Omaha’s office market saw more total lease transactions in 2021 for more total space than in any year since our firm has tracked it — 281 transactions for nearly 1.8 million square feet. In a typical year, Omaha usually sees approximately 200 transactions for 1 million square feet. In addition to leasing activity, net absorption was positive at 310,391 square feet, and Omaha’s overall vacancy rate contracted slightly over the year.
In turn, year-over-year market rent growth reached its highest point since pre-COVID-19. “Though slow-moving compared with other major U.S. metros, Omaha’s office market is showing early signs of a recovery thanks to its diversified employment base,” states CoStar.
Jack Warren, Investors Realty Inc.
It seems fair to describe the market as stable as we are not seeing large swings in space availability and pricing, but it feels tenuous, just as corporate office space decision-makers are dealing with uncertainty. We continue to see office users choosing to wait and see on decisions affecting demands for office space. Most of the numbers are trending the right way, albeit slowly, but Omaha’s vacancy rate is more than 300 basis points higher than seen in many years before the pandemic, and we finished 2021 with 324,398 square feet of sublease space available, more than we have tracked historically.
Furthermore, Omaha is coming off of years of strong new construction, and we are seeing newly vacated space. The economy seems strong with revenue growth in virtually all areas. However, supply chain complications and employment difficulties — especially with the impact of the omicron variant — combined with the looming prospect of firms exploring more permanent remote and flexible work solutions may continue to place upward pressure on the metro’s office vacancy rate in the near term.
Since the onset of the pandemic, Omaha office owners have generally opted to freeze asking rents, although new construction brings higher asking prices. Despite reaching a post-pandemic high in 2021, year-over-year rent growth is still more than 200 basis points below the five-year pre-COVID average. It will remain difficult for office owners to push asking rents until strong leasing activity returns for an extended period and the office vacancy rate declines significantly.
Office sales activity was strong in 2021, with total sales volume roughly matching pre-COVID-19 levels. Businesses faced with the prospect of coming out of pocket for significant tenant improvements or the ever-increasing cost of new construction are looking at purchasing an existing building as their best solution. Armed with low interest rates, businesses buying existing product is usually less costly and a faster solution in many cases. CoStar reports that market pricing, an estimated price of all office properties in the market and informed by actual transactions, increased for the first time since the onset of the pandemic.
Vacancy
The 2021 Omaha office market vacancy rate compressed slightly to 9.1 percent, which is 300 basis points higher than year-end 2019 (pre-
COVID-19). The best performing submarket was the Southwest, which has a vacancy rate of 5.5 percent. Only four submarkets besides the Southwest submarket had decreasing vacancy rates in 2021: the Northeast (8.9 percent), Southeast (13.5 percent), South Central (6.5 percent) and Southwest (5.5 percent). The decreases were all by less than 100 basis points except for the Northeast submarket, which experienced a 160-basis point decrease.
The worst performing submarket was Miracle Hills, which had a vacancy rate of 18.3 percent. This rate is surprising because Miracle Hills has historically been the best performing submarket in Omaha, with single-digit vacancy rates over the last decade. Most of the vacancy can be attributed to Intrado (formerly West Corp.) downsizing by 100,000 square feet. Of the space Intrado has vacated, approximately 27,124 square feet have already been leased to Scooter’s Coffee, which will move into the building this year.
The other submarkets with increasing vacancy are Central Dodge (11.1 percent), Downtown (6.6 percent), Midtown (6.6 percent), Northwest (14.1 percent), Old Mill (10.8 percent), Regency (10.2 percent) and Suburban West Dodge (12.8 percent). Increasing vacancy in historically strong submarkets is due to new construction coming to market with partial vacancy, such as California Pointe, Carson Wealth and the Baxter Building in the Suburban West Dodge submarket. It is also the result of the pandemic and the effects of businesses downsizing their office footprints due to a flexible work-from-home strategy or leaving the market to consolidate in a different city.
Deal velocity increased significantly in 2021, with 281 office lease transactions totaling nearly 1.8 million square feet, compared with 180 transactions for 718,246 square feet in 2020. Both figures are more than a typical year where Omaha sees approximately 200 transactions for 1 million square feet.
However, that is not the whole story, as 2021 benefitted from some make-up for lost transactions in 2020, and some of the 2021 transactions reflect stop-gap solutions for businesses, which may be short-term, less valuable leases. Tenants also continue to downsize and/or offer sublease space, making it feel like the office market is treading water.
Omaha recorded 324,398 square feet of sublease space available at the end of 2021. Large blocks of space exist in Aksarben Village, North Park, Suburban West Dodge, Altech Tech and Pacific Springs. We expect more sublease space due to a few large Omaha-area employers working through their workplace strategies and talking about giving space back.
Sublease space in Omaha has typically been one-off situations where a business was acquired or changed dramatically and gave space back. The current market demonstrates several businesses giving space back, which suggests sublease space will have a more significant impact on the market than ever before, particularly regarding rental rate and length of term.
Absorption
Absorption is the net change in occupancy from period to period, expressed in square feet. Omaha’s historical (pre-COVID-19) annual absorption average was approximately 250,000 square feet. In 2020, the office market experienced a negative 182,288 square feet of absorption as COVID-19 impacted every workplace, and work from home became common. At the close of 2021, the office market had absorbed 474,977 square feet, which is materially above average and makes up for the loss seen in 2020.
At year-end, the best-performing office submarkets were the Southwest submarket, absorbing 267,009 square feet, and the Suburban West Dodge submarket, absorbing 267,928 square feet. These two submarkets outperformed all other sectors and absorbed more space than Omaha’s historical (pre-COVID-19) annual average of approximately 250,000 square feet. The Suburban West Dodge submarket benefitted from Valmont (127,548 square feet) and Carson Wealth (78,464 square feet), while the Southwest submarket data reflects LinkedIn’s move into its new headquarters (200,000 square feet).
The worst-performing submarket was the Northwest submarket, finishing the year at negative 126,654 square feet of absorption. The negative absorption would be worse if the sublease space on the market was vacated, as there is 129,659 square feet available for sublease in the submarket. There is a total of eight buildings with over 20,000 square feet available in the submarket, and there was only a total of 17 leases over 20,000 square feet completed in all of Omaha last year.
Construction
While the last few years we have seen a boom in new construction, 2021 was more the year of deliveries. At the end of 2020, there was 1.1 million square feet under construction and much of that was in its final stages of completion. That led to the notable deliveries in 2021 listed below:
• LinkedIn at Sterling Ridge (132nd & Pacific) — 200,000 square feet
• The Carson Wealth Buildings at Heartwood Preserve (144th & West Dodge Road) — 120,000 square feet
• Valmont headquarters at Heartwood Preserve (144th & West Dodge Road) — 130,000 square feet
• Centris headquarters at Sterling Ridge (132nd & Pacific) — 115,000 square feet
• Waterford Building (192nd & Dodge) — 180,000 square feet
In contrast, at the end of 2021, there were only 353,000 square feet under construction between two buildings: Applied Underwriters and Union Bank & Trust, both located in Heartwood Preserve. The space for Applied Underwriters is 250,000 square feet and broke ground in late 2019 but slowed progress dramatically during 2020 and 2021. Union Bank & Trust spans 93,000 square feet and broke ground in late 2020.
This lack of new construction should not be surprising considering the amount of new space that has been added to the market the last few years and the fact we are still dealing with the effects of a global pandemic. We see this continuing in 2022 as many companies are still working remotely, creating less demand. We are optimistic this will change as more employers bring their employees back to the office and eventually upgrade their space, although we believe this return to the office will occur slowly over a few years. The return to the office will help fill the current vacancies and create demand for more new construction.
The last two years have been a sea change moment in the history of office space. Employers will be rethinking how they promote their work opportunities to potential employees, and flexibility along with new office space construction will be a major component of the future employment conversation.
Jack Warren is an office broker with Investors Realty Inc. This article originally ran in the April 2022 issue of Heartland Real Estate Business magazine.