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Why Omaha Multifamily Market Is Golden for Investor Opportunities

The $1.2 billion Avenue One development, from Jasper Stone Partners and Block Real Estate Services, will include up to 2,000 new residential units.

The $1.2 billion Avenue One development, from Jasper Stone Partners and Block Real Estate Services, will include up to 2,000 new residential units.

The national love affair with the multifamily sector may be starting to cool, but the Omaha market is just coming of age and heating up.

“Overall, it was a strong third quarter, which was a nice surprise,”said Michael Cohen, CoStar Group director of advisory services, during his State of the Multifamily Market Third Quarter Review and Outlook on Nov. 1. “We’re still in the golden age for multifamily, but we’re seeing signs of a gradual slowdown in the apartment market.”

Scott Koethe, Cushman & Wakefield/The Lund Co.

Scott Koethe, Cushman & Wakefield/The Lund Co.

Trendy new apartment towers and historic building conversions in downtown Omaha are all the rage — like most markets — but under the radar the entire Omaha metro is experiencing a significant boom in apartment development and sales.

And why not? What’s not to like about Omaha? We are the non-threatening little brother of the Midwest that everyone likes, but never thought of in that way. But something has changed and Omaha is catching the attention of players that would have traditionally overlooked our strong fundamentals.

Omaha has a diversified and stable economy fortified by nine Fortune 1000 companies, including Berkshire Hathaway, Union Pacific Railroad, Mutual of Omaha and TD Ameritrade, as well as a burgeoning innovation scene and a fiscally sound government.

With a total MSA population of just under 1 million residents, the Omaha-Council Bluffs market does not show up on most investors’ radars nationwide, but if you are a multifamily investor it should. In October 2017, Time magazine ranked Omaha as No. 3 on a list of the most up-and-coming cities in America. Omaha also ranked No. 11 on Reis analysis of potential cities for Amazon’s HQ2, behind only major markets like New York City, Washington, D.C., Boston and Chicago.

The continuation of “the golden age for multifamily” nationwide is especially exciting in Omaha and other tertiary Midwest cities, as they trend a few years behind the major markets, leaving a lot of predictable market run for investors.

Omaha’s fundamentals are strong; new construction is in balance with demand and the job market is stable and diverse with a 2.9 percent unemployment rate — under the national average of 4.1 percent. Over the last 10 years, Omaha has had a job growth rate of almost twice the national average, according to the Bureau of Labor Statistics.

Rent growth remains steady and predictable. According to Axiometrics, the Omaha-Council Bluffs apartment market posted a 96.15 percent occupancy rate at the end of the third quarter, up 49 basis points from this time last year. Positive rent growth continued at almost 2 percent for the quarter with an average effective rent of $886.

Hot spot for sales

The sales market is strong, pricing remains well below replacement cost and cap rates are starting to compress. The average unit sold in Omaha in 2017 across all classes was just north of $66,500 per door, well below replacement cost.

Trailing cap rates on deals with a value-add component are reaching near the mid-5 percent range and stabilized deals of all vintages are approaching the 6 percent mark. In my tracked set of sales (50 units and over), Omaha had 2,415 units closed as of November 2017 and another 1,333 units pending or under contract. This is a large increase over the previous year’s total of 2,220 units sold and on pace with the 2015 activity of 3,296 units sold. The major difference between 2015 and 2017 is the cap rates. The 2017 cap rates averaged almost three-quarters of a point lower than the trailing cap rates for the 2015 sales.

The notable hot spot in sales is a one-mile radius in northwest Omaha along the I-680 corridor. That submarket had the most sales activity in 2017 with 1,348 units closed and 716 units still pending. The three most notable sales in the Omaha market were all in that radius:

1) Whispering Hills sold in April for $39.9 million (446 units). The newer class A property was built in phases between 2004 and 2015. 2) The Highlands Portfolio sold in April for $33.4 million (438 units; two properties). It consisted of 312 market-rate, garden-level apartments and 126 townhomes built in 1971 and 1975, respectively. 3) The Maxx Portfolio traded in August for nearly $46.4 million (810 units over six properties, three of which were in this submarket). These properties had vintages from 1975 to 1998.

At this point, it’s unclear what is causing all the activity in this one-mile radius of Omaha that was developed in the 1970s, but the data is hard to ignore. With the pending 716 units that should close in January 2018 and the sale of Tudor Heights for $23.6 million (418 units) that closed in November of 2016, this one-mile radius will have seen over $173 million in new investment with a total of 2,482 units sold.

In a 14-month period, this area alone had nearly the same number of units change hands as the anticipated total Omaha market unit volume for 2017.

The area is hot and the investment is diverse. The properties range from Class A to C and there are five different ownership groups involved in these transactions. The new ownership groups are investing in upgrades to the properties with various levels of planned improvements, boosting the entire submarket. It is anticipated that other owners in this submarket will bring their properties to market in 2018. Expect the interest level to be strong to very strong.

New construction starts

According to CoStar, the Omaha-Council Bluffs market delivered 2,715 new units in 2017, fairly balanced between urban infill (52 percent) and suburban (48 percent). The future of proposed construction projects and those underway reveals a steady supply of new product with 2,710 units planned, according to CoStar.

Developers remain optimistic about the Omaha market for the near term. The trend should continue with the 2017 announcements of two large mixed-use projects totaling an estimated $2.4 billion. Noddle Cos. has proposed up to 1,500 new housing units in its $1.2 billion Boys Town/West Farm mixed-use development at 144th Street and West Dodge Road. Jasper Stone Partners and Block Real Estate Services have proposed up to 2,000 new housing units at the $1.2 billion Avenue One development at 192nd Street and West Dodge Road.

For 2018, we anticipate a continued compression in cap rates as more regional and national investors enter the Omaha market chasing better yields. Most investors are from the larger secondary markets like Denver, Minneapolis, Chicago and Kansas City, where the yields are decreasing due to major market investors entering the secondary markets.

There are only about 1,000 units scheduled to come to market in 2018, but I expect more deals to shake loose as owners become sellers when they see what the market has to offer.

Experts insist that nationwide we are near the top of the cycle and will move into a slowdown in the near future. Most expect this to occur two to five years from now. The good news for Omaha is that real estate fundamentals are strong. Our market timing lags behind the rest of the market and as long as we don’t overbuild, we should only see a softening in future rent growth.

— By Scott Koethe, Director of Investment Sales, Cushman & Wakefield/The Lund Co. 

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