Don’t believe those doomsday headlines: Retail sector remains a strong one

The retail sector continues to surprise, with savvy entrepreneurs opening experience-based concepts that continue to draw crowds.

Just consider the performance of this sector in Nebraska’s largest city. Omaha’s retail sector remains a strong performer, with many retailers new to the market now targeting the city and its suburbs.

Sam Rolfe, associate broker with The Lerner Company, said that demand from tenants for retail space remains high throughout the market.

“Vacancies in good retail spaces are few and far between,” Rolfe said. “It’s not easy to find good second-generation space in major shopping centers, grocery-anchored centers or centers in high-traffic, high-accessibility areas. Those spots go quickly.”

Rolfe pointed to the restaurant slice of the retail sector. Restaurant tenants are increasingly looking for second-generation space in Omaha but are often struggling to find it. This space is attractive because of how costly it can be for restaurant users to build a space from scratch.

“You’ll read doomsday headlines about the real estate market today,” Rolfe said. “But we are quite a bit sheltered from that in Omaha. We are still a community where people want to get up and go shopping. They want to see people from the neighborhood and get out of their homes. You still get that small-town feel in Omaha even though we are a respectably large market.”

Rolfe said that he saw the strength of Omaha’s retail sector first-hand when he recently attended ICSC Las Vegas. At the vendor showcase, he continually encountered retailers who wanted to set up shop in Omaha.

That is a difference from years past in which many national retailers didn’t include Omaha in their expansion plans.

National retailers that once focused mostly on the coasts are now targeting Omaha and the Midwest, Rolfe said. They like the stability and resilience of cities such as Omaha.

This doesn’t mean that there isn’t some slowdown in the Omaha retail sector. Investment sales, thanks to higher interest rates, remain down in this sector, Rolfe said.

“For investment sales to start to happen in larger numbers again, people are going to have to come to terms with how the world is now and not how it was a year-and-a-half or two years ago,” Rolfe said. “It is a waiting game now. People are waiting to see what the Fed does and how people react to that. But regardless of what the Fed does, there has to be a coming to terms with how things are. People have to adjust their strategies based on that.”

And what are customers looking for when it comes to new retail concepts in Omaha? Rolfe said that experiential real estate remains popular. That includes concepts such as indoor miniature golf, pickleball courts, indoor golf simulators and high-end arcades and bowling alleys targeted toward adults.

Quick-service restaurant concepts are also popular, Rolfe said. He pointed to Buffalo Wild Wings, which is now offering a grab-and-go concept in Omaha.

“It seems that retailers in the food area are increasingly moving in one of two directions,” Rolfe said. “They are either pumping out food and having people come through and grab it or they are offering additional elements of entertainment and experience to keep them in the restaurant. The middle ground is losing steam.”

Rolfe said that he expects Omaha’s retail sector to remain strong in the coming years. He pointed to a new development planned along North 120th Street between Maple and Fort streets. Named Tranquility Commons, this project will bring new retailers, restaurants and hotels to this section of Omaha, though construction is not expected to begin on this phase of the development until sometime in 2027.

Jason Fisher, chief executive officer with Cushman & Wakefield/The Lund Company in Omaha, said that as in all markets, certain commercial sectors are performing better than others in Omaha.

He pointed to the retail sector. Outside of large, indoor shopping malls, the retail sector here is thriving, Fisher said, with a vacancy rate as low as he can remember.

“Years ago, the storyline was that we were witnessing the death of brick-and-mortar retail,” Fisher said. “It has actually proven to be the opposite.”

Experiential retail has helped the sector, Fisher said, with companies that offer experiences such as Topgolf doing big business in the market. As Fisher said, you can’t provide an experience like bowling, knocking golf balls in the air or competing in pickleball online.

“Experiential retail is popping up all over Omaha,” Fisher said. “And that is a good thing for the retail sector.”

Fisher pointed, too, at the area’s industrial sector. The vacancy rate for this sector remains low, even though tenant demand for warehouse and manufacturing space has slowed slightly. The industrial market here has also delivered a significant amount of square footage in recent years, which is also slowing demand for new space.

As Fisher said, for the first time in a long time, the supply of industrial space in Omaha is outpacing the demand for it.

But even with that trend, the industrial vacancy rate is low. Fisher said in the first quarter of this year, Omaha’s industrial vacancy rate was still under 3%. For the last two-and-a-half years, this vacancy rate was at or below 4%, he said.

Fisher said that he expects industrial starts to continue to slow here until the demand from tenants rises again.

“It’s a natural slowdown while our development community waits for the absorption to catch up,” Fisher said. “In 2021 and 2022, demand was significantly outpacing supply. This feels like a natural correction. There are broader reasons for some of the slowdown in tenant demand, too. The distribution world is a little slower year-over-year. People are delaying and pausing some projects that were potentially in the works. It’s like everyone is taking a breath.”

The office market here is seeing more challenges, of course, as it is across the country, Fisher said. But the sector, as others say, is still showing resiliency despite these challenges.

Fisher said that he is seeing robust demand from tenants interested in renting out higher-quality space. The flight-to-quality movement that has seized the office sector is playing out in Omaha, too, Fisher said.

“When CEOs decided to bring back employees into the office whether on a hybrid system or full-time, there was an emphasis placed on making the office commute-worthy,” he said. “A lot of businesses made moves. During the last year, that flight-to-quality created a lower vacancy rate in our office sector. Our office market right now is being propped up by Class-A space the flight to quality.”

Vacancy rates in Omaha’s multifamily sector have ticked up slightly, Fisher said. Much of that is because of the significant amount of new supply that has been delivered in Omaha. Much of the new apartment products have been delivered on the fringes of the Omaha market, mainly in the west suburban areas. Fisher said that Omaha saw a record number of apartment deliveries in 2023.

This new product has increased vacancy rates slightly and slowed the growth of monthly apartment rents, Fisher said.

“It’s going to take a while to get all those new deliveries fully absorbed,” Fisher said. “There are also some new-construction projects on their heels. We expect there to be a little softness in absorption in the multifamily sector, especially in the suburban areas, for the foreseeable future here.”

Like others, Fisher is waiting, too, for investment sales to pick up in Omaha’s commercial real estate market. That hasn’t happened yet, even with the Fed stabilizing its benchmark interest rate.

Fisher said that there is a lot of capital siting on the sidelines today. Investors will deploy those dollars eventually, he said.

“It feels like once the convergence of seller expectations and significant capital needed to be placed happens, we might see transaction activity break loose,” Fisher said. “We are fortunate to be in the Midwest. The slowdown in transactions isn’t as severe in the Midwest as it is in other parts of the country. But we have definitely seen investment volume fall. Transaction activity is sluggish.”

Fisher did say that there is demand in the Omaha market for sale-leaseback transactions in the office sector. During the last 12 months, these transaction types have helped prop up Omaha’s investment-sales numbers, Fisher said.

Fisher said that the Lund Company operates in six states. The company recently received 37 offers on a multifamily property in Texas. Fisher said that is a sign that there is capital ready to be placed once investors again understand what a normal market in today’s environment looks like.

“Properties that are on the market are getting a lot of eyes on them,” Fisher said.