. The time has come, we have the Amazons and Facebooks and Googles here. It’s the evolution of the cycle that we are in.”
One headwind that the industrial market is facing? Not surprisingly, Sciscoe points to rising interest rates.
Higher rates have not slowed the leasing side of the market, Sciscoe said. But it has slowed activity from the capital markets side. There has been some slowdown in the number of investors looking to buy or sell buildings, Sciscoe said.
“Everyone has sort of hit pause for a bit,” he said. “Once interest rates go up, cap rates tend to go up and that means lower sales prices for sellers. Everyone is adjusting to this new norm. It will take some time to adjust to the new normal. I think it will take one or two new sales to reset the market.”
A busy future
Brinker Harding, senior vice president with the Omaha office of Colliers, said that the development activity happening in the Omaha market is unusual because it is taking place everywhere.
“If you go from the Missouri River to the east, the Elkhorn River on the west and all the way from south Omaha to north Omaha, there are projects happening in every submarket that are exciting,” Harding said. “There is so much going on still, in spite of what we are seeing with the headwinds of rising interest rates and soaring inflation.”
Brinker said that the many projects taking place in the downtown Omaha area have provided an especially significant boost to the area economy. The RiverFront project in downtown is a good example: It combined three separate parks into one large public green space. This, of course, has attracted plenty of retailers and restaurants to this slice of downtown.
There’s also The Mercantile, a mixed-use project overlooking Heartland of America Park lake in downtown Omaha. The project, developed by Hines, will feature apartment buildings, a boutique hotel, office buildings and a landscaped boulevard. Hines will also build a 720-car parking structure that will be owned by the City of Omaha.
Brinker said that this activity doesn’t surprise him. Developers have been busy in Omaha for several years now.
Like others working this market, Brinker cites the office sector as a solid one in Omaha. Office vacancies remain reasonable here, even with all the new office construction taking place, he said.
“I think the strength of our office market is a reaction to what happened during COVID,” Brinker said. “How Omaha and the state of Nebraska reacted to COVID put us in a desirable position as it relates to the potential growth of our market. And because of how we were able to position ourselves coming out of COVID is in large part helping us against the headwinds of rising interest rates and inflation. I think we were proactive enough to anticipate what the issues might be without overreacting to those issues.”
It helps, too, that Omaha remains attractive to companies seeking to expand to new locations, Brinker said.
“We have a very vibrant downtown and very busy midtown and suburban areas, too,” he said. “There is a great variety in where you can live and where you can work. We have a downtown environment that has been exploding with multifamily and commercial and retail development. That is very attractive to many people.”
Like other brokers, though, Brinker does have concerns about how rising interest rates and inflation might impact commercial real estate deals. He says that Omaha is seeing a bit of a slowdown in building permits already.
Even the city’s red-hot single-family housing market is slowing, Brinker said. Homes that went on the market recently were regularly generating eight offers in the first 24 hours of going up for sale. That has eased up a bit, though the housing market remains solid, Brinker said.
But even with these challenges, Brinker said that he expects demand for commercial real estate to remain high in Omaha. He also expects renters to continue to seek out multifamily units here, companies to hunt for distribution and warehouse space in the Omaha market and retailers to open new locations in what has been a steadily growing city.
“There are so many good things happening in Omaha,” Brinker said. “We have such a robust economy. It will continue to grow. One of the things that make us such an attractive community is the willingness of the people who live here to continue to invest here. And it’s not only that they want to invest in commercial real estate, they want to invest in the community. We have an incredible philanthropic community here. That interest that people have in investing in Omaha, both in bricks-and-mortar and community projects, is what makes Omaha really strong.”