Solid Fundamentals Uphold Lincoln Real Estate Market
By Tom Graf, NAI FMA Realty
Over the past decade, Lincoln has experienced sustained growth and earned a reputation as a place to be in the Midwest. Its low unemployment, stable economy, low cost of living, prospering tech scene as well as lifestyle and entertainment fitting of a big city with the feel of a small community has insulated Lincoln better than many cities of its size.
Perhaps this is most compelling with the number of cranes spotted in the skies back in 2008 and again in 2020. Just as many cities were struggling, Lincoln built its way out of the Great Recession in 2008 and 2020 was no exception.
Throughout the economic uncertainty brought on by the COVID-19 pandemic, Lincoln’s retail landscape fared well with vacancy holding at 7.1 percent for the year in 2020. New construction was active throughout the market despite store closures and bankruptcies making the national headlines.
For some opportunistic retailers, vacant spaces opened the door to take advantage of the market and negotiate better terms for new locations.
Retailers thriving in today’s market are the “daily needs” retailers — grocery, home improvement and discount concepts. Some niche online businesses, which have grown through this pandemic, have opted for physical storefronts to reach customers and attract more sales. New to the market include Five Below, Sephora, At Home, Ross Dress for Less, Mardel Christian Store, Abelardo’s Mexican Fresh and Rusty Taco.
The traditional shopping mall concept has been hit hard as big brands react to consumers shifting their retail shopping habits. Locally, however, a traditional mall and a lifestyle center are faring better than many malls across the country.
Gateway Mall, which opened in 1960, remains strong in occupancy as its space is filled with local and regional tenants such as Bling Glamour, Chic and Burgundy Cosmetics. The former Sears store, a 120,000-square-foot building adjacent to the mall, changed ownership in 2019 with plans for redevelopment. Additionally, Dillard’s recently purchased the adjacent former Younkers store for a new concept. Additional redevelopment in the surrounding area has helped to boost this centrally located mall to continue to be desirable for retailers — and highly trafficked by consumers.
Lincoln’s lifestyle development, SouthPointe Pavilions, which opened in 1998, continues to do well. Scheels completed a newly expanded 220,000-square-foot store along with a parking garage addition. Recently added tenants to the center are Sephora, Ollie & Hobbes Craft Kitchen and Versona.
One growing trend in the Lincoln market is infill development. Areas such as the Telegraph District and Historic Haymarket District, which are in or near downtown Lincoln, have become sought-after districts for restaurants, apartments and local shops.
Additional retail development is on the horizon for 50 acres of vacant land in north Lincoln, which is to be called North Star Crossing. Construction on 500,000 square feet is expected to start this spring with the first tenants opening in mid-2022. The retail development will include restaurants, service-oriented retailers, a junior box and potentially a grocer.
Industrial has been the hottest market in commercial real estate over the last few years and the best performing sector for Lincoln. This growth has been spurred by Lincoln’s strategic location as well as being the Nebraska state capital and home to the University of Nebraska flagship campus.
The market’s overall industrial vacancy rate of 2 percent at the end of 2020 is near record-lows and well below the national average. Higher demand for industrial space along with low vacancy continues to put upward pressure on asking rents, which finished the year at $5.61 per square foot NNN.
The area’s absorption was 848,433 square feet in 2020, which is a little below 2018 but well above the 10-year average. A number of speculative construction projects are planned for the market and a larger manufacturing building to come online could bring some attractive options to the market. Total industrial building sales activity for 2020 was up from 2019, as a shift from tenancy to ownership brought the price per square foot average to $75 over the past 12 months.
Lincoln is home to local industrial developers who continue to build. Continued growth in this sector allows companies to look to Lincoln as a spot for distribution centers, warehouses and data centers.
A project on the horizon will transform 570 acres of cropland north of I-80 into a data center campus of up to 2 million square feet. Project Agate is expected to invest $600 million into the development and may employ 1,000 people within 20 years.
Office space in Lincoln has been adapting to changes brought on by the pandemic. Leasing activity experienced a slowdown in 2020, however, the Lincoln market has recorded positive net absorption over the past 10 years and the city-wide vacancy rate ended the year at 9.6 percent. Office construction activity has been concentrated in the suburban submarkets, particularly in southeast Lincoln as tenants and owners have been willing to pay slightly more for amenities, location and buildout.
The central business district (CBD) submarket has been the most affected during the pandemic in the Class B and C buildings, with Class A vacancy remaining low. The largest multi-tenanted completion was the 76,000-square-foot office building developed by Olsson, which is 85 percent occupied.
Shadow space, or office space that is leased but not currently occupied, took on an entirely different meaning in the pandemic and is most evident in the CBD. What happens with such space in the future may have the biggest impact on Lincoln’s office market moving forward.
One of the better indicators of how well commercial real estate is doing in Lincoln is hearing the anecdotal comments from lenders who are optimistic and report little to no defaults in their commercial real estate portfolios.
Tom Graf is a sales associate with NAI FMA Realty. This article originally appeared in the April 2021 issue of Heartland Real Estate Business magazine.