Commercial real estate able to weather market’s ups and downs

Commercial real estate able to weather market’s ups and downs

By Cindy Gonzalez and Barbara Soderlin / World-Herald staff writers Monday, October 20, 2014

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Defense contractor Lockheed Martin has cleared out its Sarpy County building that had six laboratories and room for 340 employees, leaving an 85,500-square-foot hole in the metro area’s office market.

Such changes in commercial real estate — be it office, retail or industrial space — are indicators of how well companies and a local economy are performing.

Business leaders and brokers attribute the Lockheed downsizing more to a struggling defense industry than any local issue, though, and point to overall signs of improvement in commercial real estate.

Since the start of the year, for example, more office space has been leased than vacated (a net gain of nearly 400,000 square feet). The industrial market also has seen a flurry of deals, according to the third-quarter Xceligent report, which tracks commercial real estate.

The retail market saw new construction and positive absorption in what one broker termed the “Walmart effect,” and vacancy rates are holding steady at a not-too-high, not-too-low rate that’s a big improvement over high post-Great Recession rates.

The World-Herald has compiled highlights of how the markets are faring.

OFFICE MARKET:

Biggest lease:

Fidelity National Title Group’s planned move to the North Park business park in northwest Omaha marked the metro’s largest office lease transaction this past quarter. Set to take place next March, the relocation to a 71,500-square-foot space will take the firm from Class A to Class B building space, but gives it about 13,000 square feet more than it currently has at midtown’s Aksarben Village.

David Saag, chief claims counsel for Fidelity’s western region, said North Park’s layout suited the company’s needs better as it has restructured teams and wants to reorganize work areas.

Fidelity already has started renovating its future home near 120th and Blondo Streets. Its workforce of about 200, including 140 lawyers and support staff, primarily handles title insurance claims.

Among other notable leasing deals in the latest Xceligent report: HMS Federal Solutions vacated a 19,000-square-foot space at North Park; Union Pacific took an additional 14,500 square feet in Central Park Plaza downtown; eFrame left a 10,744-square-foot spot at 168th and Frances Streets and took 7,646 square feet at Brookfield Place North in southwest Omaha.

“Build it, they’ll come”:

Overall, the Omaha area’s office market recorded a vacancy rate of 12.3 percent — a stumble after an 11.7 percent showing last quarter, but still better than nearly 14 percent a year ago.

J.P. Raynor of Investors Realty called it a minor setback on the heels of several robust months. Judging recent activity, he foresees a stronger fourth quarter and a year that ends better than 2013.

“Although there’s not a whole lot of new tenants coming to the market looking for space, tenants that already are here have a more positive outlook, and are thinking about expanding.”

Class A office space has fared the best, with a low 5 percent vacancy rate. Among Class B buildings, the vacancy rate was nearly 14 percent, and for Class C it was nearly 21 percent, according to Xceligent.

T.J. Twit of the Lund Co. said demand for that newer, high-end office building today “far exceeds supply.” He offered the example of Lockwood Development’s Sterling Ridge office and retail development at 132nd and Pacific Streets, saying it is filling up and proving the axiom, “If you build it, they will come.”

West Dodge still strong:

Continuing as the best-performing sector is the suburban West Dodge submarket, with about 6 percent of its office inventory yet to be filled. It is followed by Miracle Hills and downtown Omaha, which both report about 8 percent vacancy.

Fidelity’s shift to northwest Omaha will help fill office space in an area of town saddled with a higher vacancy than most other submarkets.

The northwest vacancy rate improved from about 20 percent to 18 percent this past quarter. But, according to Xceligent, it remains in the bottom four submarkets for occupancy, along with southeast, northeast and south-central.

The midtown area, from which Fidelity is moving, improved its vacancy rate from 17 percent last year to 11 percent. Midtown countered its loss of Fidelity with new leases, including the Gordmans retailer in Aksarben Village. CHI Health’s purchase of a vacant complex near 72nd Street and Mercy Road also was recorded this past quarter, boosting the midtown outlook.

Biggest loss:

Lockheed’s exit from its custom-built home at 4502 Maass Road was largely responsible for an atypical quarter in which more office space was emptied than rented. (That’s the first time since early 2013 that the Omaha area suffered “negative absorption.”)

At its peak, there were between 100 and 150 people working, often on classified projects, at the facility that opened in 2006, said spokeswoman Donna Savarese. The number had been dwindling, to about 50 at the start of this year, and the last employee was out in August.

The bulk of that last wave has remained in the area, but those workers are at home, on site with customers, and five are based at a much smaller, 2,100-square-foot office that Lockheed still leases in Sarpy County, Savarese said.

She said the contractor closed its doors on Maass Road to reduce costs to customers, but “remains committed to the Omaha area.”

Jeff Bender, senior military liaison at the Greater Omaha Chamber of Commerce, sees Lockheed’s downsizing as a “ripple down effect” of national defense budget constraints. He said the local economic impact of military cuts is concerning, and “something we’re looking to address.”

Mark Obermeyer of CB Richard Ellis/MEGA, who represents the landlord of the former Lockheed property along with colleague Dean Hokanson, said it’s being marketed as a possible corporate or regional headquarters, equipped with a high-tech auditorium, fitness facility and security infrastructure ideal for a data company.

INDUSTRIAL MARKET:

Historic low:

The Omaha area has seen a drop in the availability of industrial and manufacturing space — with the vacancy rate declining from 4.6 percent a year ago to 2.9 percent.

Colliers International called that a historic low point, at least in modern times. Such a low vacancy rate among industrial, manufacturing and flexible warehouse space is not necessarily healthy because it also signals a shortage of available structures for prospective tenants.

David Maenner of CB Richard Ellis/MEGA said a more comfortable vacancy rate would be 5 percent to 6 percent.

He said a large user such as a data center might be equipped to develop a raw piece of land, but most general manufacturers and distribution companies likely would find the shortage of ready industrial properties frustrating, and the risk is they’d look elsewhere.

Maenner said the metro’s last big industrial park was developed around 2006, and before that around 2000.

“Lots are still available, but winnowing down,” he said.

New construction:

About 850,000 square feet of industrial property is under construction in the Omaha metro, Xceligent reports, but nearly 90 percent has already been leased or will be occupied by the owner.

“The market is getting tighter, there’s very little speculative construction,” said Lee Ehlers of Industrial Realty. “Demand is stable.”

About 68 million square feet of leasable single- and multi-tenant properties greater than 5,000 square feet make up the metro’s industrial market inventory (of which 97 percent is filled).

During the third quarter, the industrial market reported positive absorption — 102,000 more square feet of space was leased than vacated. Over the past year, the area saw a net 1.18 million square feet of absorption.

Rents are “creeping up,” said Ehlers, and “owners are giving fewer concessions.”

Notable deals:

Among the biggest industrial market deals recorded this past quarter was an expansion by EAD, an engineering and construction company, into nearly 24,000 square feet at 15555 Industrial Road.

A sampling of other transactions: James Skinner Baking Co. added 10,000 square feet to its 46th and F Streets building; Mid Plains Power took about 13,000 square feet at 526 Crown Point Ave.; V&D Enterprises took 22,000 square feet at 4012 S. 24th St.

RETAIL MARKET:

Vacancy sweet spot:

The metro’s retail vacancy rate has held steady at a mid-7 percent rate over the past four quarters now, according to Xceligent’s count. That’s an improvement from the recent-high 12.4 percent vacancy that Colliers recorded for the metro in the third quarter of 2009.

The third-quarter rate of 7.5 percent is “kind of a sweet spot,” said Adam Marek, vice president at Colliers International. If it gets much lower, that could limit new tenants’ ability to find an appropriate space in the market, he said.

Vacancy rates ranged from 4 percent in the east Sarpy County and Bellevue area, to 15.5 percent in Council Bluffs, where Mall of the Bluffs remains in redevelopment.

Walmart effect:

Single-tenant, big-box stores have dominated the new retail construction market over the past three years, said Marek.

Of a total of more than 1.3 million square feet of new construction in that time, 60 percent has involved Walmart, Sam’s Club or Menards. An additional 26 percent was attributed to Nebraska Crossing Outlets.

In the third quarter, the new Sam’s Club in Papillion and Walmart Neighborhood Market on Saddle Creek Road contributed much of the 275,000 square feet of new construction.

With Walmart and Menards having substantially completed their new-store development in the metro, fill-in and smaller-scale redevelopment will drive retail leasing and construction activity in the year to come, Marek said.

This means shoppers should see more projects like the revitalized historic Blackstone District in Midtown, which are more difficult deals to pull together, but have a ready market in established neighborhoods.

Besides big-box projects, other new construction in the third quarter included the 45,000-square-foot Loveland Centre at 90th Street and West Center Road, where the Bookworm relocated this month, and a fully leased 12,000-square-foot strip center, home to Beauty Brands, Batteries Plus Bulbs and a Firehouse Subs, at 72nd Street and East Centennial Road in Papillion.

Notable deals:

The two biggest transactions involved the Deerfield Place and Plaza North shopping centers. Both changed hands in August, purchased by NewQuest Epic Investments of Houston from Phillips Edison & Co. of Cincinnati as part of a nine-property portfolio that brought $150 million, Commercial Property Executive reported.

The 130,000-square-foot Deerfield Place, at 136th and Q Streets in Millard, traded for more than $12 million, according to Colliers. It was formerly home to Baker’s and Walgreens; today it is anchored by the Mega Market flea market, and includes a Dollar Tree that opened in September. Freddy’s Frozen Custard, not part of the center, opened next door this week.

Lerner is marketing a new pad site at the center.

Plaza North, a 200,000- square-foot center anchored by Baker’s at 90th and Fort Streets, sold for more than $18 million, Colliers said. A Lerner listing says nine spaces are available, a total of 140,000 square feet, in what it calls a “redevelopment opportunity.” The biggest available space is 103,000 square feet that has been used as a ConAgra Foods financial services center.

The largest lease deal of the quarter was the new Michaels that is now open at Shadow Lake Towne Center in Papillion, formerly a Borders store. Kim Jones, regional marketing director at Red Development, said she expects more new tenants at Shadow Lake in spring 2015.

“We do have a lot of leasing discussions going on,” she said.