Why Omaha Apartment Owners Should Expect Another Banner Year
With a three-year average occupancy of 96 percent, Omaha’s apartment market has displayed strong fundamentals that we expect to continue this year and beyond. Given the strong tailwinds created by Omaha’s healthy economy — the local unemployment rate stood at 3.6 percent in January compared with 4.9 percent nationally — it is not surprising that occupancy is high, rents and revenues are rising and new developments continue.
According to the recently released IREM fall 2015 Omaha Metropolitan Area Apartment Survey, the year-end market occupancy rate was a strong 96 percent, with the lowest submarket at 94 percent and the highest at an outstanding 98 percent.
On a 10-year historical basis, the Omaha market’s occupancy rate has ranged from a low of 92 percent in 2008 to a high of 96 percent in both 2013 and 2015. Any owner will tell you a solid two percent gain in occupancy over a multi-year period has a significant impact on net operating income.
Both rents and revenues continue to grow within the Omaha market. Most owners have been raising rents between 2 and 4 percent a year, and in some cases 5 percent. The general expectation is that rents and revenues will both continue to rise by 3 to 5 percent this year.
Meanwhile, renters are increasingly paying for pass-through and other charges, including utilities (gas, water, sewer), trash, pet rent and application fees. This trend results in both additional immediate revenues and a mitigation of expenses.
As is the case nationwide, there is plenty of capital for acquisitions and refinancing. Investors continue to chase yield into secondary and tertiary markets, and Omaha apartment sales have clearly benefited from that trend.
Cap rates have trended down in recent years and are currently the lowest that they have been in the past 20 years, resulting in some of the highest priced sales ever seen in Omaha. For well-occupied product of any class, we are able to find multiple bidders who offer aggressive prices on deals.
Supply Plays Catch-Up
The Greater 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 (see chart). For 2015, that number was down almost 22 percent to 1,292 units. I expect 2016 to have a similar number of approximately 1,300 units.
While some experts may see the lower number as an indicator that the construction cycle has peaked, I believe it is likely more indicative of a pause in the pace of construction as opposed to a downward trend.
With a total inventory of approximately 97,000 units and a steady population growth of around 1.2 percent annually, the Omaha apartment market will need an additional 1,164 apartments just to keep up with the population growth, and the Omaha market is prepared to deliver.
The market’s ability to absorb the higher levels of permitted apartments over the past three years with no detrimental effect on occupancy also indicates that 2016 may be a year of measured, but good, development activity.
Another trend is the increase in the number of renters by choice seeking a certain lifestyle. In particular, many young people want to be in an apartment with nicer finishes, but more importantly located near amenities.
The live-work-play concept that is already inherent in the highly urban areas across the nation has migrated to the downtown area of Omaha. Renters are putting an increasingly high value on convenience and proximity when it comes to choosing an apartment. While not yet widely used in Omaha, walkability scores and other convenience measures will permeate apartment leasing.
We also see this trend when we look at the some of the recent apartment development activity such as NuStyle’s two latest planned projects: the 75-unit Rochester Building downtown, and the 214-unit development known as The Breakers.
Other projects in process include the 90-unit Blackstone District by GreenSlate Development and Clarity Development; The Conrad, a 153-unit project by Commercial Investment Properties at 37th and Jones streets); the Lumberyard District, 338 units by Lanoha Development Co. on the old Millard Lumber site; and City Ventures’ two new projects, the 125-unit Corvina downtown and 99 units at 60th and Northwest Radial.
What to Expect
Last year proved to be quite rewarding for apartment landlords in Omaha, and we expect the same in 2016. A lack of new projects helped keep occupancy high at 96 percent. Consequently, rents and revenues continued to rise.
Downtown Omaha continues to be a relative hotbed of activity as developers scoop up infill locations to appeal to the modern renter looking for a walkable lifestyle. This activity will continue to increase the overall supply of units downtown, but we fully expect that Omaha’s population growth and demand for downtown living will enable the market to easily absorb these units without negatively impacting either occupancy or rental rates.
Capital continues to flow freely with strong pricing and aggressive financing terms available. In short, it’s a great time to be an apartment owner in Omaha.
— By Ed Fleming, Senior Vice President Omaha, Colliers International. This article originally appeared in the April 2016 issue of Heartland Real Estate Business.