The Omaha apartment market remains a strong performer. According to MPF Research, Omaha’s apartment occupancy stood at 95.5 percent at the end of 2012, up a modest 80 basis points from the end of 2011 and in line with Omaha’s average occupancy rate of 95.9 percent since 2000.
Coupling the strong occupancy rate with a continued favorable financing environment, it is no surprise that developers are eager to bring new units on line and move quickly to lock in permanent financing.
As a result, 2012 saw 1,225 multifamily housing building permits issued, which was very much in line with my predicted total of 1,300 permits for the year, and up 25 percent when compared to 2011.
The addition of 1,225 units will increase the apartment housing stock in Omaha by 1.4 percent on an overall inventory of approximately 88,000 units. My expectation is that permit activity will again be around 1,200 units for all of 2013, with a small chance that it could possibly increase to as many as 1,400 units.
There are a number of local and regional developers who are actively seeking multifamily land, and the lack of top sites is likely to be the biggest development constraint this year and 2014.
Renter Demand is Strong
Statistics from the Greater Omaha Chamber of Commerce offer further evidence of the area’s ability to handle the issuance of 1,200 new multifamily housing building permits. Omaha experienced a 2 percent growth in its employment base during 2012 and finished the year with a low unemployment rate of 4.2 percent.
When looking at national demand trends for the period 2010 to 2020, my extrapolation is that Omaha will need to average between 850 and 1,150 new units each year to keep up with apartment demand.
This is based on the National Multi Housing Council’s range of 300,000 to 400,000 annual new apartments required to meet projected demand over the next decade. Omaha’s proportionate share yields the range above.
In other words, when looking at both the local environment and the national trends, both are supportive of current yearly apartment growth of 1,000 to 1,200 units, with downward pressure building on occupancy and rental rates as the number surpasses 1,200 units annually.
We continue to see average rents increase modestly in Omaha. For example, in 2012, the average rent rose by 1.8 percent to $735 per unit per month, according to MPF Research. This increase is slightly below the average of 2.1 percent annually since 2000, but well ahead of the annual increases of 1.3 percent during the 1990s.
Not surprisingly, rent growth in the 1990s was limited by a healthy building cycle (1995-2002) during which annual permits averaged some 1,500 units. According to a recent survey from the Institute of Real Estate Management (IREM), average monthly rental rates per square foot were $1.07 for studios, 83 cents for one bedrooms, 72 cents for two bedrooms, and 75 cents for three bedrooms.
Interestingly, IREM’s fall 2012 survey revealed an average occupancy rate of 93.6 percent, or 1.4 percentage points lower than the fall 2011 survey, suggesting that Omaha’s additional supply of apartments has in fact resulted in lower occupancy.
Market Ripe for Lenders
Omaha continues to be an attractive market for lenders due to solid real estate fundamentals and a strong underlying economy with a diversified job base. With the 10-year bond continuing to hover around 2 percent, apartment owners are taking advantage of today’s low interest rate environment.
In fact, many owners who have been watching interest rates come down during the past five years finally pulled the trigger in 2012 and placed anywhere from 10- to 30-year fixed-rate debt on their properties. In many ways, 2012 was the year for refinancing for apartment owners in Omaha.
That being said, we also saw five larger multifamily sale transactions (150+ units) during 2012. I personally brokered two of the five transactions. Two of the sales were by a merchant developer and three were by local and regional private investor groups.
In addition, 2013 is off to a strong start as another large apartment complex is already under contract. To put 2012’s activity into perspective, Omaha often experiences only one to three large multifamily sale transactions annually. Not surprisingly, all of the sales were partially driven by the excellent financing environment currently available, and/or the long-term, fixed-rate financing that was already in place.
From an investment perspective, demand for Omaha multifamily far exceeds supply. Local and regional investor groups aggressively pursue available properties and many are pre-sold well prior to hitting the broader market. For properties we do bring to market, we regularly generate a dozen or more offers from bona fide buyers.
In addition to possessing solid underlying dynamics, Omaha enjoys a growing economy, moderate rent growth and pricing per door that is at least $25,000 below that of nearby larger markets such as Kansas City, Denver and Minneapolis.
Consequently, in this highly attractive financing environment, investors are willing to pay top dollar for well-located, well-maintained and well- occupied communities.
— Ed Fleming, senior vice president, Colliers International