Why Industrial Landlords in Omaha Will Soon Have Negotiating Leverage

Overall, 2012 was a strong year with an estimated 142 new leasing transactions completed. Unlike 2011, however, in which eight major deals in excess of 100,000 square feet dominated the industrial market reports, none of the deals in 2012 were blockbuster.

In fact, only three transactions were in excess of 50,000 square feet. What does this mean? A lot of mid-sized deals occurred. For the first time in a while, those vacant spaces ranging from 2,000 to 10,000 square feet have accounted for a glut of excess space in recent years are getting leased.

More significantly, the mid-sized deals indicate growth of both new and local businesses expanding their presence in the Omaha industrial market.

Meanwhile, speculative or new construction is at a standstill. Almost all of the new construction in the market has either taken the form of build-to-suit or owner-occupied space, or is mostly pre-leased space.

Flat Rents Defy Logic

If historical tendencies hold, a vacancy rate near 5 percent would signify that the time is nearing to add inventory to the market. But for several reasons, that isn’t happening.

Since Xceligent began tracking the Omaha market in late 2010, rents have remained relatively unchanged while the market as a whole has positively absorbed around 1.5 million square feet of inventory.

Such a trend defies logic. How can a market absorb between two and three percent of its overall inventory and not see at least a slight uptick in asking rents?

Regardless of the answer, the lack of rising rental rates, combined with a rise in construction costs and a lack of well-located industrial land, is making speculative construction difficult not only to finance, but also to justify.

Despite unchanged rents, landlords are still expected to invest significant dollars to compete for the best tenants. Rent abatement, generous tenant improvements, and attractive lease rates are all part of the equation. Even though market conditions imply that negotiation power should be on the landlord’s side of the table, it isn’t.

Historically, industrial owners in Omaha have preferred the long-term stability of their assets as opposed to a quick return on investment.

Although a landlord may want to push for the extra 25 cents per square foot in rent, doing what it takes to keep a long-term, stable tenant takes precedence. It is these conservative business decisions that make Omaha such a stable business environment.

Something Has to Give

Assuming business expansion in Omaha continues at its current pace, at some point inventory will have to be added to the market. Otherwise, asking rents will have to increase. One of these factors has to give. It is simple economics; landlords won’t need to entice tenants with free rent or other leasing incentives. Space will fill up.

Tenant rep brokers are already griping about the lack of quality product in the market because much of it has been leased. My gut tells me that the next few years will be a good time to be a landlord in Omaha.

— Kevin Stratman, broker, Omaha-based Investors Realty Inc.