HEARTLAND SNAPSHOT, MAY 2004

Omaha, Nebraska

Trenton Magid, President, Coldwell Banker Commercial World Group

Corporate recruitment has been the big story in the Omaha, Nebraska, market. Within the last 2 years, several companies have relocated to or expanded in Omaha including The Gallup Organization, Sitel, Northrop Grumman, SAIC, Claas KgaA, Northern Natural Gas, PayPal, AFLAC, Cargill, ConAgra, Cintas, Oriental Trading Company and Union Pacific. Together, these moves could add up to 5,000 new jobs.

This year, a number of companies have announced plans to relocate to or expand in Omaha. Auto Club Group, an association of Midwestern AAA clubs, will open a 450-employee office in southwest Omaha in September. ConAgra, an Omaha-based food giant, will add 440 jobs to its local workforce. Northrop Grumman, a Los Angeles-based defense contractor, will boost its existing 650-person Omaha labor force by 100. Pacific Life, a California insurance giant, is bringing a 250-person operation to eastern Nebraska. Union Pacific Corporation will transfer 1,038 jobs from St. Louis to its new Omaha headquarters.

Omaha has enjoyed a great deal of economic development successes lately for several reasons, according to Rod Moseman, vice president of economic development for the Greater Omaha Chamber of Commerce. These reasons include workforce quality, tax structure and business incentives. Local businesses tend to be active in building and promoting the city.

“Omaha has gained a very good reputation for public-private partnerships in economic development,” Moseman says. “In addition, we’re blessed with a strong philanthropic environment.”

Local business leaders formed the Greater Omaha Economic Development Partnership, also known as GO!, to sustain the economic development momentum. The organization’s goals include generating at least 5,000 jobs with yearly salaries of $50,000 per year and increasing the metropolitan population to 1 million by 2010. The current metropolitan statistical area population is 793,000, but 1.1 million people live within 50 minutes of downtown Omaha.

According to Moseman, GO! emphasizes the recruitment of space/defense, bioinformatics and medical research companies because Omaha already has a strong foothold in these high-growth fields.

The economic development activity has been beneficial to Omaha’s construction and commercial real estate industries. The Downtown/Riverfront area is in the midst of a $2 billion building frenzy.

For example, the $291 million Qwest Center Omaha opened last September in downtown. The state-of-the-art building includes 250,000 square feet of convention space and a 17,000-seat arena. The $71 million, 450-room Hilton Omaha Hotel, which is connected to the Qwest Center via skywalk, opened this spring. The Gallup Organization opened its $81 million operations headquarters and training center along the Missouri River last fall. Other Riverfront buildings under construction include a regional headquarters for the National Park Service and two 12-story residential towers known as Riverfront Place.

Other downtown projects include the $260 million Union Pacific headquarters, which will be the largest office building in Nebraska when it opens in August. In addition, a $90 million performing arts center is underway two blocks east of the headquarters.

Outside of the central business district (CBD), The University of Nebraska Medical Center completed the $77 million Durham Research Center last year. In suburban La Vista, Springfield, Missouri-based John Q. Hammons announced it will build a 10-story, 300-room Embassy Suites hotel along Interstate 80. The $50 million project, which is scheduled for completion in early 2006, will include 100,000 square feet of convention space.

Retail

The retail market continues to be Omaha’s strongest commercial real estate sector, with an increase in activity this year from last year. Local brokers estimate retail vacancy at 5 percent.

“There’s more interest from national and regional retailers new to the market,” says Boh Kurylo, vice president of The Lerner Company. “Retail sales for most of the national retailers have been very strong in Omaha. Word gets out, so other retailers are looking to come in.”

While several major retail construction projects are underway, the most notable is RED Development’s 600,000-square-foot Village Pointe — Nebraska’s largest lifestyle center. Village Pointe will introduce Omaha to a number of new retailers, according to John Bacon, director of communications for RED Development. The project, which opens this month, will be heavily landscaped and will feature outdoor fire and water features.

Village Pointe tenants include Scheels All Sports, Z Gallerie, Bed Bath & Beyond, Wild Oats, Cost Plus World Market, Talbots, Coldwater Creek, DSW, Jos. A. Banks, Pier 1 Imports, Coldstone Creamery, Flat Top Grill, Cheeseburger in Paradise, Kona Grill, Panchero’s Mexican Grill and Funny Bone Comedy Club. A 16-screen theater will anchor the west end of the project. The 125,000-square-foot Scheels will be one of the largest sporting goods stores in the nation and will feature an indoor Ferris Wheel.

RED Development also recently overhauled the 170,000-square-foot Regency Court, adding Pottery Barn, Pottery Barn Kids, Williams-Sonoma, Ann Taylor Loft and Paradise Bakery & Cafe.

Several other national retailers and restaurants are entering the Omaha market, including Whole Foods, J. Jill, Sur La Table, Fareway, Flemming Steakhouse, Ted’s Montana Grill, Colton’s Steakhouse, Camille’s Sidewalk Café, Noodles and Company, Qdoba, Cici’s Pizza, Mimi’s Café and Chipotle.

Big box retailers continue to expand in the Omaha area. Construction of large retail space is taking place in several suburban parts of the metropolitan area. One trend has been the conversion of industrial ground to retail uses. Three big boxes are under construction on a 52-acre site on the front lawn of the sprawling CommScope plant in southwest Omaha. In addition, Omaha-based Woltemath Otis and Chicago-based Kimco are proposing to convert a former hydraulics plant into a power center along North 72nd Street.

According to Kurylo, the home improvement stores, such as Lowe’s Home Improvement Warehouse and The Home Depot, are about to slow down development of Omaha stores. Discounters, such as Target and Wal-Mart, continue to expand rapidly. Kurylo expects soft-goods stores, such as Kohl’s, Gordmans and T.J. Maxx, to continue looking for additional sites.

Retailers that are closing stores include Circuit City, which vacated the Omaha market in March. Also, only three out of five of the area’s Kmart stores remain open for business. Burlington Coat Factory recently opened an 80,000-square-foot store in a former Kmart space. Another former Kmart location was purchased by Bellevue University.

Office

Office landlords are paying a price after rapid construction during the past few years left the area with large amounts of vacancy. Significant speculative building in the late 1990s, and large owner-user projects by First Data Resources and First National Bank, have created a vacuum in the office market.

Greg Hornish, principal of The Hornish Company, estimates city-wide office vacancy at 19.8 percent and downtown office vacancy at 30 percent. Downtown vacancy will rise this summer when Union Pacific opens its 1.2 million-square-foot headquarters, vacating leased space in six downtown buildings.

As a result of this vacancy, tenants are enjoying discounts of 20 percent from the leasing “face rate” through free rents, generous tenant build-outs and other incentives, Hornish says.

However, Omaha’s office market is still robust despite the vacancy. “It’s not all doom and gloom for landlords, because there is still a lot of activity,” he says. “The number of users is a lot higher than in times past when we had excessive vacancy. Qualitatively, the Omaha market is very exciting.”

Several small office projects are under construction in the Omaha area. Other than the CBD, the greatest area of construction activity is near 132nd and West Dodge Road. Three office buildings are underway at this location, including Commercial Federal Bank’s 100,000-square-foot operations center.

Some high-end Class A buildings in Omaha can be leased for $25 per square foot while other Class A buildings can be leased for less than $20 per square foot. The vacancy has allowed tenants to find great deals on Class B and Class C space downtown.

Industrial

After a couple of slow years, Omaha’s industrial market is starting to heat up. Major projects include Oriental Trading Company’s 600,000-square-foot distribution center in Sarpy County and Kansas City Life Insurance Company’s 175,000-square-foot speculative space in Council Bluffs, Iowa.

Omaha’s area-wide average lease rate is $3.75 per square foot for industrial and $6.50 per square foot for flex buildings, according to Brett Cook, a leasing representative for Darland Properties. Rents are higher along Interstate 80 in Sarpy County because the buildings are newer. In the last year, industrial vacancy has dropped from 14 percent to 10 percent.

“The market is gaining ground and getting stronger,” Cook says. “If you take out Sarpy County and Council Bluffs, the vacancy is only 8 percent, which gets us closer to the standard of 6 percent.”

Like the office market, the industrial tenants are enjoying reduced rent and other concessions. During the last few months, leasing activity has risen sharply in small industrial spaces as local companies are starting to take more risks.

“In the first 2 months of 2004, I have done 10 transactions of 2,000 square feet or less, which is nice because this is the first significant demand we have had for small spaces in a couple of years,” Cook says.

As in most United States’ markets, industrial buildings in Omaha are adding amenities. Higher ceiling heights, ESFR sprinkler systems, extra docks and drives, high-tech communications infrastructure and increased parking are among them.

Multifamily

While a handful of apartment complexes are under construction, multifamily development in Omaha has been slow in the last 2 years, says Christopher Mustoe, an Omaha-based appraiser specializing in multifamily properties.

Heavy apartment construction in the late ‘90s, low interest rates and a challenging economy during the last few years have slowed construction and left rents flat. Older buildings, which lacked amenities, were particularly hurt. During this time, land sales declined and some planned projects were dropped. Fortunately, developers finished all of the projects they started, so there are no abandoned, partially completed complexes in the area, Mustoe says.

“The most recent downcycle was a big blow,” Mustoe says. “Like most markets, we were hit hard. It took 3 years to drop, and it will take 3 years for the market to climb out. I think things will really start to look good in 2006.”

Leasing traffic was up in 2003, but rents stayed flat. Mustoe predicts multifamily land sales will rise sharply in 2005, which will lead to a building boom in 2006 and 2007.

“Some submarkets have occupancy in the high 90 percent range,” Mustoe says. “Other areas are struggling to get out of the high 70 percent range.” Until the market fully rebounds, successful landlords are controlling rents while trying to provide competitive amenities.

Mustoe is bullish on the market’s future because the Omaha area has been successful in recruiting corporations and because office space is plentiful. “The new jobs continue to pull people in,” Mustoe says. “If 30 percent of the newcomers are looking for apartments, as is the average in our market, then I see a great opportunity to fill a lot of units.”

Overall, the Omaha market is well positioned for economic growth. Office vacancy is high, but Omaha is experiencing a great deal of success attracting office tenants. For the first time in many years, Omaha now has available office product to offer companies looking for branch offices and regional headquarters. The industrial market is making a solid recovery. As Omaha continues to add jobs and population, demand will increase for multifamily housing. Retail should remain hot as Omaha becomes more of a regional convention and tourism destination.

Trenton Magid is president of Omaha, Nebraska-based Coldwell Banker Commercial World Group.



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