It is difficult to find one aspect of the Omaha industrial market to highlight when recapping 2015. Quite frankly, about every single facet of the market improved last year: sale prices ticked up, land prices rose, absorption was positive, the vacancy rate was low, asking rental rates climbed, and there was plenty of new construction.
There are no signs of this momentum slowing. What is even more telling is the steady trend in the same direction — the market has shown signs of improvement each of the last five years. There have not been one or two transactions skewing the metric.
Sales prices of existing industrial property averaged $56 per square foot in 2015, and over 2 million square feet of inventory was sold. This is quite a jump over the average of $47 per square foot in 2014. We believe this uptick in sales prices is due to a number of factors, but most notably a combination of high demand, low inventory of platted industrial lots and high construction costs.
Users have been forced to make a choice — build new product or rehab existing buildings. This dilemma has created a bit of an odd and possibly concerning scenario: Buildings are worth more vacant than fully occupied.
The industrial land market has played a big part in shaping current conditions. Omaha saw close to $11 million in industrial land sales in 2015. The average sales price of these platted lots was $4 per square foot, higher than the previous two years. At the same time, developers didn’t really add any new shovel-ready sites to the market.
Although there are several projects in various stages of development, space users are going to continue to face the dilemma of either buying a piece of land in a less desirable location, being a developer that must convert farm ground into a site, retrofitting or rehabbing an existing property, or simply waiting for some new inventory to come on line.
Healthy Absorption
Kevin Stratman, Investors Realty
The Omaha industrial market absorbed 470,000 square feet of space in 2015, according to Xceligent, despite the addition of 631,000 square feet. It should be noted that our market tracks both owner-occupied and investment properties, so when Republic Beverage built its own 231,000-square-foot facility and moved in, the market both added and absorbed 231,000 square feet. That being said, it is still impressive because the market was able to backfill large vacancies created by such owner-occupant development.
The Sarpy West submarket led the way during 2015 with over 292,000 square feet of net absorption. Beyond that, a majority of submarkets actually saw negative absorption. Some of them, like Council Bluffs, saw negative absorption of 32,410 square feet simply because it is a less active submarket, plus it saw a single large vacancy occur during the period. The same can be said for Sarpy East, which recorded negative absorption of 66,962 square feet in 2015.
Meanwhile, the overall vacancy rate of the Omaha industrial market continues to hover at 3 percent, which is extremely low. Large lease transactions, which offered a healthy mix of national and local companies in 2015, included Sleepy Eye LLC (44,240 square feet), SPC Pools (30,840 square feet), Flowers Baking Co. (25,891 square feet), Lennox (18,593 square feet), and Thrasher Inc. (19,475 square feet). All of these transactions occurred in existing space.
Average asking rents of available properties rose 9 percent in 2015 on a year-over-year basis, according to Xceligent.
Investors Realty projects that 2016 will be another great year for the industrial market. There is a staggering 1.1 million square feet of industrial space either planned for 2016 or currently under construction, of which 300,000 square feet is speculative.
This new construction will open up additional properties to hopefully relieve some of the stress the market is currently under. It will be especially interesting to see how the speculative construction performs. The rents these projects generate combined with the lease-up time will be a great barometer of how healthy the industrial market is currently.
Construction Wave Hits
The tide began to turn in 2015 when it came to new construction. In all, we not only saw three speculative projects completed, but additionally an impressive six owner-user, build-to-suit projects were completed. These projects amounted to just over 479,000 square feet of new construction.
Republic Beverage’s new facility at 8648 S. 117th St. was the largest project at over 230,000 square feet. Other single-user facilities of note included Waldinger Corp.’s 76,362-square-foot facility at 8802 S. 121st St.; ABC Roofing’s 48,000 square feet at 13251 Lynam Drive; and Titan Machinery’s 32,560 square feet at 14961 Shepard St. Olsson Associates, Nebraska Atlantic Transportation and Navigator Motorcoaches also built new facilities in 2015.
Spec construction focused on two large facilities and one minor flex project. Nebraska Warehouse Co. built a 184,800-square-foot facility at its new Krambeck Industrial Park, which is located southeast of 156th and Cooper Street and south of Highway 370 and Commerce Business Centre. KVI also built a 43,919-square-foot new building in Portal Plaza Business Park at 10411 Portal Road in Papillion.
New construction shows no signs of slowing. Currently, Investors Realty is tracking 10 projects adding over 1.1 million square feet in 2016 and beyond.
Rental Rates Climb
Historically, much of the information about actual rental rates has been kept confidential. Landlords are not required to publish that information or register it with the county. Average asking rates are typically the best way to track whether rates are trending upward or downward.
In 2015, the average asking rate hovered around $4.94 per square foot, up approximately 9 percent from 2014 (see chart). What is most impressive is the growth in the warehouse/distribution category in Omaha’s three largest industrial submarkets.
The average asking rent in Sarpy West, the largest submarket, finished the year at $5.25 per square foot, a 5.2 percent increase from the prior year. The second largest submarket, South Central, posted an increase of nearly one dollar per square foot, ending 2015 at $4.40 per square foot compared with $3.59 per square foot at the end of 2014.
The Southwest industrial submarket, the third largest in metro Omaha, recorded an average asking rent of $4.50 per square foot compared with $3.95 a year earlier.
The Investors Realty industrial team also notes that in a majority of transactions, rental concessions such as rent abatement (free rent) is now uncommon, tenant improvement allowances are significantly reduced and lease terms are longer.
Enviable Vacancy Rate
We began and ended 2015 with a 3 percent vacancy rate. Several large vacancies did occur, however, including 98,500 square feet at 325 Veterans Memorial Highway in Council Bluffs (Telmar Network Technology); 78,204 square feet at 13333 Lynam Drive (Manko Window Systems); 54,420 square feet at 13619 Industrial Road (Diesel Power Equipment Co.); and 25,891 square feet at 2624 Edward Babe Gomez Avenue (Shake & Shingle Supply). Despite the large chunks of space that came on the market, we were able to backfill a number of these vacancies.
Out of the nine submarkets that make up the Omaha industrial market, four have vacancy rates below the 3 percent average market-wide. Only one, the Northeast submarket, has a vacancy rate higher than 5 percent.
It’s worth noting that the vacancy rate for flex space fell from 5.1 percent at the end of 2014 to 4.4 percent at the end of 2015, the lowest it has been since Xceligent began tracking the Omaha industrial market in 2010.
— By Kevin Stratman, Industrial Broker, Investors Realty Inc. This article originally appeared in the April 2016 issue of Heartland Real Estate Business.