Omaha Office Market Is Somewhat Insulated from Broader Economic Conditions

by Kristin Harlow

By Eric Rose and Erick Tjarks, Cresa

The Omaha office market proved to be somewhat insular from the effects of the many factors the real estate industry has experienced since 2020 (COVID-19, the hybrid work-from-home model, discussions of impending recession to name a few). Although down year-over-year, which given the recent interest rate hikes is expected, market sales volume remains above-average over the surveyed period going back to 2007. Though, this transaction volume dropped precipitously in the second half of 2022 and has continued to be slow in early 2023. 

However, the local market has seen pockets of increased activity, as Northwest Omaha saw heightened transactional volume, with Midtown Omaha, downtown Council Bluffs and suburban West Dodge following suit. As showcased above, market cap rates have largely accounted for interest rate hikes and are currently stable but subject to future interest rate increases. These statistics all point to a stable market, with fundamental performance on solid footing.  

Eric Rose, Cresa

However, it should be noted that, according to CoStar, 2022 is only the second year on record when demolitions outpaced gross deliveries, with only 93,000 square feet of net deliveries Omaha ranked in the bottom 10 of the top 60 office markets across the country. This dip in the supply side is likely to continue, as construction starts plummeted in the second quarter of 2022 and in-progress builds are at a low historically. 

The most active submarket for construction at year-end 2022 was Southwest Omaha, most notably with the soon-to-be-completed Applied Underwriters headquarters facility at Heartwood Preserve. There are several other pending development projects slated to complete between 2023 and 2025, much of which will be fully pre-leased due to lack of existing good quality supply in Omaha’s most sought after office submarket. Construction starts in Omaha will be bolstered in the 2023 figures, as Mutual of Omaha’s new headquarters tower began construction in January.  

The result of these factors is a slightly increasing vacancy rate, which currently stands at 7.6 percent across the metropolitan statistical area (MSA). Although this is not near the peak of 10.3 percent experienced in the midst of the Great Recession, it is approximately 200 basis points higher than the pre-pandemic average. Despite this fact, Omaha remains favorable relative to the nationwide figure of 12.5 percent.  

Erick Tjarks, Cresa

The Miracle Hills submarket showed the highest vacancy across the metro (14.5 percent), followed by Central Dodge (12.5 percent), downtown Council Bluffs (12.1 percent) and Northwest Omaha (11.3 percent). Historically, these submarkets have been some of the best performing in the metro area. 

These elevated levels of vacancy are largely due to one or two large office users in each submarket vacating and/or downsizing, but we expect those vacancies to be filled relatively quickly and the remainder of the market to stay tight relative to national averages. Meanwhile, the best performing submarkets include Southeast (3.6 percent), Midtown (5.4 percent) and downtown (5.6 percent), all well below the local MSA average.

Omaha’s rent growth of nearly 2 percent is significantly better than its metro peers. Despite being strong relative to other cities, this rent growth has not kept up with the current inflationary pressures, which could create a cash-flow crunch given the increased cost of materials and leverage. With the Federal Reserve continuing to increase interest rates as of the writing of this article, investors have had to consider alternative avenues of investment, which was a contributing factor to the decrease in sales activity in the second half of 2022. 

The unprecedented cadence of interest rate hikes continues to curb new investment, as investors continue to wait for rents to catch up or rates to be cut. These environments can oftentimes be breeding grounds for opportunistic investors who may be able to find assets below market average pricing due to the strains of increased interest rates.

Overall, as compared to the country and its peers, the Omaha office market continues to show strong fundamentals. Although there remains uncertainty in the long-term effects of the hybrid work model, the financing environment and the overarching economy, Omaha continues to see sales transactions, lease-ups and now large-scale construction that will continue driving the Omaha office space forward in its typical conservative manner.

Eric Rose is a managing principal and Erick Tjarks is a vice president with Cresa. This article originally appeared in the April 2023 issue of Heartland Real Estate Business magazine.

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