National, Regional Investors Are Drawn to Omaha’s Apartment Market
With asking rental rates increasing, an average vacancy rate of 5.7 percent and a low average asking rent per unit of just $855 per month, Omaha’s apartment market is increasingly attractive to national and regional investors.
According to apartment research firm Reis, Omaha’s average asking rental rate has increased in every quarter for the past seven years, and is expected to increase by another 2.2 percent in 2018. While not stellar growth, it continues a steady march upward that has benefited owners in Omaha for quite some time.
Driving the growth in rents is the balanced nature of the Omaha market coupled with Omaha’s strong underlying economy. From a population growth perspective, census data shows that Omaha’s metropolitan statistical area (MSA) has grown 1.2 percent per year since 2010, and is now estimated at 939,000 people. That steady trend is expected to continue for the foreseeable future, as Omaha’s population is projected to grow another 1.1 percent per year through 2022.
In terms of absorption, Omaha has averaged an annual addition of 4,000 households over the past 10 years, according to Reis. Renters account for 34.3 percent of Omaha MSA’s housing units, translating to roughly 1,372 new renter households each year. These figures are very much in line with apartment permits and deliveries, as Omaha has averaged 1,286 apartment permits over the past decade. The result is a balanced, steady market with consistent growth.
Omaha is clearly a place that developers and national investors are increasingly finding attractive. From an economic perspective, Omaha has a highly diversified economy with a very low unemployment rate of 2.8 percent as of January 2018, according to the U.S. Bureau of Labor Statistics.
Omaha routinely exemplifies Nebraska’s “The Good Life” slogan, as noted by technology and science website Gizmodo in March 2017 when Omaha was listed as one of only three cities in the country to have economic strength, affordable housing and a high quality of life.
From a capitalization rate perspective, the Midwest in general and tertiary markets such as Omaha consistently provide investors with yields that are roughly 100 to 150 basis points higher than the coasts and other markets. As reported by Real Capital Analytics, national apartment cap rates averaged 5.6 percent during 2017. During that same period, Midwestern markets saw average cap rates of 6.5 percent, and tertiary Midwestern markets saw average cap rates of 6.9 percent.
While many assets command significantly lower cap rates than 6.9 percent, the relative additional yield that can be obtained in Omaha, especially on a leveraged basis, is particularly attractive to regional and national investors.
It should also be noted that the overall U.S. economy has clearly picked up steam since the November 2016 election, and is hitting on many cylinders. Along with improved growth comes the potential for wage growth and modest inflation. And as a result, the 10-year Treasury bond has increased by over 50 basis points since mid-
December of 2017, and we have yet to see how that will fully impact apartment sale pricing.
From my perspective, the bond market is still looking to find a firm footing and has not yet settled into a new normal range. And the early data is that the interest rate movement will not significantly impact apartment sale pricing. As a longtime apartment developer once told me, “Inflation is an apartment owner’s best friend.”
Supply, demand in balance
The Greater Omaha Chamber of Commerce reports that annual new multifamily housing permits jumped to 2,116 units during 2017. That’s an increase of a full 913 units from the prior year, which is 43 percent more than the average number of multifamily housing permits issued in the past decade.
Looking forward, I expect 2018 to be another strong year for apartment permits, but I also expect the absolute number of permits issued to be closer to 1,200 to 1,400 units. In other words, 2018 should be strong relative to the past decade, but not strong enough to disrupt the overall balanced market dynamics.
Leading the charge on multifamily permits issued in 2017 are Vann Properties’ Antler View with 372 units; Giddings Group’s Duke of Omaha with 283 units planned; CIP’s The Villas at Falling Waters with 173 units; J. Development’s 162 units; NewStreet Properties’ 120-unit expansion of The Landings; and Dicon Construction’s work on Pacific Renaissance Apartments with 118 units.
Room for rents to rise
Furthermore, with the new apartment stock being delivered at all-in construction numbers of $135,000 or more per unit, a modest new supply of higher-priced product into a balanced market will only serve to push rents higher. And we certainly believe that apartment rents in Omaha have room to grow. The average asking rental rate in Omaha is $855, compared with $1,320 in Denver and $1,297 in Minneapolis, according to Reis.
While wages in Denver and Minneapolis may be slightly higher than in Omaha, they are not a full 50 percent higher. That clearly suggests that for whatever reason renters in Denver and Minneapolis are willing to pay quite a bit more for housing than landlords have been able to command here in Omaha. On a long-term basis, that gap will narrow, and Omaha apartment owners are most certainly going to benefit from the adjustment.
Continued high expectations
We continue to expect that 2018 will be a great year to own apartments in Omaha, with strong occupancy of 94.3 percent and an expected 2018 year-end occupancy rate of 93.7 percent.
With the slight dip in occupancy by one or two percent, coupled with the high permits issued in 2017, we expect that developers may take a deep breath in 2018 and ease off the new construction gas while the market settles. That slight pause should allow the market occupancy to catch up with demand and push occupancies in 2019 to 95 percent or more.
— By Ed Fleming, Executive Vice President, Colliers International. This article originally appeared in the April 2018 issue of Heartland Real Estate Business magazine.