Lincoln Office Market Assesses Amount of ‘Shadow Space’
Historically, Lincoln, Nebraska, has been a resilient Midwestern city. Home to state and county governments and the University of Nebraska-Lincoln, it has weathered past economic ups and downs and provided steady growth close to 2 percent each year.
As COVID-19 restrictions ease, people are gradually returning to shop and find entertainment downtown, and new construction continues to rise above Lincoln’s skyline. Interestingly, the last time this many cranes were visible downtown was during the last economic downturn. It has been remarked that during that time, Lincoln “built its way out of the recession.” Now, many building projects are helping to maintain the resiliency of our economy during these challenging times.
Prominent projects, proposed or initiated prior to the pandemic, continue to move forward. Examples include a proposed 15-story, 300,000-square-foot mixed-use building by Chicago-based Argent Group housing 200 residential units. Omaha-based White Lotus Development plans a $54 million redevelopment of the Pershing Auditorium block, a vacant city-owned venue. White Lotus would bring 100 affordable housing units with a wellness center, childcare center, retail, community green space and potentially a new city library.
Other notable projects include a $21 million renovation of a 100-year-old, seven-story Atrium Building by new local owners. Pushing the 275-foot building height limitation in downtown Lincoln, Lafayette, Indiana-based Trinitas Ventures plans to purchase and demolish the Journal Star building at 926 P St. and build a two-tiered apartment building on the site with 321 units. Furthermore, the nearly complete 20-story Lied Place condominium building will be the tallest privately owned building in the city.
After more than a year-and-a-half of uncertainty, Lincoln’s central business district office submarket has inched closer to a recovery, yet one integral piece is slowing efforts to recover: shadow space. While businesses are functioning, employees are not necessarily returning to offices. This creates “shadow space,” or space that is leased but unoccupied or underutilized, and publicly perceived as dark.
Prior to the pandemic, many employers had begun to adopt flexible working arrangements to attract and retain an increasingly younger workforce. The pandemic is accelerating this trend, forcing many businesses to send workers home, leaving desks empty and office buildings largely unoccupied.
Significantly, the State of Nebraska has been reducing its footprint by pulling its employees from privately owned lease space in favor of either work-from-home arrangements, working from state-owned buildings or permutations thereof.
In October 2020, the Downtown Lincoln Association (DLA) estimated as much as 65 percent of downtown office square footage was shadow space. Anxious speculation has centered around the timeline for returning the workforce to the office.
While daily office use is slowly increasing, corporate users lag in bringing workers back. In fact, a second DLA survey conducted in June 2021 found that out of 109 downtown businesses, only 31 percent reported that their offices were or would be at full capacity within 90 days. The delta variant pushed return-to-office dates even further out with some companies opting for first quarter of 2022, while others are taking a wait-and-see approach.
According to NAI FMA Realty’s first-half 2021 market report, Lincoln’s downtown office market activity remained slow and vacancy increased to 12.3 percent, up from 10.1 percent year-over-year. Predictably, sublease space coming to market is rising. Current sublease offerings include newly built out (and in some cases, never occupied) spaces. While last year tenants were requesting shorter-term extensions or a right to terminate due to the uncertainty in the market, they weren’t necessarily reducing space. Some businesses sought more personal space, which could reverse the trend of densely populated office spaces.
The most notable retail trend is in banking. A growing number of bank branches are moving and/or consolidating downtown locations as they evaluate their space needs. The industry was likely headed in this direction, but COVID-19 accelerated the change.
Banks such as First National Bank of Omaha, Wells Fargo Bank and Great Western Bank are among those institutions relocating and dramatically reducing their downtown footprints. However, locally owned Union Bank & Trust seized the opportunity in Wells Fargo’s downsize and is moving its downtown branch into a majority of the space to be vacated by Wells Fargo in the prominent 11-story, I.M. Pei-designed building at 13th and O streets (which will be re-branded as Union Bank Place in 2022).
The outlook for the office market is murky and it will be interesting to see what develops over the next few years, especially as the fate of today’s growing “shadow space” is determined. While some companies may forego leasing space entirely and adopt a complete work-from-home policy, many others will come to realize that the office environment provides a critical business hub for community, connection and creative collisions. Lincoln is primed for growth, and as we move out of the pandemic, this disruption is creating many opportunities for businesses to survive, evolve and thrive.
Richard Meginnis is president and Tom Graf is a sales associate with NAI FMA Realty. This article originally appeared in the October 2021 issue of Heartland Real Estate Business magazine.