Dan Smith, senior partner Smith Gardner Slusky, summarized the national development picture:
Strongest, new construction sectors: Hotel, Student Housing, Multifamily, Assisted Living
Strongest remodel sector: Industrial
Weakest ground up sectors: Retail. Office space.
Midwest: Omaha and Lincoln
Housing: "Me Too" Development
The development profit concern is getting funding for "me too" type developments is easier to loan document with existing history, but is there a shortage of the right types of housing?
- Developments coming on-line are for large, single family homes. Many designs are multi-story priced at $350,000+.
- Assisted living communities are opening.
- Multi-family sector is continuing to grow.
- Is there a signaling of rent compression?
- Can the market continue to absorb this many units with higher rent structures?
Where are the starter home options with innovations - like the innovations seen in multi-family? Where are the innovative, step down homes for boomers?
The reality in Omaha and Lincoln is there is room to grow in all housing marketing. Unemployment remains at below 3% for Nebraska this year and help wanted signs abound. The question remains - we need more housing to sustain growth but do we have the right kind of housing coming online?
Industrial: Just Never Vacant
Current 2.8% vacancy rate doesn't accurately reflect what is really happening. Industrial leases coming up are either renewing quickly (and for longer terms), or showing and leasing before hitting the open market.
The asking rates are continuing to increase. Spec space is going for over $6-$6.50 for shell space with pressure on the asking rates to drive higher.
To remain diverse, the Midwest needs to resolve its industrial shortage.
Commercial and Office: Ready to Pay?
It's a landlords' market. The large tracts of land in Omaha especially are developer controlled.
"Higher occupancy rates across sectors is creating demand price pushing", states Barry Zoob, commercial real estate agent with Colliers. "There is more caution in leasing decisions. But as the population shifts, we need to continue to innovate and engage the next generation for the future of the Midwest."
In Omaha, large, Grade A office space is difficult to find. But costs of new building is rising in almost every area.
One of the new, hidden costs is the volatility of banking regulations. Even bank regulators are uncertain of the regulations. Equity allocation to hold back has changed. This has created an environment of using diverse collateral to secure loans.
Changing Market = Changing Deal = Profit Potential
The general consensus: higher costs doesn't dampen the optimism of investors. Labor shortages in the Midwest is driving costs but also driving housing demand.
*Jerry Slusky is a partner at Smith Gardner Slusky with his main practice in commercial real estate, and the founder of the CRE Summit. The CRE Summit is currently planning its 27th year of continuing education to the commercial real estate and legal community in Omaha, Lincoln and Council Bluffs. Information is available on the 2016 CRE Summit coming April 8 and to view the education seminars from 2015.