The office segment of Omaha’s commercial real estate market is currently in a transitional phase. Companies that have been in the market for office space during the past two to three years have realized that discounted rent and/or the ability to relocate into higher-quality properties are feasible options.
In order to retain and attract tenants, landlords are now required to lower rents and renovate properties to the extent they can. This pressure on property owners has been the leading force behind this current state of transition, and the ripple effects are felt through all classes of buildings.
Tenants in Class C properties are now able to climb the property ladder and obtain favorable lease rates in a Class B property. Owners of Class C properties are forced to renovate, or redevelop, to avoid obsolescence. The Lund Co. refers to this evolution as “Real Estate Darwinism.”
FACELIFT PAYS OFF
A perfect example of the evolution of a property is the 450 Regency building. Originally constructed as a single-tenant, build-to-suit for IBM in 1983, the property became stale and was a non-factor in the overall office inventory in Omaha.
The building sat vacant for many years after its second tenant, Commercial Federal/Bank of the West, moved to a headquarters building on the West Dodge corridor. Companies in the marketplace for space were simply not attracted to the dated interiors and unattractive exterior. In 2008, Lund450 Regency LLC and Jasper Stone Partners purchased the Class B building and completely renovated the interior and exterior. The Omaha World Herald reported at the time that new owners were investing $15 million into the project.
The results speak for themselves. Post-renovation, 450 Regency is arguably the most visually distinct suburban, Class A property in the Omaha market. A completely fresh, bright and modern interior now exists, speaking volumes for true real estate efficiency in what was a back-office, bulk space-type property.
The technology and the mechanical systems were overhauled, creating a unique work environment where companies can live in high form without sacrificing function. 450 Regency went from completely vacant to 100 percent leased in 18 months — proof of the building’s attraction and the success of this type of project.
LEASING ACTIVITY ACCELERATES
The current environment has led to a great deal of activity in the Omaha office leasing market. The local real estate community as a whole benefits tremendously from a robust and diverse local economy.
In 2011, a rising proportion of the activity in the market was due to job growth. The big story of the past couple of years is the migration of tenants between building classes.
The overall office market vacancy rate in Omaha stood at 15.1 percent in the third quarter of 2011, but the Class A vacancy rate is a much healthier 5.9 percent. The good news is that the market absorbed 115,161 square feet of space in the third quarter.
This office trend will continue in Omaha, eventually resulting in a tipping point. The pendulum will then swing back in favor of property owners and landlords. Rents will then increase, leasing incentives will decrease and new development will begin to occur at a higher rate.
— T.J. Twit Jr. is vice president of the Omaha-based Lund Co.
Photo Caption: 450 Regency was completely transformed from a Class B office building to a Class A showpiece as part of an extensive interior and exterior renovation project.