Why The Performance of Omaha’s Apartment Market Continues to ExcelJust like Omaha’s diverse and strong economy — a 3.2 percent unemployment rate as of December 2014 — the local apartment market continues to shine. Occupancy remains high, rents are up significantly over the past year as additional charges continue to be passed through to tenants, and new construction has not yet overtaken demand. In short, 2014 was another golden year for apartments. We expect more of the same in 2015 because the market has not yet peaked.
The latest estimate by the Institute of Real Estate Management (IREM) is that there are now 95,128 apartment units in the Omaha metro area, with an overall occupancy level of nearly 96 percent as of fall 2014.
This strong occupancy level is virtually unchanged from the fall of 2013 when it stood at 96.17 percent. From a historical perspective, the occupancy level for Omaha’s market over the past decade has remained strong, ranging from a low of 92 percent to a high of 96 percent. We expect Omaha’s occupancy rate in 2015 to remain strong, likely in the 95 to 96 percent range.
Rents on the Rise
Not surprisingly, the higher occupancy gives landlords greater pricing power. Historically we have observed about a 2.5 percent annual increase in rents per square foot, and 2014 was no different.
IREM’s 2014 fall survey reported much stronger growth per square foot on a year-over-year basis, ranging from a 9 percent increase for studio apartments up to 20 percent for three-bedroom units. A few of the newer projects are likely skewing these numbers. The owners that I’ve polled report much more modest rent growth.
The bottom line is that rental rates have increased for existing multifamily properties, and we expect them to increase again this year.
The trend over the past few years has been for landlords to increase non-rental revenue through water and sewer fees and utility reimbursements. There has also been an increase in non-refundable administration fees at the time of application. While relatively modest for any given tenant on a per month basis, these fees and additional charges have resulted in material revenue growth for many apartment owners over the past few years.
Investors Take Notice
Because of the strong Omaha economy and healthy multifamily occupancy and revenue growth, it is not surprising that Omaha apartment complexes have increased in value in recent years. We saw aggressive trades during 2014, especially on a price per unit and capitalization rate basis.
Omaha has traditionally been more of a develop-and-hold community, but in 2013 and 2014 we experienced a strong pickup both in overall sales and in larger portfolio sales. Regional investors and developers are more active than ever. Valuations per unit are moving toward those of larger Midwestern cities. Acquisitions are also fueled by the continued low interest rate environment and aggressive lender terms that may include several years of interest-only payments.
Annual multifamily housing building permits issued over the past 10 years have ranged from a low of 367 units in 2009 to a high last year of 1,650 units. While a 450 percent increase is often a sign of a bubble, that is not the case in Omaha. The additional 1,650 units represent only a 1.7 percent increase in overall supply, which can be absorbed with virtually no impact on the occupancy rate.
The number of households in Omaha has historically grown at around 1.5 percent annually. (The population of the metro area now stands at approximately 895,000.)
We expect new multifamily housing building permits to reach 1,700 units this year. The biggest wildcards are the rising construction costs for raw materials and the availability of qualified tradesmen such as framers, drywallers, electricians and plumbers.
New multifamily developments continue to pop up. Two notable downtown projects — America First Real Estate Group’s 100-unit Jones 13 and NuStyle Development Corp.’s 290-unit The Wire — both delivered in 2014. Suburban projects currently underway include McNeil Company Builders’ 282 luxury units at Park 120 at Oak Hills, Reimer Properties’ 193 units at 1010 On The Lake, and Broadmoor Development Co.’s 190-unit additional phase at Broadmoor Hills. These new projects help revitalize the downtown housing stock while simultaneously accommodating Omaha’s continued suburban growth.
While the overall U.S. economy could suffer a setback or interest rates could increase, longtime apartment owners in Omaha understand that these risks are likely to extend the golden years for apartments by keeping renters — especially those leasing new apartments — in apartments for an additional period of time.
The Great Recession affected the psyche of many renters who have come to value the flexibility that renting offers. Also, with today’s workforce more mobile than ever, the traditional approach of buying a home in order to build equity does not make sense for some workers who expect to relocate every two to three years.
For all these reasons, we believe that we haven’t yet seen the peak of the Omaha multifamily cycle.
— By Ed Fleming, senior vice president of Colliers International. This article originally appeared in the April 2015 issue of Heartland Real Estate Business magazine.