Construction bonanza continues in the heartland

The real estate boom has slowed down in Omaha, but you wouldn't know it by looking around. To find the evidence, you need to look past the robust construction going on in the sizzling downtown market along the Missouri River, or in the opposite direction along the main corridors that moved the city dramatically westward in the 1990s.

On Sept. 1, the U.S. Air Force Heartland of America Band played rousing patriotic marches under sunny skies at the dedication of The Omaha World-Herald's $125 million, four-city-block production facility, known as the Freedom Center. It was the sound of Omaha marching forward.

But there are signs of softening in the Omaha real estate market. “Is the music still playing, or is it slowing down?” asked Bennett Ginsberg, president of Omaha's Mega Corp. “The economy has caused some trepidation… and it has turned into a tenant's market.”

Although the Air Force band was celebrating the opening of a state-of-the-art newspaper plant, it could have been trumpeting any number of victories for real estate development in downtown Omaha. In all, the downtown boom totals $1.56 billion in new development projects.

The Freedom Center is a few blocks from First National Bank's $200-million-plus, 40-story office tower, which (although not yet completed) has reached higher than any building in all of Nebraska, Iowa and Kansas. The Freedom Center also is a block from where locally based Union Pacific Corp. will complete its new headquarters building in 2004.

A few blocks in the opposite direction will be the new world headquarters for Gallup International and a $280 million convention center/sports center, both within sight of anyone traveling from downtown to nearby Eppley Airfield. The airport itself has invested $110 million in improvements in the last five years, and the convention center/sports arena is hailed by civic leaders as a big step toward making Omaha a world-class city.

Around the corner from the Freedom Center to the east, the Missouri River takes on an increasingly inviting charm, the likes of which was hardly imaginable a couple decades ago. Expansion of this riverfront development into something grand is now in the forefront of public thinking.

Gallup International capped a long succession of Omaha development projects by announcing this year that it will build an office campus, whose first phase will include $45 million in construction for its headquarters, a Gallup University management training center, a child development center and other facilities. The campus, scheduled to open in 2003, will bring 650 workers to Omaha.

In its part of the Gallup deal, the city will spend about $64 million to acquire 130 acres of riverfront property stretching from the airport to downtown and upgrade the site from a scrap yard, liquid storage tanks and dock facilities into something of beauty. The plan includes a National Park Service regional headquarters building and a public park north of the Gallup campus.

The view during a drive into the sunset along any one of Omaha's west-reaching corridors defies the notion that the Omaha commercial real estate boom of the 1990s is now on the wane. West Dodge Road, the main corridor that stretches from downtown, is getting a facelift at 72nd Street, which 40 years ago was the busiest intersection in Nebraska. Now any number of intersections 50 blocks further west compete for that distinction.

The original Father Flanagan's Boys Town — now going by the modernized name Girls and Boys Town — was not long ago beyond the city's western fringe at 136th Street and West Dodge Road. Now this incorporated campus of group homes, churches and schools is tucked into the suburban landscape just like any other neighborhood or subdivision.

The other large western-reaching corridors — West Maple Road and West Center Road — demonstrate impressive retail and office development. Although West Maple Road was the hottest spot of the 1990s and still attracts much real estate attention, West Center Road now claims recognition as the metro area's No. 1 growth area. The amount of retail development at the corner of West Center Road and 180th Street, 36 blocks west of Omaha's busiest shopping mall — Oak View — is astonishing.

“Omaha can only grow west — Westward, Ho!” said Ginsberg. “So retailers are buying in the path of progress.”

Signs of a slowdown

However, after a decade of amazing success in nearly every phase of real estate development, it is hard for Omaha's leading brokers to take a gulp and accept a year of so-so performance.

“I hear rumors or stories that we are not at the bottom of this, whether we call it an economic downturn or a slight recession,” said Ginsberg. “I think Omaha is a little recession-proof because of the nature of Omaha businesses and the conservative nature of the city.”

But Ernie Goss, an economics professor at Omaha's Creighton University, said an Omaha downturn is signaled by a reduced growth in retail sales. “Monthly retail sales for most of Nebraska are not holding up well,” Goss said. “In terms of sales volume, Omaha has not kept up with the rate of inflation.”

The question now is whether the softening market is a blip or something more worrisome. The answer for this metropolitan area with a population of 716,998 and sizzling downtown development is not clear.

“Omaha has never seen the hockey-stick effect, with things going way up or going way down,” said Ginsberg. “It's not like the other cities with big technology bases, where a year ago the rent was $80 and now it's $40. Omaha doesn't see that, which is good. We are still going to move forward. There are a lot of projects on the table.”

As the national economy continued to give off mixed signals, the Omaha area's economy slowed from the growth rates of the late 1990s, but not as great as once anticipated, according to the Nebraska Business Forecast Council, a group of 10 state and regional economists, including Goss.

Not long ago, the biggest worry of Omaha industry and Nebraska businesses as a whole was a tight labor market, with Omaha's unemployment rate settling below 3%. In the wake of several Omaha firms announcing layoffs in early 2001, that is not as big an issue. The number of Nebraskans filing new unemployment claims rose 44.1% from May of 2000 to May of 2001.

The Forecast Council now foresees a growth in jobs of 1.4% in 2001, 1.9% in 2002 and 2.1% in 2003. This follows a decade in which job growth averaged 2.1% per year. Total Omaha employment grew by 28.4% between 1990 and 1999, compared with a nationwide growth rate of 18%.

Job growth in the construction sector slowed in 2000 to a mere 2.7%, down dramatically from the 4.8% average from 1995 to 2000. The Forecast Council predicts a return to 4.8% annual job growth in construction in 2002 and 2003.

Goss said Omaha's growth has come in spite of a high-tax environment, which includes a 6.5% city-state sales tax, a progressive income tax and hefty property tax. “Except for the problem with taxes, I think Omaha should do quite well in the next decade,” Goss predicted.

Historically, Omaha's diverse business base has insulated the city from the drastic economic swings experienced by many cities, such as those with a heavy emphasis on the technology sector or others that relied on the oil market in the 1970s and 1980s. Civic leaders believe that tendency still holds true. The largest employment sector in the city is for services, at 33.1%.

Omaha-based companies include ConAgra Inc., Mutual of Omaha and Union Pacific. “These companies seem to withstand the down economy,” Ginsberg said.

Rich Secor Jr., a senior vice president for Omaha-based The Lund Co., notices an attitude of guarded optimism. “There is a cautious attitude, but it's not doom and gloom,” he said. “I think people are still bullish on the Omaha economy. We think what is happening regionally is temporary.”

Office space galore downtown

There will be a price to pay for all the success in attracting and keeping major companies in downtown Omaha. Once First National Bank completes its tower in the fall of 2002 and adds 730,000 sq. ft. of space, and after Union Pacific builds its new 1.1 million sq. ft. headquarters and vacates its long-time home on West Dodge Road between 14th and 15th streets, there will be many floors of space to fill. Already, 300,000 sq. ft. — or 10% of the downtown office space — is vacant.

When Union Pacific completes its 19-story, $260 million headquarters building in 2004, an agreement calls for the City of Omaha to purchase and then market the company's current 12-story, 440,000 sq. ft. office building. When it happens, Union Pacific will consolidate office functions that now take up 378,000 sq. ft. in eight other leased locations in Omaha.

The good news for Omaha real estate brokers, said R. J. Neary, vice president of Investors Realty Inc., Omaha, is that all of the space in the downtown market won't open up at the same time. “It is going to open up opportunities that we haven't had before to bring tenants into downtown, and it's going to give others a chance to expand,” he said.

Potential new tenants will have numerous options when they look at downtown space, a luxury that wasn't available in recent years. In addition to having the additional space in the downtown market to pick from, companies looking for office space will no longer have to compete against First National and Union Pacific — those office-hungry giants that are building their new facilities.

“It's like a double-whammy,” said Neary. But Neary added Omaha will absorb the space in much the same way as it did when Enron Corp. pulled 5,000 employees out of downtown and took them to a new headquarters in Houston in 1987.

“That was brutal on the occupancy rate in downtown Omaha, but we got through it,” Neary said. “Not only that, but the ConAgra campus and the Landmark building were built after that. It seems every five years or so something happens to create some space.”

Secor believes it will be a challenge to achieve positive absorption in the downtown office market for a number of years. “We're also seeing some softness in submarkets in west Omaha,” he said.

Some of that western space opening up is due to a local company re-establishing its presence in the city. First Data Corp. is gradually consolidating its operations at its new campus setting at 72nd and Pacific streets. “A lot of the product they have is very good, marketable space,” said Secor.

According to Neary, landlords have not been offering drastic concessions to attract tenants, but there has been a softening in pricing and terms. On the flip side, he added, there are not many tenants that want to move. “In talking with brokers in Minneapolis and Kansas City, I think our office market is still more active than theirs,” Neary said.

Retail momentum slows

Retail growth is continuing in Omaha, although at a reduced pace. Sales numbers during the first five months of the year have been less than spectacular. Net taxable sales in Omaha for the first five months of 2001 totaled $2.4 billion (excluding automobiles), up only 1.49% from the previous year, according to the Nebraska Department of Revenue.

Bellevue, the suburban city that brushes against Omaha to the southeast and ranks as the state's third largest city, experienced a 15.5% increase in net taxable sales during the same five-month stretch. Bellevue's increase can be attributed to a proliferation of new retail stores, including a Wal-Mart Supercenter and new restaurants.

Secor of The Lund Co. said the number of big-box and specialty-store startups is slowing. “A lot of the national retailers are somewhat on hold right now,” Secor said. “They are not expanding as rapidly as they did in the past. There is no question that activity has waned substantially.”

The slowdown came as the big home improvement stores — Wilkesboro, N.C.-based Lowe's Companies Inc. and Atlanta-based Home Depot — staked out their locations and prepared to duke it out for a market dominated by Eau Claire, Wis.-based Menards Inc. In early 2001, Menards owned more than half of Omaha's home improvement market. Lowe's recently selected a third Omaha-area site, even as its first two locations were under construction.

Secor said the big-box and specialty stores are very particular about their sites. “They want to make sure it's going to work for them,” Secor said. “If they can't find those sites readily available, they will just sit on the sidelines until they become available.”

The hottest Omaha retail sector is now between 168th and 192nd streets on West Center Road. “It's just booming,” said Ginsberg. Progress on West Center Road seems assured, with a Lowe's store and a Wal-Mart Supercenter going up on the southwest corner of 180th St. opposite a SuperTarget. More than 106,000 people live within five miles of the 180th Street and West Center Road intersection, and 11% of the households within one mile have incomes of $150,000 or more.

Omaha-based Legacy Development LLC is poised to develop 225 acres of mixed-use space from 168th Street to 180th Street on the south side of West Center Road. Legacy plans 260,000 sq. ft. of lifestyle retail space and 1 million sq. ft. of Class-A office space.

Other retail projects are in the works for Sarpy County, which borders Douglas County to the south. Mega Corp. is enthused about its new mixed-use project at Interstate 80 and Giles Road called SouthPort, one of the few projects under development that is accessible to the interstate. Work on utilities began in September.

When fully developed, SouthPort could add 1.1 million sq. ft. of retail space to a metro area that currently has three malls with more than 800,000 sq. ft. of space and two between 400,000 sq. ft. and 800,000 sq. ft. Papillion, another suburban city bordering Omaha on the south, is still trying to work out the infrastructure needs for another proposed mall, the 1.1 million sq. ft. Papillion Gardens.

Multifamily market takes a break

Softening development in the Omaha metro area's apartment market began appearing in parts of the city in 2000, resulting in minimal or no increase in rental rates and some concessions.

“While neither painting a completely rosy picture for the market, nor casting a dark cloud of doom, the market has begun to show pockets of softness,” said Omaha apartment appraiser Christopher Mustoe.

Occupancy levels, which had been steady throughout the 1990s at 95% or above, slipped below 90%, especially in some complexes in the once-hot northwest area.

“That was in 2000, and most of those projects were able to stabilize back into a full and tight market,” said Mustoe. “What you didn't get was the increase in rental rates as regularly as you had seen.”

This is a change from the late 1990s, when apartment owners were implementing rent increases two or three times a year, or “whenever they thought they could get them,” said Mustoe.

Mustoe said developers have postponed a few apartment projects that are in various stages of planning. “A couple of developers have sites picked out and have platted them, but they have not started,” Mustoe said. “From what I see, there will not be a big demand for new units in the next few years.”

The softening in the multifamily market, noted Mustoe, is the result of out-of-town investors grabbing a piece of the expanding Omaha market and creating an atmosphere of overbuilding.

Even so, there is one burgeoning multifamily market that has not experienced a slowdown — downtown, according to Mustoe.

The dramatic transformation of downtown Omaha into a modern, vibrant community has resulted in the conversion of one warehouse after another into an upscale multifamily building.

“It's getting harder and harder to find the ideal building that can be converted to multifamily,” said Mustoe.

A lull in industrial development

Ginsberg noted that Omaha's industrial market is experiencing a minor slowdown. “I think that market will probably see less activity, and we will probably see more concessions on behalf of landlords,” he said.

Neary noted that the industrial market is less active than the other commercial sectors in Omaha. However, he added, the vacancy rate “isn't huge — 10%, give or take a couple of points.”

“I would say we are building more than we are absorbing,” said Neary. “The cycle in industrial would have turned, even without the economic slowdown.”

Investors Realty is marketing one industrial building that was the short-term home of Peoria, Ill.-based Caterpillar Inc. before it transitioned into its new manufacturing plant in southwest Omaha.

How about a convention hotel?

Following voter approval, the city agreed to take on $198 million in debt to build the $280 million convention center and arena, but that didn't end the controversy. The next goal was to build a convention hotel. In the competition between Bethesda, Md.-based Host Marriott Corp. and Beverly Hills, Calif.-based Hilton Hotels Corp., the city awarded the project to Hilton. The Hilton hotel will feature 450 rooms, more than was in the original Hilton proposal but fewer than proposed by Marriott.

Meanwhile, the prospects of the convention center spurred other hotel activity downtown, including a 180-room Hilton Garden Inn and a 180-room Courtyard by Marriott, both at 10th and Dodge streets. A Residence Inn is planned for the corner of 10th and Harney streets a few blocks to the south.

These three hotels join the Embassy Suites near the riverfront in the Old Market area, which is less than a five-minute drive from the airport or the convention center. With the prospect of new visitors to a convention center, Abbott Drive, which connects downtown to the airport, also has flourished, with the development of Wingate Inn, Super 8 and Hampton Inn hotels.

William D. Hord is a reporter for The Omaha World-Herald.

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