Omaha Industrial Market Dips Toe into Modern Speculative Development

by Kristin Harlow

By Kevin Stratman, CCIM, SIOR, Investors Realty

Like many metropolitan areas, new construction has been the recent theme in Omaha’s industrial market. Since 2015, the Omaha market has delivered almost 5 million square feet of new flex, industrial and warehouse properties. This is significant, considering the market as a whole is only about 90 million square feet. Equally impressive, the market has kept the vacancy rate below 4 percent despite all this growth.

A bulk of this development has taken place in the popular Sarpy West submarket on the southwest side of the metro area along the I-80 corridor.

Kevin Stratman, Investors Realty

Notwithstanding all of this construction, the market continues to have a lack of opportunities for users of all sizes. At the time of this writing, there are only 10 vacancies in existing properties for lease that are greater than 50,000 square feet. Only one of those vacancies is in a modern warehouse building.

Both national and local tenants alike are shocked to find the limited number of spaces available to them. Which begs the question, why is there so little speculative construction in Omaha?

Omaha has always been a more conservative economy. The market might not see the high of highs that the bigger markets see in boom times, but it also doesn’t often see the lows. This balance is what attracts investors to Omaha.

Historically, major distributors tended to locate in larger markets like nearby Kansas City, so the need for large-scale modern distribution space was limited. Further, our market tends to have owner-occupants in industrial properties. And why not, it’s a great investment for a strong locally owned business. So then, why would the market have invested heavily in spec warehousing on a large scale?

E-commerce influence

E-commerce and last-mile logistics are changing the way developers here are thinking about second tier and third tier. Consumers in Omaha still want prompt delivery of online goods. Markets like Omaha, that didn’t get serious looks for major distribution centers before, are now trying to find solutions for companies trying to fulfill last-mile business. These users tend to require modern amenities Omaha simply has not been building for. And to satisfy this demand, the market is having to play catch up.

Over the last five years, the market has seen two major speculative developments that have marked Omaha’s expansion into modern spec warehousing. Krambec Industrial Park and R&R Commerce Park, both located along Interstate 80 in the popular Highway 50 corridor in Sarpy West. These are both great projects and have found leasing success. In total, there have been six modern spec warehouses built in the Omaha market since 2015. But these properties only account for less than 25 percent of the overall new construction in the market. 

So, if spec isn’t a significant percentage of the overall construction, what accounts for all the new construction? Mostly it has been either owner-occupant driven or a build-to-suit development. This isn’t necessarily a bad thing. Newly delivered spaces become fully occupied at completion, which is good for vacancy rates. These users also typically vacate space in the process, which adds space for the market to backfill. But a truly healthy market needs an adequate supply of vacant space. Omaha simply does not have that.

To complicate the issues further, the Sarpy West submarket is running out of ground. There are several reasons for this that are beyond the scope of this writing, but the core of the issue is twofold: scarcity of sites capable of being brought sewer and rapidly increasing land values as a result.

This has placed developers in an interesting position. Is the demand created in the e-commerce and fulfillment market significant enough that it is worth paying more for land in hopes that rents continue to appreciate? Is investing in spec construction on an unproven corridor viable or prudent? To a market that has been proud of its conservative financial approach, neither are very enticing.

Looking ahead

The tide may be starting to turn, at least somewhat. Despite these challenges, there is roughly 1.2 million square feet of Class A warehouse space planned to break ground in 2021. Local developer White Lotus Group plans to break ground on 300,000 square feet of spec space in Building 1 of its new I-80 Logistics Hub development along the I-80 corridor in Sarpy West next year.

R&R Commerce Park will continue to build out in 2021 as well, with 300,000 square feet under construction currently and another 300,000 square feet planned for late next year. Another 149,000 square feet is slated for development at an infill location in central Omaha at 72nd and F streets just south of I-80.

What’s most exciting — and might potentially have the biggest impact on the market — is that some of this construction is on the alternative corridors. Council Bluffs, Iowa is poised to see its first modern spec warehouse in 2021. There are some infill sites that are going to see new construction as well. Northwest Omaha is also being contemplated for spec development.

Collectively, these projects will help meet the needs of the growing metropolitan area and potentially identify the next “hot” corridor for our market. If successful, they could prove to be the tipping point for more to come.

Kevin Stratman is an industrial broker with Investors Realty Inc. This article originally appeared in the October 2020 issue of Heartland Real Estate Business magazine.

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