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Thoughts on the Omaha apartment market – March 2015

The apartment market will continue to experience healthy demand in 2015, but increasing construction costs and higher property taxes are producing strong headwinds. Supply will exceed demand by 300 units this year: not enough to cause discomfort for owners and developers, but enough to reduce occupancy rates by 1-2%. Vacancy, especially in the core submarkets, will stay below a tolerable rate of 6%.

The biggest challenge this year for developers won’t be demand, it will be construction costs. It is likely that many projects that receive building permits will be delayed due to cost overruns.

The Omaha metro area will have 1,500 units permitted in 2015, but not all will be started due to costs outstripping rents. This is the same number as 2014 but slightly higher than needed.

The market will experience 2% rent growth, but gross income will be up by 3% by passing through more expenses – especially water and sewer fees.

There are additional threats to the apartment market on the horizon:

Home buying will pick up this year as people gain more confidence in the jobs market. The “people don’t want/can’t afford houses” has become a tired cliche.

The biggest challenge to existing properties is the property tax re-assessment which occurred this year for the first time in 5 years. Real estate taxes for multifamily units (especially B and C properties) are set to increase 20% to 50%. New taxes kick in in 2016 – a hellish wake up call for those who aren’t prepared.

The agricultural economy is down. I don’t think people realize how much the farm business filters into Omaha. With commodities down, you’ll see lending decline, cutbacks at Claas, less vehicle spending and shopping trips to Omaha etc.

The sewer separation project is another problem. Every massive infrastructure project run by the government has been over budget. The previous rate increases are already reducing demand as people conserve water. With less water use, The City is going to be forced to raise sewer fees again in 2 years.

Here is my wild card… a major corporate downsizing or defection will occur. We’ve heard about Yahoo! and Woodmen, but there are others in transition: First Data, ConAgra, CHI Hospitals, Gavilon, Kelloggs, and Gordman’s are all searching for ways to cut costs.

Crime is a major factor in choosing where to (or where not to) live. The gun violence rate is appalling for a city of our size. This poses a very challenging environment in which to continue to attract residents to emerging neighborhoods in east Omaha. Marginal developments at the fringes of downtown may struggle from oversupply and perceived lack of safety.

Do I have any optimistic trends? Yes!

  • Entrepreneurs are creating jobs shed by corporates at a healthy rate. Omaha has a diverse economy and has a creative group of young people that used to leave the city but are now choosing to stay.
  • The education “industry” is strong and growing as UNO adds sophistication and UNMC is enhancing it’s services and growing in prestige.
  • The PayPal spin off from Ebay could unleash some advancement in electronic payment systems.
  • Companies like Home Instead and Right at Home growing with the elderly trend.
  • The Omaha 1% annual population growth story has been intact for years – nice and steady – and it will continue.
  • More disposable income will result from tighter labor markets and moderate gas prices.
  • The Fed is unlikely to raise rates. The dollar is too strong.
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