Our Perspective 11/ 13/ 2020

Jason Kinnison featured in REBusiness Online: Omaha’s Strong Multifamily Market Fundamentals Drive Investment Sales Activity

The Omaha multifamily market’s occupancy, rents and new construction activity remain stable despite the economic uncertainty surrounding the COVID-19 pandemic.

As a solid Midwestern market, Omaha’s apartment sector remains strong due to its healthy market fundamentals, including a strong employment base and a highly educated workforce.

Omaha boasts an approximate 94.9 percent occupancy rate and consistently has a steady supply of roughly 1,500 new units delivered annually. New construction activity has historically been at an absorbable pace, however, there has been a slight lag in absorption recently, which has the potential to compress occupancy levels as well as asking rents.

Multifamily rent collections remained strong in the second quarter, supported in part by the increased unemployment benefits offered to renters who lost jobs and the government-sponsored stimulus initiatives. Additionally, federal eviction bans were enacted.

Omaha’s multifamily real estate property values continue rising and capitalization rates remain low. Over the last five to seven years, Omaha has experienced an increase in multifamily investment sales activity. Historically, the market has been controlled by local investors with a buy-and-hold mentality. However, as valuations have risen and activity has increased in investment sales, there has been a shift to more owners selling assets. This shift is also attracting more out-of-town investors.

Between 2015 and 2019, Omaha’s average multifamily sales volume was $130 million, including its peak year of $160 million in 2016. This year, the market is on pace to hit the five-year average with year-to-date sales volume of $124 million. That includes the July sale of the 314-unit Steeplechase on Maple Apartments for $39 million to a Colorado-based investor. What was significant was its 5.25 percent cap rate.

Activity also includes the recent sale of the 258-unit Valley View Estates across the river in Council Bluffs, Iowa, that was purchased by a Utah-based investor for $30.1 million. The asset previously had been under contract with a different group but fell out of contract due to the pandemic. This new buyer swooped in and made an offer.

Both transactions had a value-add component. The drivers behind these transactions include the multifamily sector’s healthy fundamentals and attractive financing rates. Despite uncertainty, multifamily remains one of the safest asset classes for investors and is favored among lenders.

Who is lending?
On the debt side, government-sponsored agencies Fannie Mae, Freddie Mac and HUD remain very active and have been the shining stars this year. They are consistently the go-to lenders in providing liquidity.

Additionally, life insurance companies stayed active in financing multifamily assets and remain a preferred lender. Although various programs hit a brief pause button, they are back in the market and quoting business. Each life company is taking its own approach to evaluating loans; most are selective and want a good story.

Another trend is the strength of the refinance business in this historically low-rate environment.

Trends on the equity side
Equity continues seeking good opportunities in multifamily. Investors are pursuing distress, although few opportunities exist in the market. Equity is also returning on the value-add side with renewed interest by lenders and investors.

Lenders are also looking at new construction. Roughly 3,000 new units are projected over the next two years in Omaha. One future development is the 500-acre Heartwood Preserve in West Omaha. Located west of Boys Town, it will include a mix of uses including multifamily.

Outlook
The Omaha multifamily market is holding its own despite uncertainties around the pandemic. While there were measures propping up the multifamily market in the first half, the second half has more ambiguity. It is difficult to forecast due to the inability to fully contain the COVID-19 outbreak. Additionally, unemployment benefits expired, and there has not been a resolution on how they may be replaced.

While rent collection has been steady in Omaha, that could be a question mark moving forward. That said, Omaha’s multifamily investment sales market is expected to remain solid. With cap rates compressed and values rising, transaction activity is poised to continue at a steady pace as more out-of-town investors pursue assets.