Omaha, Nebraska office market holds steady
Omaha’s office market saw more total rental transactions in 2021 for more total space than any year since our company has tracked it – 281 transactions for nearly 1.8 million square feet . In a typical year, Omaha typically sees around 200 transactions per 1 million square feet. In addition to leasing activity, net absorption was positive at 310,391 square feet, and Omaha’s overall vacancy rate contracted slightly during the year.
In turn, year-over-year market rent growth has reached its highest point since pre-COVID-19. “While moving slowly compared to other major US cities, Omaha’s office market is showing early signs of recovery thanks to its diverse employment base,” CoStar says.
It seems fair to describe the market as stable as we don’t see big swings in space availability and prices, but it looks tenuous, just as office space decision makers face uncertainty. . We continue to see office users choosing to wait and see decisions affecting office space requests. Most numbers are moving in the right direction, albeit slowly, but Omaha’s vacancy rate is more than 300 basis points higher than for many years before the pandemic, and we ended 2021 with 324 398 square feet of available sublease space, more than we’ve tracked historically.
Additionally, Omaha is coming off of years of solid new construction and we are seeing newly liberated spaces. The economy looks strong with revenue growth in virtually every area. However, supply chain complications and employment difficulties – particularly with the impact of the omicron variant – combined with the looming prospect of companies exploring more permanent remote and flexible working solutions could continue to put upward pressure on the vacancy rate for metro offices in the short term.
Since the start of the pandemic, Omaha office landlords have generally opted to freeze asking rents, although new construction is driving higher asking prices. Despite reaching a post-pandemic peak in 2021, year-over-year rent growth is still more than 200 basis points below the pre-COVID five-year average. It will remain difficult for office owners to push asking rents until strong rental activity returns for an extended period and the office vacancy rate declines significantly.
Office sales activity was strong in 2021, with total sales volume roughly matching pre-COVID-19 levels. Businesses faced with the prospect of shelling out funds for major tenant improvements or the ever-increasing cost of new construction consider buying an existing building as their best bet. Armed with low interest rates, companies buying an existing product are usually less expensive and a quicker solution in many cases. CoStar reports that market prices, an estimated price of all office buildings on the market and informed by actual transactions, have risen for the first time since the pandemic began.
The Omaha office market vacancy rate in 2021 compressed slightly to 9.1%, 300 basis points higher than at the end of 2019 (before
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The worst performing submarket was Miracle Hills, with an 18.3% vacancy rate. This rate is surprising as Miracle Hills has consistently been Omaha’s best performing submarket, with single-digit vacancy rates over the past decade. Most of the vacancies can be attributed to Intrado’s (formerly West Corp.) downsizing of 100,000 square feet. Of the space Intrado has freed up, approximately 27,124 square feet has already been leased to Scooter’s Coffee, which will move into the building this year.
Other submarkets with increasing vacancy rates include Central Dodge (11.1%), Downtown (6.6%), Midtown (6.6%), Northwest (14.1%), Old Mill (10 .8%), Regency (10.2%) and Suburban West Dodge (12.8%). percent). The increase in vacancy in historically strong submarkets is due to new construction entering the market with partial vacancy, such as California Pointe, Carson Wealth and the Baxter Building in the Suburban West Dodge submarket. It’s also the result of the pandemic and the effects of companies shrinking their office footprints due to a flexible work-from-home strategy or exiting the market to consolidate in another city.
Transaction velocity increased significantly in 2021, with 281 office rental transactions totaling nearly 1.8 million square feet, compared to 180 transactions for 718,246 square feet in 2020. Both numbers are more than a typical year where Omaha sees around 200 transactions for 1 million square feet.
However, that’s not all, as 2021 saw some compensation for deals lost in 2020, and some of the deals in 2021 reflect stopgap solutions for businesses, which may be short-term and less valuable leases. . Tenants also continue to reduce and/or offer sublet space, making the office market appear to be stalling.
Omaha recorded 324,398 square feet of available sublease space at the end of 2021. Large blocks of space exist in Aksarben Village, North Park, Suburban West Dodge, Altech Tech and Pacific Springs. We expect more sublease space due to a few large employers in the Omaha area working on their work strategies and talking about giving back space.
Sublease space in Omaha has typically been one-time situations where a business has been acquired or dramatically altered and returned space. The current market shows multiple companies returning space, suggesting that sublease space will have a bigger impact on the market than ever before, especially in terms of rental rate and length of term. .
Absorption is the net change in occupancy from period to period, expressed in square feet. Omaha’s historical (pre-COVID-19) annual average absorption was approximately 250,000 square feet. In 2020, the office market saw a negative absorption of 182,288 square feet as COVID-19 impacted all workplaces and working from home became common. By the end of 2021, the office market had absorbed 474,977 square feet, which is significantly above average and offsets the loss seen in 2020.
At the end of the year, the best performing office submarkets were the Southwest Submarket, absorbing 267,009 square feet, and the Suburban West Dodge Submarket, absorbing 267,928 square feet. These two submarkets outperformed all other sectors and took up more space than Omaha’s historical (pre-COVID-19) annual average of approximately 250,000 square feet. The Suburban West Dodge submarket benefited from Valmont (127,548 square feet) and Carson Wealth (78,464 square feet), while the Southwest submarket data reflects LinkedIn’s move to its new headquarters (200,000 square feet).
The worst performing submarket was the North West submarket, ending the year with a negative absorption of 126,654 square feet. The negative uptake would be worse if sublease space in the market were released, as there are 129,659 square feet available for sublease in the submarket. There are a total of eight buildings with over 20,000 square feet available in the submarket, and there were only a total of 17 leases over 20,000 square feet in all of Omaha last year. .
While in recent years we have seen a boom in new construction, 2021 has rather been the year of deliveries. At the end of 2020, there were 1.1 million square feet under construction, and much of it was in the final stages of completion. This has led to the notable deliveries in 2021 listed below:
• LinkedIn at Sterling Ridge (132nd & Pacific) – 200,000 square feet
• The Carson Wealth Buildings at Heartwood Preserve (144th & West Dodge Road) – 120,000 square feet
• Valmont Headquarters at Heartwood Preserve (144th & West Dodge Road) – 130,000 square feet
• Centris Headquarters in Sterling Ridge (132nd & Pacific) – 115,000 square feet
• Waterford building (192nd and Dodge): 180,000 square feet
In contrast, at the end of 2021, there was only 353,000 square feet under construction between two buildings: Applied Underwriters and Union Bank & Trust, both located in Heartwood Preserve. Space for Applied Underwriters is 250,000 square feet and started in late 2019, but has slowed progress significantly in 2020 and 2021. Union Bank & Trust spans 93,000 square feet and started in late 2020.
This lack of new construction should come as no surprise given the amount of new space that has been added to the market in recent years and the fact that we are still grappling with the effects of a global pandemic. We see this continuing into 2022 as many businesses are still working remotely, creating less demand. We’re optimistic that this will change as more employers bring their employees back to the office and eventually improve their space, although we believe this return to the office will come slowly over a few years. Returning to the office will help fill current vacancies and create demand for more new construction.
The past two years have been a time of dramatic change in the history of office space. Employers will rethink the way they market their work opportunities to potential employees, and flexibility and building new office space will be a major part of the future employment conversation.
Jack Warren is a desktop broker at Investors Realty Inc. This article originally appeared in the April 2022 issue of Heartland Real Estate Business magazine.