Developers see strength in the Omaha office market, especially for larger leases

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Posted: Wednesday, February 6, 2013 12:00 am

When the walls went up for the new Westroads IV office building, it was a gamble of sorts.

That's because tenants had not been secured in advance for the first “speculative” office structure to be constructed in the Omaha area in four years. Today, with six months to go before completion, letters of intent indicate that half the space could be accounted for already.

It's the kind of progress that Dale Scott, vice president of leasing for CB Richard Ellis|MEGA, had hoped for.

And it's an indication of a recovering office market that commercial real estate brokers expect to gain momentum — signaling business expansions and a growing workforce.

Consider other signs:

» A new multitenant office building is set to break ground in March at the Sterling Ridge development near 132nd and Pacific Streets. Omaha currently has few options for businesses looking for large blocks of top-notch space other than the Westroads IV and Sterling Ridge projects, said T.J. Twit, vice president of the Lund Co. “Those guys are at the right place at the right time,” he said.

» While the overall office vacancy rate remained steady from 13.7 percent in 2011 to 13.9 percent in 2012, today's rate is lower than when the economy started to dived in mid-2008, said Barry Zoob, senior vice president of Colliers International. Omaha's highest-grade office stock (Class A) outshined all but one of five comparable Midwestern markets with a 5.3 percent vacancy rate.

» The net amount of leased space, called absorption, was on the positive side for the third consecutive year, as 2012 ended with nearly 275,000 more square feet filled, according to the year-end trend report by Xceligent Inc. That's about 210,000 square feet more than was absorbed during 2011.

Big transactions that characterized 2012's office market include CSG System's move to a newly built 208,000-square-foot headquarters, Tenaska's announced 100,000-square-foot home, Gavilon's 131,000-square-foot facility and a new 110,000-square-foot structure that will house Gordmans' new corporate offices.

“Omaha's real estate market and economy continued to be buoyed by the success of homegrown businesses,” said an Investors Realty analysis by J.P. Raynor and Timothy Kerrigan.

Fourth-quarter facility expansions, including those for NorthStar Financial Services Group, Kiewit and Solutionary, led to a strong finish last year, Zoob said.

He said that despite uncertainty in the U.S. economy and presidential election, a fear of falling off the “fiscal cliff” and the European financial crisis, the Omaha office market showed “remarkable strength in the fourth quarter.”

More broadly, Zoob said, the Omaha market over the past three years has seen about 600,000 square feet of positive absorption despite having more than 900,000 square feet of formerly owner-occupied and uncounted inventory placed on the market. Owner-occupied space is not tracked until it becomes rentable.

Additionally, about 400,000 square feet of formerly leased office space returned to the market after several Omaha firms built new buildings they now lease from developers.

How Omaha stacks up

A look at six similarly-sized Midwestern markets showed Omaha faring better than average in the occupancy rate of all office building types except for Class C properties.

The analysis by Omaha's Investors Realty included Milwaukee, Tulsa, Okla., Oklahoma City, Des Moines and Little Rock, Ark.

Omaha's Class C vacancy rate of 23.1 percent was worse than all but Tulsa's 24.2 percent. Des Moines' rate was 8.9 percent, and the average of the six markets was 19.4 percent.

Class A properties in Omaha were fuller than all the markets but Oklahoma City, which had a 2.9 percent vacancy rate compared with Omaha's 5.3 percent. The average was 9.7 percent.

Omaha's 15.2 percent vacancy rate for Class B buildings was slightly lower than the 16 percent average.

The local commercial real estate industry uses a data base by Xceligent Inc. to track leasing activity at 421 non-owner-occupied office buildings (up from 418 a year ago) that total 20.5 million square feet. Office buildings are removed from the inventory when they're demolished or put to a different use such as housing. Buildings are added once they're constructed or available for leasing.

In the Omaha market, 50 Class A properties account for nearly 5.9 million square feet; 254 Class B properties make up 10.8 million square feet; and 117 Class C buildings comprise about 3.8 million square feet.

Such results, Zoob said, reflect the Omaha market's resiliency and a recovery that has outperformed the nation as a whole.

Still concerning to most commercial brokers, though, is the lag in the number of transactions, especially small and medium leases.

Investors Realty notes that about 20 fewer deals, or 75 transactions, were made during 2012. (That count is of transactions of more than 1,000 square feet.) The market was able to overcome that deficiency, ending on a positive note, because fewer businesses were downsizing or leaving the area.

“We think businesses are planning for future growth,” said the report.

Scott Brown of Quantum Real Estate said his firm represents a larger business currently seeking a top-rate suburban environment — and only a couple of properties meet its need for 20,000 square feet-plus.

“With the limited supply of available spaces in the Class A market, we are also starting to see rental rates slightly increase, which is what happens when demand exceeds supply,” Brown said.

He foresees a busier year and more demand for Class B office space because of the availability of options, lower rental rates and landlords willing to strike a deal. Brown expects a movement by owners to update facilities to compete for tenants that can't find a Class A spot.

Twit said the lack of large Class A spaces in suburban markets may benefit downtown Omaha as more clients are considering the central business district as a possibility.

Sterling Ridge, meanwhile, is crawling with crews working on the interior of Millard Refrigerated Services' new 90,000 square-foot headquarters — which will open in May with a high-tech 100-seat auditorium, a deck and lounge overlooking a pond, sun-automated shade system and rooms with marble and walnut wood finishes.

A 60,000-square-foot office building to be built to the east is a third of the way filled with tenants yet to be announced, said Lockwood Development owner Chip James. It is to be done in the summer of 2014.

Other structures will rise later, he said, as more than 700,000 square feet of Class A office space, 60,000 square feet of retail centers, restaurants, an assisted-living facility, residential housing, a tri-faith religious center and an upscale hotel are to sprout over a five- to 10-year period on the 150-acre site.

While James sees demand as “still pretty soft” for smaller spaces in existing buildings, he notices a thirst for new construction and larger spaces. He is eyeing more land for future projects and expects to keep busy.

“The sun poked through the clouds in 2012,” said James. “2013 will be equally as good, if not better.”

Contact the writer: 402-444-1224, cindy.gonzalez@owh.com

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