Omaha Retail - Market Minute

May 10, 2023

Omaha is most notably known for hosting Berkshire Hathaway's headquarters, but to one's surprise, in CNBC's Top Business States Ranking, Nebraska was #7. The low cost of business and centralized location in the midwest has attracted many new companies and commercial development. As a result, the metro continues to see job growth, with unemployment down 2.7% year over year.

To better understand the market, we collaborated with Dan Dutton, Co-Managing Principal and founding member of the Omaha Lee & Associates office. Omaha Lee & Associates opened their doors in March 2022 and has quickly grown to an office of 11 brokers. Dutton has had an extensive career in commercial real estate but has made the most impact in retail landlord and tenant rep. He most notably brokered all Ross Stores locations in Nebraska and plenty more throughout the central US.

Demand outpaces inventory

The Omaha MSA has steadily grown in population faster than the national average, and as the saying goes, retail follows rooftops. According to Dutton, retail leasing has remained resilient through the wavering economic conditions. Overall vacancy is below 5%, and if you factor out shopping malls, there are submarkets with below 4% vacancy, the lowest vacancy rate since 2015. The low vacancy is primarily because companies want to expand and capitalize on the revival of retail sales and foot traffic. In addition to the demand, the region's lackluster retail development has made it challenging for tenants to expand, which benefits a brokerage. For a tenant to compete for space, they now require a broker to know what spaces are currently or have the possibility of being available soon. The tight market has also allowed landlords to push rent growth; average rents increased $0.17/SF year over year.

Future of Retail

Dutton believes there will always be demand for retail. Since his start in 2005, there have been plenty of "retail killers," including Amazon, E-commerce, the global pandemic, and the financial crisis, but none of these factors have led to its demise. Instead, the most critical impact these factors had on the market was their ability to make the market adapt. As a result, brokers, retailers, and landlords must rethink how they do business and ultimately create a better service and product.

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Smash Park Concept

Omaha's retail is fresh and exciting

Dutton noted the increasing number of new concepts coming to the region. Retailers looking to capitalize on the demand for experience-based activities have introduced indoor minigolf, high-end bowling, and axe-throwing. For example, Blue Sky Patio and Pickleball is an indoor/outdoor pickleball court patio bar or Smash Park, which features dozens of outdoor games and activities. In addition to experience-based leasing, service-oriented retail has replaced most brick-and-mortar laggards. The medical industry has become a vital component of today's retail market, as almost every shopping center now includes a dentist, chiropractor, or emergency clinic. Another user looking to enter the Omaha market is Ivybrook, a premier preschool with 70 locations nationwide.

Restaurant growth throughout the metro has rebounded exceptionally well since the pandemic. The sector's growth was limited due to the tight labor market, but it appears to have leveled off for now. Lee & Associates Omaha represents Culver's and Mcdonald's; both are actively seeking expansion throughout Omaha.

Re:Cap Key Takeaway

The Midwest Retail market generally provides higher returns compared to the coastal market. Although the threat of higher interest rates puts pressure on cap rates, Dutton believes there are plenty of attractive opportunities in off-market deals. The longer-term fundamentals of Omaha make a great investment case, population increase, national brands entering the market, and relatively cheaper investment opportunities. Another positive sign for Omaha is the robust office market, as many companies are returning to the office. Foot traffic downtown has almost returned to pre-pandemic levels and will increase further with the introduction of the new streetcar. Great news for a much needed boost in the downtown retail market.

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