Omaha’s Strong Apartment Fundamentals Draw National Attention of Investors
With an average occupancy rate of 96 percent at the end of 2016, coupled with a four percent growth in asking rental rates during 2016, Omaha’s apartment market continues to be a strong performer.
According to apartment data research firm Reis, Omaha’s average asking rental rate has increased in every quarter for the past 23 quarters, and is expected to increase 3.6 percent in 2017. On the occupancy front, Reis expects the vacancy rate to finish 2017 slightly higher at 4.9 percent, which would still result in a projected healthy 95.1 percent occupancy rate.
On a 10-year historical occupancy basis, Reis reports that the average occupancy over the past decade has been 95.3 percent. Meanwhile, the Institute of Real Estate Management (IREM) reports that the occupancy rate during the same period ranged from a low of 92 percent in 2008 to 96 percent in both 2013 and 2015.
Since the beginning of 2007, the average annual increase in asking rental rates has been 2.7 percent, according to Reis. Over the past 23 quarters, the cumulative increase in asking rental rates has been 19.3 percent.
Investors take notice
While Omaha may not have as robust rent growth as some East and West Coast markets, it’s clear to developers and investors that Omaha has experienced continued solid growth while maintaining strong occupancy levels across the metro area.
In addition to increased average asking rents, owners continue to benefit from the ongoing trend and expansion of pass-through and other charges to multifamily residents, including items such as utilities (gas, water, sewer), trash, pet rent and application fees. While this trend was less pronounced a decade ago, it has now fully permeated the market.
An ample amount of capital available nationwide for acquisitions and financings has helped fuel transaction activity in Omaha. Furthermore, Omaha has also benefitted from the ongoing trend of investors chasing yield into secondary and tertiary markets.
After trending downward for a number of years, cap rates stabilized in 2016, but remain at the lowest they have been in the past 20 years. The combination of strong rent and revenue growth and high occupancies has resulted in some of the highest-priced sales ever seen in Omaha. Local, regional and national investors continue to hunt for product in Omaha. What’s more, multiple bidders are offering aggressive pricing on deals.
Supply-demand in equilibrium
The Omaha Chamber of Commerce reports that annual new multifamily housing building permits issued over the past 10 years have ranged from a low of 367 units in 2009 to a high of 1,650 units in 2014. For 2016, that number was 1,565 units, up 21 percent from 2015 but below the 1,650 units in 2014 (see chart). I expect the number of building permits issued in 2017 to be around 1,500 units.
If one reads the newspaper, it’s hard not to come across a new development deal touted every few weeks. However, when viewed in the big picture, the new supply of apartments in Omaha is appropriate for a city of Omaha’s size and growth.
In particular, metro Omaha had an estimated population of 925,303 in 2016, with a historical annual growth rate of 1.3 percent since 2000. On the apartment front, there is a total inventory of approximately 100,000 units, so roughly 1,300 apartments per year would need to be added to keep up with the population growth.
With the nationwide trend moving away from home ownership and toward renting, Omaha can and has easily absorbed 1,500 or more units per year.
Similar to other successful, growing cities, Omaha has seen an increase in the number of people who rent by choice, as they seek nicer finishes, but more importantly a location near amenities. In addition, the current supply of starter homes in Omaha remains low, and the cost to construct homes has increased significantly in recent years due to both construction costs and new City of Omaha regulatory burdens related to “park fees” and construction materials.
I expect that we will see several projects deliver in 2017, including Lanoha Development’s 346-unit Lumberyard District; McNeil Development’s 282-unit Park 120 Oak Hills development; Moylan Development’s 218-unit Capitol District development; and City Ventures’ 99-unit Benson Lights development.
Development projects expected to break ground this year include NuStyle’s The Landing (731 units planned to deliver in 2018/2019 on the former Creighton Medical building downtown); Burlington Capital’s The Vantage (294 units at 156th and Ida streets), Broadmoor Development’s Aksarben Village Phase III (241 units at 61st and Center streets), and McNeil Development’s 125 West Dodge Road (303 units at 125th Street and West Dodge Road).
High expectations in 2017
Much like 2016, we expect 2017 to be a great year for apartment owners in Omaha. With continued strong occupancy at 96 percent, coupled with solid asking rental rate growth of 3.6 percent along with a reasonable supply pipeline, it’s no wonder that apartments continue to perform well.
As a city, Omaha has a highly diversified economy. According to the Bureau of Labor Statistics, the unemployment rate in Omaha fell to 3.2 percent in January compared with 3.3 percent statewide and 4.8 percent nationally during the same period.
Omaha’s downtown is thriving, and several infill locations have witnessed strong redevelopment (Aksarben Village, Benson, Dundee, and the Blackstone District to name a few).
As such, Omaha’s density continues to increase and much of the new housing stock in those increasingly dense areas consists of apartments, which are occupied primarily by young professionals who have eschewed the suburbs for a more urban environment.
In short, the future looks bright for the Omaha apartment market. The combination of rising rents, strong occupancies and the widespread availability of capital is leading to aggressive financing and strong sales pricing.
—By Ed Fleming, Executive Vice President, Colliers International. This article first appeared in the April 2017 issue of Heartland Real Estate Business magazine.