Omaha’s office market enjoyed a number of significant transactions in 2017, and has over 500,000 square feet currently under construction. However, aside from a handful of notable transactions, most of the activity in the office market was uninspired. The overall lack of velocity in the market is, we think, more attributable to a lack of opportunities for tenants than a lack of interest. Without product, tenants are postponing real estate decisions, and those eyeing the Omaha market with significant expansion plans have to look elsewhere.
Below are some highlights from our recently released Office Market Report. To access the full report, please visit www.investorsomaha.com
Downtown Omaha saw its vacancy rate decrease to 12.3 percent, driven primarily by the leasing at ConAgra Building 5. This vacancy rate is expected to further decrease as ConAgra Building 1 is slated for demolition and will be off the market, and there is leasing activity brewing in the approximately 50,000 square foot Gavilon sublease space as well as at Central Park Plaza.
Further, the Landmark Building could see most of its 139,000 square foot vacancy eliminated with the creation of a boutique hotel. The announced redevelopment of the ConAgra campus also offers exciting potential for the central business district.
The Northwest Submarket , which is primarily driven by North Park office park, was unable to sign leases until new ownership electrified the market in late 2015 and 2016. This submarket ended 2016 at 4.2 percent vacancy, but that number has nearly doubled to end 2017. However, this increased vacancy offers needed opportunity for tenants and brokers who have limited choices for 20,000 to 30,000 square foot spaces.
Vacancy climbed in the Central West Dodge, Midtown, Northwest and Southwest submarkets. The new construction the market is experiencing is very helpful, but vacancy is down to 1.8 percent in the critical Suburban West Dodge submarket, which makes new transactions in this desirable area almost impossible. The overall market vacancy rate increased slightly to 11.1 percent, 20 basis points higher than year-end 2016. Although the rate increased, it is still below historical rates.
In 2017, we saw construction completed of six new major office buildings consisting of a total of 72,800 square feet, which was significantly down from the 275,583 square feet completed in 2016. Of the over 500,000 square feet of office space currently under construction, only 100,000 square feet is available for lease. Much needed new office construction is planned for 2018 in Aksarben and along West Dodge Road.
Asking rental rates across the market experienced an increase of $.56 per square foot on average in 2017, but were down $.33 per square foot from the second quarter high. This rise in asking rental rates is likely a result of higher construction costs and lack of quality leasing options rather than demand.
In, 2017 absorption was a lackluster 135,383 square feet, the lowest since 2011, and well below the 250,000 square feet of positive absorption the market typically experiences. Class A and B buildings drove the positive absorption for the year with 62,514 and 140,657 square feet respectively, while Class C buildings were a drag on the market with 67,788 square feet of negative absorption. Suburban Omaha experienced 5,972 square feet of positive absorption while Downtown Omaha experienced 129,411 square feet of positive absorption.
How Does Omaha Compare Nationally?
The national economy appears strong and corporate profits solid. We think the recent tax law changes are having an overall positive impact on the commercial real estate industry. New construction and speculative construction nationally have been in check and we think the national office market will continue its steady expansion.
The local economy is stable, and the agricultural economy, which has suffered over the last several years, appears to have stabilized as well. Omaha businesses are reporting generally strong operating results and 2017’s lack of office activity should translate into a strong 2018 for Omaha’s office market. We generally see a stable 2018 with the primary markets like Downtown, Aksarben and Suburban West Dodge being very successful with new construction and leasing over the next two years.
For a closer look at how Omaha compares to seven other Midwestern markets of similar size, please see the full Office Market Report.