Crossroads, other planned office space adds up, but when will it be filled up?

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Posted: Sunday, March 9, 2014 12:00 am

Omaha has more than 3 million square feet of office space in various stages of planning and development, an unprecedented amount that could take 15 years to lease and set off intense competition among new and existing properties.

The latest player is the Crossroads redevelopment, calling for 400,000 square feet of office space and an equal amount of retail space at 72nd and Dodge Streets. The developers are asking voters to approve a $50 million general obligation bond issue in May as part of a $161 million combination of city incentives that hasn't been used before in Omaha.

The multitude of projects proposed isn't expected to result in a sudden glut of square footage or dive in rents, brokers and developers say, because the planned office space will be constructed over several years, and in most cases only after tenants are secured.

And if history is any indicator, not all the projects will be built.

Some called the number of proposed projects good for recruiting jobs. But the prospect that some projects won't make it has some developers and brokers questioning the incentives requested by Crossroads Village developers.

Said Arun Agarwal, developer of the West Dodge Pointe project that broke ground last week: “Is the government getting involved in picking winners and losers in private development?”

Keeping tabs on all the players in the office-building boom won't require veering much beyond the Dodge Street corridor.

With the upswing in the economy, developers are playing catch-up after a construction lull during the Great Recession. The planned office structures stretch from Lanoha Development's potential tower in downtown Omaha to the Fountain West office park set to break ground this spring near Elkhorn.

In between are such projects as the soon-to-be-built 125,000 square feet of Waitt Plaza offices at Aksarben Village, and up to 600,000 square feet of additional offices planned at the 132nd and Pacific Streets Sterling Ridge development.

Click here for an enlarged map.

On average the past three years, the Omaha market has absorbed a net of about 200,000 square feet of leased office space a year. At that rate, it could take 15 years or so to fill 3million square feet — or fewer years if the area sees a burst of new job growth.

That 3 million square feet doesn't account for new office sites in surrounding communities, such as the last phase of the Papillion Professional Park or the 25-acre office and housing redevelopment envisioned at Playland Park in Council Bluffs. Nor does it account for smaller project sites such as 72nd Street and Poppleton Avenue, or existing offices yet to be filled.

Currently, there is a 13 percent vacancy rate in the market of about 21 million square feet of multitenant office space.

“People are pioneering,” said Chip James of Lockwood Development, which is developing Sterling Ridge and a proposed office site at 122nd Street and West Dodge Road. “Without tenants, they're all not going to be built; banks are not going to finance all of that.”

Still, said Barry Zoob of Colliers International, “It's really a magical moment. This positions Omaha very well on a regional and national basis to provide choices for office users and corporate headquarters.”

Developers know it takes time to get projects off the ground and leased, said Bennett Ginsberg of Omaha's CB Richard Ellis/Mega, which is handling leasing of Fountain West for R&R Realty Group of West Des Moines. “R&R knows this is not a sprint, it's a marathon.”

To Timothy Kerrigan of Investors Realty, the addition of 3 million square feet of office space is a “reasonable supply” to fill up over the next decade.

He pointed to the last four to five years when corporations — including Blue Cross Blue Shield of Nebraska, TD Ameritrade, Tenaska, Gavilon, CSG, Northstar and Gordmans — moved into headquarters totaling about 1.5 million square feet.

“It is a market with demand,” said Kerrigan, who expects activity to pick up more over the next few years.

Crossroads Village developers Rod Yates of OTB Destination and property owner Frank Krejci also say they are not worried about the competition.

“Crossroads — the overall development — is already 50 percent spoken for,” Yates said. “We have retail and corporate tenants lined up.”

Yates said that Crossroads Mall, an iconic fixture located at one of Omaha's busiest intersections, has been neglected for too long. “This is a once-in-a-lifetime development,” Yates said, and the incentives “are the resources, the vehicle to make this happen.”

The proposed $ 50 million bond issue would be repaid through the city's existing 1.5 percent local sales tax on purchases within the Crossroads Village district. The bonds would be backed by city taxpayers, but the project is projected to bring in about $6million in sales tax revenue each year, and the developers have pledged to maintain a $4 million reserve fund that could be used for payments if tax receipts fell short.

The property is high-profile enough and the potential big enough that it's worth a city commitment, supporters say. More than just a shopping center, Yates said, Crossroads when built will function as a lively city within a city, and be a prominent Midwest destination.

Certain office sites will appeal more to specific types of companies and their employee demographics, and that could help dictate what gets built first.

Those building along the suburban West Dodge corridor, for instance, tout visibility, parking and accessibility. Developers of newer downtown and midtown projects, including Crossroads, aim to attract an urban workforce that wants to be in the midst of upscale retailers, restaurants and entertainment.

Younger employees “are looking for developments in an urban setting that offer a mixture of uses in that setting ... intended to create a '24/7' ” feel, said Sean Davis, principal at Morris & Ritchie Associates, a Baltimore architectural firm. “People can leave their residence, shop, go out to eat or go to work without ever getting in their car.”

In Omaha, Aksarben Village is an example of that dynamic. Its central location, restaurants, shops, cinema, bike trails and proximity to the University of Nebraska at Omaha and the Peter Kiewit Institute prompted the DLR Group, an architectural firm, to move its headquarters there in 2011.

“We have eight places to go and eat. We have a fitness center close by. Employees go there before work, after work and during lunch,” said DLR senior principal Tom Penney. “Our younger employees take the greatest advantage of the biking trails. When the ice is off the trails, they're on them.”

The firm, which employs 80, brings in job candidates from all over the country, and Aksarben's perks are a definite plus when it comes to recruitment, Penney said.

Each of the proposed new projects is developing its own set of perks.

Fountain West at 192nd Street and West Dodge Road, for example, will offer a cascading fountain and trails as part of its package. R&R's Brett Bosworth expects to lure corporate decision-makers and medical-related firms that want a workspace away from traffic snarls and close to their own homes and a growing labor market.

R&R has chosen to avoid traffic-drawing retail and residences on its 40-acre campus — leaving that to neighboring Jasper Stone Development's proposed projects. Just a few minutes away by car, Bosworth noted, is the Village Pointe shopping center at 168th Street and West Dodge Road.

Also at that intersection is West Dodge Pointe, another office park that just launched construction of its first office building. In all, Agarwal of White Lotus Group envisions 450,000 square feet of office space there, with some service retailers and luxury apartments and pathways connecting commercial with residential areas.

Unique to Sterling Ridge, a former golf course, are religious buildings that will create a tri-faith campus. Nearby office buildings will be surrounded by water features, sculptures, landscaping and restaurants, James said.

The addition of such Class A office options bodes well for the city's business recruitment efforts, those in the real estate industry say. But most admit that older office structures could empty in the process and construction of newer structures could be delayed as a battle rages for tenants.

“There is no question that if I was looking to develop at 192nd and Dodge, I'd be concerned about what is being built at 72nd and Dodge,” said Trenton Magid, principal of World Group Commercial Real Estate. “The simple fact is there are only so many tenants.”

Said T.J. Twit of the Lund Co.: “There is definitely going to be competition between projects. This is unprecedented to have this many Class A office projects planned.”

Class A office space is especially needed, said Twit, as the vacancy rate in that higher-quality space is a low 5.4 percent.

Colliers' Zoob said he hadn't ever seen as much proposed office space. “In my 15 years in the commercial real estate business, and 45 years as a businessman, there has never been anything quite like that.”

Zoob views the options as good long-term planning and said he expects to see increased leasing activity. He said the amount of planned spending on new commercial construction and improvements last year in the Omaha area was about $669 million, higher than the pre-recession $661 million in 2008.

On the retail side, last year was a banner year, too. The Omaha area absorbed nearly 850,000 square feet of new and redeveloped retail space, with Nebraska Crossing Outlets in Gretna leading the way with 332,500 square feet.

The influx of new retail, including a Menards and Walmart Neighborhood Markets, led to an improved area retail vacancy rate, falling to 7.4 percent in the fourth quarter of 2013 from 8.4 percent during the same period the previous year.

That's the lowest vacancy rate since the fourth quarter of 2003 when the rate was 7.2 percent, according to Colliers International.

And just like office developers, retailers are clamoring for space along high-traffic corridors such as Dodge.

Crossroads is promising 400,000 square feet of retail space occupied by national, new-to-market brands, 400 residential units, a 135-room hotel, 50,000-square-foot fitness club and grocery store. Plans call for an open-air design with ground-floor retail, offices above and an urban park at the center, with the first phase to be completed in mid-2016.

Friday, Crossroads' developers announced they were in negotiations with Recreational Equipment Inc., better known as REI, the Seattle-based outdoor hiking and camping outfitter, to be one of the center's anchor tenants, occupying 24,000 square feet.

Yates said it was an example of the new-to-Nebraska retailers he is seeking for Crossroads Village.

But to get started, Yates and Krejci are asking for a total of $161 million in city incentives: the $50 million bond issue, $58 million from a new 1.95 percent occupation tax on purchases within the project and $53 million in tax-increment financing. The pair, who redeveloped Nebraska Crossing Outlets in Gretna with similar incentives, plan to invest $234 million.

Yates said he is assembling a door-to-door campaign to promote passage of the $50million bond issue. “I'm not even thinking about it not passing,” he said.

Some developers worry, though, that Crossroads may have a disproportionate advantage if it receives the proposed public incentives to help pay for the campus.

“I am concerned that there could be an imbalance,” said Jay Noddle, whose company led development of Aksarben Village. “It's important to have a level playing field out there for all developers, then the dynamics of the marketplace will dictate or determine which areas are more successful sooner.”

He questioned whether the package of public benefits would lead to lower rents and create an artificial market or demand for Crossroads space. Noddle said he doesn't mean to attack the project, and said multiple options are good for Omaha tenants and out-of-state businesses looking this way.

But he's worried that an uneven playing field could hurt developers, business and hotel owners and retailers who “have already taken a risk.”

Aksarben Village and West Dodge Pointe each had help financing infrastructure costs. Aksarben had tax-increment financing and West Dodge Pointe formed a sanitary and improvement district. Neither had the combination of incentives requested by Crossroads.

Among the biggest losers when new office and retail businesses come on line, said commercial brokers, are owners of older facilities.

Landlords may be forced to offer rent discounts or other concessions to lure both office and retail clients. Owners who don't have updated facilities will be forced to modernize or repurpose their facilities for other uses. “If property owners have to renovate the lobby to give it a cool, techy look, they should,” said Davis, the Baltimore architect.

Bottom line, he said, the engine that fills office and retail space is “positive job growth.”

Omaha and other cities are looking to new high-growth, high technology startups, among the nation's largest job creators, to boost job growth. In 2012, new technology firms created about 11 percent of all U.S. private sector jobs and generated revenues equal to 21 percent of the nation's GDP.

Crossroads is making a high-profile play for medical and technology startups. Yates and Krejci have said they plan to reserve about 100,000 square feet of office space for those types of ventures, a move they say will transform not only Crossroads but also Omaha itself.

The lures include fast 10-gigabits-per-second Internet service provided by CenturyLink. CenturyLink is sponsoring the 100,000-square-foot technical village and is planning to invest in promising startups and lend its business, technology and marketing expertise to those firms. Yates and Krejci also plan to seed fledgling companies.

But competition is already nipping at their heels. Less than a week after Crossroads announced its partnership with CenturyLink, a “major” office and mall owner met with CenturyLink seeking 10-gigabits-per-second Internet at its Omaha locations, said Danny Pate, CenturyLink's vice president and general manager for Nebraska.

Here and elsewhere, competition for high-tech workers continues to climb.

Increasingly, local firms that want to attract and retain tech-savvy employees have to look the part of a rising startup. That could mean vacating traditional office space.

“Looks matter,” said Kandace Miller, president and chief executive of Omaha's AIM, a nonprofit that seeks to develop information technology talent.

“High end technology-oriented, ambitious kids ... want that open feel — that collaborative feel — in their workspace, something that screams 'cool company, forward-thinking,' ” Miller said. “It's on their checklist.”

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