Despite a general downturn in commercial real estate nationwide, Midlands experts say they remain bullish on the future of the industry locally.
“If I had to grade the overall commercial real estate market in 2023, my grade would be a C+ in terms of favorability. Overall, transaction volume was down across firms, based on research I have done on a nationwide basis,” said Sam Rolfe, associate broker with the Lerner Co. “However, I have found the markets that we track closest — Omaha, Council Bluffs, Lincoln —are quite healthy and somewhat sheltered from the doomsday forecast being pushed in larger coastal markets. Due to this my grade in our specific market would uptick to a B.”
Rolfe said these challenges carry a silver lining for developers and builders in the commercial space.
“The discrepancy between demand for space and supply of available space, coupled with extremely thorough underwriting and cost analysis, isn’t necessarily a bad thing as a whole,” Rolfe said. “Businesses are now taking a more precise approach in their site selection, which should lead to an overall healthier market.
“However, in the short term, the process of getting deals across the finish line is certainly longer than years past.”
Lerner’s work is headlined by NorthStar Crossing, a large retail and commercial development located at 27th and Folkways Boulevard in Lincoln. The 50-acre project sits one mile south of I-80 and will offer 500,000 square feet of commercial space. The development is just north of the company’s Lincoln Crossing and seeks to capitalize on the continued prominence of North 27th Street as a commercial trade area.
Challenges by Segment
Christian Jensen of Cushman & Wakefield | The Lund Co., also gave local market conditions a solid B grade, while acknowledging some very challenging conditions.
“Undoubtedly, deal volume has slowed with demand down 20% year over year,” he said. “Interest rates are an important metric to track; over the last 16 months, the central bank has raised the fed funds rate by more than 500 basis points. Still, demand still outweighs current industrial supply.”
Looking at CRE categories individually, Jensen said the most significant issues varied by market segment.
“The industrial sector is experiencing historically low vacancy rates, which has been putting upward pressure on rents and property values,” he said. “Higher interest rates, inflation, overall economic slowdown, along with debt and equity markets, have caused developers to tighten the screws. Finding developable ground with proper infrastructure continues to be our crux, specifically when it comes to sewer and power.”
At the same time, various elements of the CRE market continue to enjoy robust opportunities, something lacking in many metro markets around the country.
“Industrial space in Omaha is a hot commodity, specifically in the 10,000- to 20,000-square-foot range,” Jensen said. “The Sarpy west submarket has been the industrial hotspot in recent years due to new construction and close proximity to I-80 and Highways 50 and 370.”
A project of note in the company’s portfolio is Storz Warehouse, located at 5902 N. 9th St. in Omaha. The project, which is currently under construction and targeting an April 2024 completion, would add 202,000 square feet of Class A warehouse and distribution space.
Planning is Key
Part of what drives the CRE market in any community is the vision and long-range planning by the city itself. Doug Bisson, urban design and planning principal at HDR, said Omaha has done some good things in this regard to help insulate the city from market fluctuations being experienced elsewhere.
“About two years ago, the Greater Omaha Chamber and the city unveiled their urban core strategic masterplan. This plan identified a whole host of different things, from mobility and quality of life to amenities,” he said. “If you want to talk buzz in Omaha, it’s the new Riverfront parks.
“It’s become apparent that if you’re within a couple blocks of these park spaces, you are set. If you’re a little bit away, you kind of feel like you’re off the beaten path. These parks, I think, are becoming major drivers for reinvestment. Tie that in with Omaha moving forward with the streetcar that’s going to pass these spaces, and there are hundreds of millions of dollars of quality-of-life enhancements that are either just recently opened or under construction. It’s setting the stage for absolutely great things to come in the future.”
John Heine, CRE broker and partner with Oak Investment Real Estate, scored the market a C+ in 2023, noting smaller retail development as a bright point.
“Despite all the negative news and the rise in interest rates, there has been a fair level of activity and transaction volume,” he said. “Small strip retail is filling up and staying occupied.
“New projects are commanding very healthy rents, but also require these rents to justify the construction costs. Industrial remains very strong and has very little vacancy. Multifamily vacancy is slightly ticking up with more concessions offered today than a year ago. Office is the sector with the most concerns and negativity. Two challenges include the uncertainty of the office market and the decisions companies make when their office leases expire, coupled with refinancing at significantly higher interest rates.”
A leading project for Oak Investment Real Estate at present is Leavenworth Pointe, located at 3105 – 3115 Leavenworth St. Completed in March, the $4 million project brought nearly 12,000 square feet to the city’s core. Redeveloping the old buildings meant upgrades to the structures and adding amenities such as a new parking lot and alley, patio, more windows, and skylights. Owners also had to be creative behind the scenes including rezoning, replating and obtaining tax increment financing to get done.
Choppy Waters Ahead
Jerry Slusky, longtime real estate attorney, said creativity in financing is more of a mandatory skill these days, which can separate successful companies from the casualties of a recession.
“Interest rates, coupled with high construction costs, are debilitating the market,” he said. “There is absolutely no way, or very little way, for a new development deal to survive in these times.
“Mind you, I’ve been at this 50 years and I’ve been through a recession, at least one in each decade. For commercial real estate, this ties for the lead. It’s just that difficult.”
Slusky said while there are definitely things to be optimistic about concerning how CRE professionals have managed to adapt thus far, the economic challenges facing the industry are so bad that most developers and builders are merely hanging on for dear life.
“As we get closer to ’24, you can see this isn’t going to back up instantaneously,” he said. “I’ve been to two conferences in the last six months and I’ve heard the same thing; the most popular saying is ‘stay alive to ’25.’ If you can get a deal done and you can get it started now or in the spring, there will be a huge demand, particularly for apartments, in ’25.”