The Omaha office market is poised for a significant increase in Class A inventory. Currently, there are planned developments in various stages that would add more than 3 million square feet to the marketplace.
Slated for development is the Fountain West Office Park at 192nd Street and West Dodge Road. The developer, R&R Realty Group, has publicly committed to building the first of a group of speculative buildings. It will be a Class A, 75,000-square-foot building. Construction will likely begin in the second quarter of this year and be completed in about 18 months.
The total inventory of the market today is just shy of 21 million square feet. This figure is comprised of non-owner occupied, non-medical office product. The 3 million square feet of planned development is unprecedented in Omaha, so why is the pipeline expanding now?
(To view larger version of chart, click here.)
A Historical Perspective
For the past three years, the Omaha office market has recorded average annual absorption of 200,000 square feet. Prior to the recession, our pace was nearly 300,000 square feet yearly.
While the pace of absorption has been healthy for a mid-market city like Omaha, new development has remained relatively slow. The stagnant development during the past decade was largely a function of a conservative development community and not a lot of outside development money flowing into Omaha. This approach has kept Omaha stable while other markets suffered through the tough economic stretch of 2008-2010.
Another factor driving today’s imminent surge in development is the lack of available high-quality office space. Indeed, the suburban Class A office vacancy rate is a tight 4.6 percent. A rate this low is unhealthy for a competitive marketplace. Companies that may have considered relocating to Omaha or expanding within the market are forced to look elsewhere simply due to a lack of viable product.
Pendulum Will Swing
Owners of high-quality space have recently enjoyed a market that favors them. If you are a business looking for 10,000 square feet of Class A suburban office space, you can count your options on one hand.
The limited choices have led to a lot of lease renewals with terms favoring landlords. As more developments sprout up, however, the pendulum will swing to a more neutral leasing environment with more equitable deals being completed.
Not all of the planned projects will come out of the ground at once. Even though Omaha’s key economic indicators are healthy (the local unemployment rate stood at 4 percent in January), we couldn’t support a wave of speculative development all at once, and lenders wouldn’t allow it.
While the projects planned vary in scope and location, they will all be competing for the same tenants. Therefore, very little development will occur that is not build-to-suit or significantly pre-leased.
The impending development wave is not a pipe dream. Idle talk of new construction in years past has been replaced by actual renderings and site plans. It will be interesting to watch these planned projects come to fruition and to see in what order they are built and who is occupying the space.
Older Product Could Suffer
The other side of the story is going to be the vacancy left behind by the companies that will be occupying space in the new buildings. Because the projects slated for development are Class A projects, the majority of the tenants moving into these buildings will be moving out of B+ or A properties. These tenants may currently be boxed in due to space constraints in their building, or they may be looking to upgrade from their existing space into something new.
The result will be more vacancies and competition among landlords of existing buildings. In some cases, there will need to be extensive upgrades and renovations to make the buildings more competitive. In other cases, it may be determined that the now vacant property suffers from functional obsolescence. Redevelopment may be necessary to alter the use of these properties.
While it’s difficult to predict what the office landscape will look like in a few years, one point is clear: Omaha is poised for a great deal of development activity that will change the market significantly.
— By T.J. Twit, Vice President, Office Specialist, Cushman & Wakefield | The Lund Company. This article originally appeared in the April 2014 issue of Heartland Real Estate Business magazine.