Tim Kerrigan, Investors Realty Inc.
Class A Advantage
As businesses compete for the best and brightest employees, office space becomes an important hiring tool, causing businesses to look for inviting buildings and spaces in locations with enhanced amenities. This trend has increased activity in Omaha’s Class A office market, driving down the vacancy rate and spurring new construction.
Omaha’s Class A vacancy rate stood at 5 percent at the end of the third quarter of 2014. The average asking rent was $24.95 per square foot on a gross basis, up 4 percent since the start of 2014. The uptick in Class A rents is likely to continue Corporate headquarters and speculative buildings are spurring the Class A construction boom. Local businesses such as Millard Refrigerated Services, Tenaska, Gavilon, TD Ameritrade, NorthStar Financial Services Group and Gordmans have completed build-to-suit corporate headquarters in the last two years.
Meanwhile, construction is underway on an 88,000-square-foot build-to-suit for Pacific Life Insurance Co. Two speculative Class A buildings completed in 2014 are 100 percent occupied, and four new speculative buildings are underway or in the final planning stages.
Path of Development
Most of this Class A office construction activity is occurring along the West Dodge Corridor and in Aksarben Village, an entertainment and shopping district in the heart of Omaha, but for differing reasons. The West Dodge Corridor is popular because it is Omaha’s primary east-west thoroughfare and it is in close proximity to the suburban employment base.
Aksarben Village, which is developing into Omaha’s truest mixed-use development outside downtown, appeals to the Millennials and the creative class opting for urban environments that offer live/work/play solutions. The village is a collaboration site for entrepreneurs combining educational components, offices, residential and an entertainment district.
Rising Tide Lifts Class B
This move to Class A space has provided opportunities in the Class B office market. As of the third quarter of 2014, the Class B vacancy rate stood at 13.8 percent and the average asking rate was $18.75 per square foot.
Omaha stalwarts Union Pacific, Kiewit Corp. and Berkshire Hathaway’s National Indemnity Co. leased large blocks of additional space in 2014, while growing Omaha businesses took down 300,000 square feet.
Omaha enjoys nearly 2 million square feet of quality Class B inventory to accommodate growing businesses, particularly for companies seeking to expand to the city. Notable among Class B properties is North Park Office Park, which operated above 98 percent occupancy from 1986 through 2007 when the original developer sold most of the buildings.
North Park is currently 41 percent vacant primarily because most of the buildings have been owned by tenant-in-common (TIC) investors. The TIC fractional ownership model makes some deals possible that may not occur otherwise, but the nature of the TIC ownership structure makes it inherently difficult to consummate leases.
The presence of many fractional owners makes decision making difficult, and new leases often require additional capital if reserves aren’t sufficient. Raising additional capital can be very difficult in a TIC structure. Fortunately, only one TIC ownership entity remains at North Park, and it is on solid financial footing.
The office park has what large employers seek: large floor plates, abundant parking, a convenient location near the suburban workforce and amenities on site (11 restaurants and bars, a hotel, a fitness center and other services in the campus).
North Park comprises 11 office buildings totaling 725,000 square feet, 300,000 square feet of which is on the market today. Tenants ranging from 10,000 to 100,000 square feet can expect to find attractive options, especially in exchange for lease terms of seven to 10 years.
Office Demand Drivers
Omaha’s office market is approximately 21 million square feet of competitive space, excluding owner-occupied space. The local economy is driven by agribusiness, insurance, medical, technology and other businesses in the financial services sector.
Omaha boasts five Fortune 500 company headquarters: Berkshire Hathaway, Kiewit, ConAgra Foods, Union Pacific and Mutual of Omaha. Omaha also is home to the operational headquarters of other national players including TD Ameritrade, West Corp., First Data Corp. and PayPal.
Omaha is also a Midwest medical hub. Nebraska has the fifth most hospital beds per capita in the United States at one bed per 20,000 people, according to StateMaster.com. The great majority of those beds are in Omaha, which is home to the University of Nebraska Medical Center, the Creighton University Medical Center, the Omaha VA Medical Center and more than a dozen other major hospitals in the metro area.
Ripple Effects
While not directly affecting office transactions, two major construction projects in Greater Omaha are impacting the market and are keeping local contractors healthy. Those two high-profile projects include the construction of the $524 million, 915,876-square-foot U.S. Strategic Command Headquarters at Offutt Air Force Base, and the multi-billion dollar Google Data Center compound on 1,000 acres south of Council Bluffs, Iowa.
Highly confidential, the Google project started in 2012, has a decade long construction cycle and has been described as one of the largest construction projects taking place in the world. Google has abundant land and is spending $2 billion per quarter on its global data center construction program, according to datacenterknowledge.com.
Near-Term Outlook
As of September 30, 2014, Omaha’s overall office market vacancy rate stood at 12.2 percent, down from 13.9 percent a year earlier. It was a weak third quarter with negative absorption of 70,000 square feet, but year-to-date absorption was positive at 204,000 square feet.
The fourth quarter was fairly flat, but a handful of significant tenants in the market suggest the first half of 2015 will bring positive absorption. The market should continue to improve slowly but steadily in 2015 and 2016 as the low vacancy rate for Class A space provides opportunities for new projects at the top end of the market.
A healthy but workable overall vacancy rate, along with attractive rents in well-located Class B properties, provides office space solutions for larger users.
— By Tim Kerrigan, CCIM, vice president, Office, Land & Investment, Investors Realty Inc. This article first appeared in the January 2015 issue of Heartland Real Estate Business magazine.