Investors Realty Inc. Office Market Report / 402-330-8000 / January 2017

Office Market Report Omaha, Nebraska / January 2017

Omaha Office Market Conditions and Trends By Tim Kerrigan, CCIM, SIOR and JP Raynor, J.D.

It’s a Mixed Market for Omaha OfficeOmaha’s office market returned to stability in 2012 as it started to overcome the negative effects of the Great Recession, and it remained stable moving forward. One year ago we thought the activity in the market justified an upgrade from stable to robust and the overall results for 2016 lived up to that label with 148 transactions accounting for just over 1.1 million sq. ft. leased. Further, the overall market racked up 231,231 sq. ft. of positive absorption. Plenty of momentum remains, but individual results will be varied as it is a mixed market.

The Downtown Submarket has more space available than it has had in years and its shallow tenant pool is concerning. This submarket has seen vacancy grow from 10% to 14% year over year as 2016 brought two large blocks of available space to the market with ConAgra and Gavilon.

Suburban Class B space, which was abundantly available over the last several years, particularly in the Northwest Submarket, has seen the supply

of most of the quality space disappear. Omaha burned through 300,000 sq. ft. of large floorplate Class B suburban product in the Northwest and South Central Submarkets due to activity from, among others, BuilderTrend, Wisconsin Physicians, Medefis and United HealthCare, leaving the market with few options in that product type and no

immediate plans for construction.

Meanwhile, Omaha’s overall Class A vacancy rate is healthy at 6.7% and new construction is planned in parts of the city. In a sign of a dynamic market, Omaha has more exciting build to suit options available than ever before with cool options in the

Downtown, Midtown, Suburban West Dodge and South Central Submarkets. Aksarben and the West Dodge Corridor remain very active, getting looks from virtually every active upscale office user, and both will see new construction this year. New construction is both speculative as well as drivenArticle continues on page 2

151,255sq. ft.

776,883 sq. ft.

235,070sq. ft.

914,577 sq. ft.

294,402sq. ft.

980,368 sq. ft.

231,231sq. ft.

1,102,278 sq. ft.

20162013 2014 2015

Total Square Footage Leased For Deals of 1,000 sq. ft. or more

Total Market Absorption Square Footage

Omaha Market Changes In Square Footage Absorption and Its Impact When Viewed as a Share of Total Annual Leasing Square Footage

Page 2Investors Realty Inc. Office Market Report / 402-330-8000 / January 2017

Market Conditions and Trends— continued

by specific tenants, which itself will create some speculative space.

Vacancy rates can be described as generally flat across the market except for big swings in the Downtown and Northwest Submarkets which saw a 600 basis point increase and a 1200+ basis point decrease, respectively. The Northwest Submarket rate went from 16.5% to 4.2% and saw nearly 192,000 sq. ft. of positive absorption in 2016, continuing a trend started in 2015. The submarkets along the Dodge corridor continue to perform well with vacancy in the Suburban West Dodge Submarket at 4.1% and the Miracle Hills Submarket at 5.1%, up from only 3.2% one year ago, but still quite low. Opportunities to lease large spaces along west Omaha’s primary corridors have become very limited which creates more potential for buildings outside those primary corridors like World Communications Park on I-680 at 72nd Street and Hwy 370 where Bellevue and Papillion meet. Fine buildings in these locations will get new looks from larger users in the market.

Rental Rates are up slightly overall but notable in the market is the increase in the Average Asking Rental Rate based on Full Service Gross (FSG) for Class A, which went from $27.89 to $28.60 over the year. This

totals a nearly $4.00 psf increase since 2013, reflecting the high cost of new construction. These rates have been ‘catching-up’ and are not expected to continue a dramatic increase but we don’t expect them to recede either.

As previously stated, the Downtown Submarket, Omaha’s largest and arguably most eclectic with towers, campuses, renovated product and everything in between, is cause for concern but offers significant opportunity, and we suspect it will be fertile soil for some of Omaha’s next big companies. Omaha continues to see growth in entrepreneurial companies like Flywheel, BuilderTrend, Proxibid and Hudl, and the community is focused on new startups through efforts like the Omaha Startup Collaborative, which provides resources, education, and support to new entrepreneurs. The goal is to increase the number of startups launched to increase the number that become scaled businesses. The effort is already showing results and these companies frequently seek an urban environment. It will take a few years to lease the available space and some rental rates will see reductions, but new construction will continue and we expect some exciting things to happen at downtown’s more significant vacant spaces.

Construction

2016 saw the completion of six significant office buildings consisting of 275,583 square feet:

• The Lumberyard

• Berkshire Hathaway HomeServices HQ

• The Corvina

• Northstar Financial

• Advent Building

• Green Plains Energy’s HQ

The Corvina Northstar Financial

Advent Building Green PlainsEnergy

Page 3Investors Realty Inc. Office Market Report / 402-330-8000 / January 2017

Market Conditions and Trends— continued

Overall market vacancy ended 2016 at 10.9% which is surprisingly unchanged from year end 2015. The largest positive change happened in the Northwest submarket where the vacancy rate decreased from 16.5% year end 2015 to 4.2% year end 2016. The 1,200+ basis point swing is attributed to the leasing activity in the North Park Office Park near 120th and Blondo where struggling office buildings were sold to capable ownership entities who were able to re-lease longtime vacancies. The largest negative change happened in the Downtown submarket where the vacancy rate increased from 10.1% year end 2015 to 13.9% year end

2016. The 600 basis point change is attributed mostly to ConAgra’s vacating of two of the office buildings on its corporate campus totaling 197,576 square feet.

Class A vacancy rates remain low at 6.7% even with new product coming to the market. The Class B vacancy rate of 12.1% has decreased over the last year because of an active leasing market, while the lower vacancy rate of 15.5% in Class C buildings is due to vacant buildings being sold to owner users or repositioned to alternative users. These sales result in the buildings being removed from our tracked set.

Vacancy

Q1 Q2 Q3 Q4

10%

15%

20%

25%

5%

2011Q1 Q2 Q3 Q4

2012Q1 Q2 Q3 Q4

2013Q1 Q2 Q3 Q4

2014Q1 Q2 Q3 Q4

2015Q1 Q2 Q3 Q4

2016

Class A Class CClass B TotalOmaha Area Six Year Vacancy Rate Trends By Building Class

15.3%15.8%16.8%17.3% 17.1%

17.7%

15.0%14.4%

15.2%15.4%

14.3%14.0%14.2%14.4%

16.3%

17.4%17.8%18.7%

21.4%

15.6% 15.4% 15.3% 15.5% 15.5%

4.2%4.4% 4.8%5.7% 5.7%

6.5% 6.7%

4.1%

3.2%4.0%4.0%4.4%

5.5%6.1%

4.7%5.6%5.5%

6.2%6.1%6.2%6.6%7.6%7.9%

6.1%

12.2% 13.9%

13.0% 13.4%

12.1%12.3%13.3%13.5%14.6%14.5%14.1%

13.7%13.4%13.6%14.1%14.0%13.7%11.9%11.6%

12.4%

13.1%

12.1%

10.9%11.8%

10.7%10.8%11.4%11.0%11.1%11.3%11.2%11.5%11.4%11.5%

10.6%10.8%11.4%

11.3%12.3%

11.4% 11.0%11.3%11.7%

10.9%11.5% 11.1% 11.5%

10.9%

Currently Under Construction:

• West Dodge Hills located at 18125 Burke Street. It is a speculative office building with 105,000 square feet available to lease.

• Alvine and Associates HQ located at 1207 Cass. It is part of a mixed use building containing office, retail, and apartments developed by Lanoha Development.

Expected soon:

• Lockwood Development is expected to start construction on Building E at Sterling Ridge in the spring of 2017. The building is 60,000 square feet and considered speculative construction, although multiple tenants are currently in negotiations with the landlord.

West Dodge Hills Building E - Sterling Ridge

Page 4Investors Realty Inc. Office Market Report / 402-330-8000 / January 2017

Market Conditions and Trends— continued

AbsorptionNet absorption for the overall market for 2016 was 231,103 square feet, which tracks with the market’s ten year average. Suburban Omaha experienced 481,593 square feet of positive absorption while Downtown Omaha experienced 250,490 square feet of negative absorption. Suburban Omaha Class A and B buildings had robust absorption, 141,511 and 339,797 square feet respectively. In Downtown Omaha, Class A and B buildings accounted for all of the negative absorption except for 865 square feet. The Northwest, South Central, and Midtown submarkets dominated the lease market with positive absorption of 191,749, 132,432, and 108,866 square feet respectively.

Table shows transactions over 1,000 sq. ft. only

Size (Sq. Ft.) # of 2013Transactions

2013 Sq. Ft.

# of 2014Transactions

2014Sq. Ft.

# of 2015Transactions

2015 Sq. Ft.

# of 2016Transactions

2016Sq. Ft.

Above 50,000 1 131,255 3 288,930 3 244,053 6 413,67220,000-49,999 3 73,068 4 118,232 8 242,955 6 170,11410,000-19,999 19 280,988 14 206,121 4 53,741 10 126,101

5,000-9,999 15 99,807 20 135,086 29 198,442 23 159,3402,500-4,999 32 111,069 38 134,815 43 145,233 35 117,6471,000-2,499 47 80,687 56 91,393 60 95,944 68 115,404

Total 117 776,883 135 914,577 147 980,368 148 1,102,278

Building ClassA 23 329,339 27 393,712 22 250,748 32 249,652B 69 344,342 81 441,422 97 643,938 93 775,147C 25 103,202 27 79,443 28 85,682 23 77,479

Total 117 776,883 135 914,577 147 980,368 148 1,102,278

Rental Rates Asking rental rates across the market saw a slight increase of $.02 psf on average in 2016, but this is a case where there is more going on than is revealed in the overall figures. For instance, 2016 saw massive leasing in the Northwest Submarket and most of the quality space is gone leaving the lower cost to push the average asking rental rate downward. The small Northeast Submarket had the addition of a high quality former ConAgra space come on market and increase the average asking rental rate nearly $5.00 psf. Rates are up notably in Regency and Miracle Hills with the addition of quality product, but down slightly in the Suburban West Dodge and Southwest Submarkets primarily as the result of space in some of those markets’ older buildings coming available for lease. When considering asking rental rates, each submarket has its own elements to consider. A common theme in asking rental rates is the impact of new construction. Those submarkets with new construction are seeing increases in the average asking rental rates and this is seen mostly in Class A.

Class A Class CClass B Total

Asking Rental Rates (FSG) Per Sq. Ft. by Building Class

2012 20162013 2014 2015

$26

$22

$18

$14

$10

$13.96 $14.03

$12.08 $12.54$13.23

$24.05 $23.97$23.13

$27.89$28.60

$18.16 $17.83 $17.91

$19.47 $19.20

$18.72 $18.68$20.09 $20.60

$18.95

Page 5Investors Realty Inc. Office Market Report / 402-330-8000 / January 2017

Office Data by Omaha Submarket

Year

Ove

r Yea

r Cha

nge

in

Avg.

Ren

tal A

skin

g R

ates

2016

Ave

rage

Ren

tal A

skin

g

Rat

es (S

F)

2015

Ave

rage

Ren

tal

Ask

ing

Rat

es (S

F)

Year

Ove

r Yea

r Cha

nge

in

Abs

orpt

ion

(SF)

2016

YTD

Net

Abs

orpt

ion

(SF)2015

YTD

Net

Abs

orpt

ion

(SF)

Year

Ove

r Yea

r Cha

nge

in T

otal

Vaca

ncy

Rat

es (B

asis

Poi

nts)

2016

Tot

al V

acan

cy R

ates

2015

Tot

al V

acan

cy R

ates

2016

Tot

al V

acan

t (SF

)

2016

Inve

ntor

y (S

F)

Subm

arke

ts

Downtown 4,512,145 628,707 10.1% 13.9% 3.8% 90,149 -250,490 -340,639 $19.62 $19.94 $0.32

Central West Dodge 2,418,782 192,340 6.7% 8.0% 1.3% -12,913 -37,351 -24,438 $21.00 $21.39 $0.39

Suburban West Dodge

2,373,330 97,124 3.2% 4.1% 0.9% 117,937 89,967 -27,970 $27.43 $27.29 -$0.15

South Central 2,398,720 479,281 26.3% 20.0% -6.3% -98,733 132,432 231,165 $17.35 $17.10 -$0.25

Midtown 2,114,022 81,158 7.2% 3.8% -3.4% 77,107 108,994 31,887 $19.76 $17.18 -$2.58

Northwest 1,554,413 64,636 17.6% 4.2% -13.4% 72,681 191,749 119,068 $20.15 $15.13 -$5.02

Southwest 1,488,488 117,858 9.2% 7.9% -1.3% 21,832 65,324 43,492 $19.89 $19.51 -$0.38

Old Mill 1,194,487 187,966 14.0% 15.7% 1.7% -8,932 -20,174 -11,242 $19.31 $18.16 -$1.15

Southeast 876,676 282,080 47.2% 32.2% -15.0% -3,231 -11,161 -7,930 $16.93 $15.66 -$1.27

Regency 1,023,338 93,788 7.3% 9.2% 1.9% 806 -24,401 -25,207 $22.60 $24.84 $2.24

Miracle Hills 766,450 38,713 3.3% 5.1% 1.8% 37,878 -11,029 -48,907 $19.99 $21.92 $1.93

Northeast 179,116 21,977 12.2% 12.3% 0.1% -179 -2,629 -2,450 $18.32 $24.16 $5.84

Omaha Market 20,899,967 2,285,628 12.7% 11.4% -1.3% 294,402 231,231 -63,171 $19.18 $19.20 $0.02

Page 6Investors Realty Inc. Office Market Report / 402-330-8000 / January 2017

Featured Office Listings

Central Park Plaza 729 to 105,719 sf [FOR LEASE]Downtown Omaha | 15th & FarnamStarbucks and Sullivans Steakhouse located within the building. On site management and security. Abundance of windows allowing for great views of downtown Omaha.

One Valmont Plaza 9,117 sf [FOR SUB-LEASE] | 138th & West Dodge RoadClass A Office Building in First National Business Park available for sublease. Located on the second floor of One Valmont Plaza along the popular West Dodge Corridor.

Legacy Oaks 2,815 sf [FOR LEASE] | 172nd & West Center RoadMove-in ready space with perimeter office, open space, glass wall conference room and a kitchenette. Great natural light and ability to park at front door. Single story medical/office building.

7350 World Communications Drive 91,600 sf[FOR SALE OR LEASE] | 72nd & I-680Motivated Landlord! Large floor plate w/ open space, windows, and a mix of private offices. Kitchen/cafeteria, Exercise room w/ lockers & showers. Move-in ready, single tenant.

Omaha Works Office 20,000 -93,000 sf [FOR LEASE] | 132nd & I StreetBe a part of the redevelopment of one of Omaha's industrial landmarks. Flexible sizes/layouts available designed to fit your needs. Rail served site. Property is centrally located with terrific access.

First Westroads Bank Building 1,580 - 3,584 sf [FOR LEASE] | 156th & West Dodge RoadAvailable Fall 2016 maybe sooner, third floor suite - lots of windows. Auditorium in the building with audio/video capabilities for group meetings & presentations.

17410 Burke Street 1,550 - 6,550 sf [FOR LEASE] | 174th & BurkeNew building addition complete in August 2016, awaiting tenant improvements. Prime location on 1st floor, large parking field and an abundance of natural light throughout.

La Vista City Centre 3,500 - 200,000 sf [FOR LEASE] 84th & GilesThe development team is in place. The TIF district is in place. The site is scheduled for demolition and site prep fall/winter if 2016. Community management team is in place.

Lumberyard District Office 1,898 - 16,853 sf [FOR LEASE] | 135th & Millard AvenueA brand new development in central Omaha! Available August 2016. Floor plate allows for abundance of natural light. New construction allows tenant to design their own space. Signage available.

West Dodge Pointe 23,616 - 80,000 sf [FOR LEASE] | 168th & West Dodge RoadBuild to suit Class A office space. Building signage available for large user. Underground parking available. Design elements subject to tenant input.

Tagge Rutherford 2,487 - 9,698 sf [FOR LEASE] | 156th & West Dodge RoadExisting Class A Office Building ready for occupancy. Modern construction featuring a dramatic 3 story atrium and efficient floor plans with minimal common areas - Great views - Underground parking

Old Mill Business Campus 4,380 - 19,480 sf [FOR LEASE] | 108th & West Dodge RoadAffordable rental rates for West Dodge. Opportunity for dock or drive-in door. Central location within minutes from Dodge Street & Interstate 680. All amenities in the immediate area.

Renovation Coming Soon!

Page 7Investors Realty Inc. Office Market Report / 402-330-8000 / January 2017

Notable Transactions in 2016

Company (Tenant/Buyer) Transaction Type Size (SF) Submarket Area

Sterling Office & Industrial Properties* Sale 121,202 Northwest

Builder Trend* Sale 105,530 South Central

Treehouse Foods Lease 70,994 Old Mill

Wisconsin Physicians Service Insurance Lease 67,148 Old Mill

Northstar Financial Lease 60,000 Southwest

Berkshire Hathaway Lease 57,000 Suburban West Dodge

Green Plains Energy Lease 53,000 Midtown

Medefis & Avantas Lease 41,202 Northwest

Centene Management Company Lease 33,574 Northwest

Conifer Revenue Cyle Solutions LLC* Lease 30,281 Northwest

Warren Distribution Lease 28,028 Downtown

Heiskell Properties, LLC* Sale 26,986 Northwest

Distribution Management Systems Inc. Lease 26,382 Southwest

ES&S Lease 25,937 South Central

Shawn Melotz* Sale 25,650 Central West Dodge

United Healthcare Lease 21,290 Northwest

Ellie Mae, Inc Lease 20,083 Northwest

Jack Henry & Associates* Lease 19,441 Northwest

United Healthcare Lease 17,194 Northwest

NCI Information Systems, Inc.* Lease 15,796 Northwest

Buffet Early Childhood Institute Lease 15,439 Midtown

World Group Lease 15,418 Suburban West Dodge

SRRT Bedford, LLC* Sale 14,364 Northwest

Business Properties of Nebraska LLC* Lease 14,234 Northeast

Turner Park North, LLC* Sale 12,898 Midtown

Lyman Richey Sale 12,500 Midtown

Ervin & Smith Advertising & P.R. Lease 12,269 Midtown

A confidential tenant Lease 12,064 Downtown

The Nebraska Medical Center* Lease 11,674 Southeast

Omaha Community Foundation* Lease 11,549 Midtown

Nebraska Orthopedic Hospital Lease 11,000 Southwest

* transaction involved Investors Realty, Inc.

Page 8Investors Realty Inc. Office Market Report / 402-330-8000 / January 2017

How Does Omaha’s Office Vacancy Compare?

Contributors:Tim Kerrigan, CCIM , SIOR

J.P. Raynor, JDJohn Dickerson, CPM

Brian FarrellSteve Farrell, CCIM, SIOR

Jerry Huber, CCIMBrian Kuehl

Mike Rensch Jeanette Weber, CPM

Ryan Zabrowski, CCIM, SIOR

www.investorsomaha.com

Below is a chart comparing Omaha with six other Midwestern office markets of similar size. Omaha, at 20.9 million sq. ft. excluding owner occupied buildings, has shrunk from 21.3 million sq. ft. one year ago. This is because some buildings have been purchased by their respective tenants and are now owner occupied or have been purchased and repurposed as something other than office space. Omaha sits right in the middle of the pack, just slightly smaller than the Oklahoma City market.

The two Oklahoma markets, Oklahoma City and Tulsa, both saw increases in their overall vacancy rates for the second year in a row as energy companies vacated space. The only other market to see an increase in overall vacancy rate was Little Rock with a minor 20 basis point uptick, which still leaves Little Rock with the second lowest overall

vacancy rate behind only Madison. Omaha’s overall vacancy rate is the third lowest and saw a respectable 180 basis point decline during 2016. Madison’s overall vacancy rate is down 330 basis points for 2016, which was on top of a 210 point drop in 2015. Madison also saw increases across all classes (A, B and C). The smaller markets generally have lower overall vacancy than the larger markets.

Omaha’s Class A market, which had been best in class for several years, has risen to 6.7% and is now second best to Madison at 5.1%. Madison is a vibrant college town which is clearly seeing a lot of leasing activity. Our data does not indicate new construction, which can be difficult in Madison due to development regulations. Omaha’s uptick in Class A vacancy does not reflect a lack of leasing activity, rather it is a result of some

new construction. Generally speaking, a Class A vacancy rate between 5% and 8% indicates a fairly solid market with appropriate opportunity for transactions. As those rates go above 8%, which is the case in four of these seven markets, concern grows. Similar to last year, Omaha settles in the middle of the pack for both Class B and Class C vacancy, which have both decreased in Omaha in 2016.

The Class C rate for all seven markets was probably above 20% in 2009, and now only one market is above 20% - Tulsa at 21.9%. Presumably these other markets have seen Class C office buildings get repurposed, usually for apartments, in the cities’ vibrant inner core. As tenants have fled to quality a new life has opened for these former Class C office buildings, creating stronger communities.

Omaha appears to be very solid overall and has gained on the field. While not leading in any one sector, Omaha is near the top in every measure. We continue to believe our active market, stable of good companies and growing companies and the intelligent development of new product will keep Omaha well positioned among its peers.

Regional O�ce Market Comparison

City / Area2016 Vacancy Rates

By Building ClassCity Overall

Vacancy Rates2016 Total OfficeInventory (sq. ft.)

28,179,600

22,923,724

21,570,042

20,899,967

15,645,857

14,976,294

13,293,841

19,641,332

2016

16.7%

21.1%

13.0%

10.9%

7.7%

8.0%

11.6%

12.7%

2014

19.3%

19.5%

10.4%

13.4%

13.1%

9.3%

13.9%

14.1%

2015

18.4%

19.5%

11.2%

12.7%

11.0%

7.8%

12.0%

13.3%

ClassB

27.1%

10.4%

12.1%

8.1%

7.3%

12.2%

13.7%

18.7%

ClassA

15.1%

9.8%

15.1%

6.7%

5.1%

8.0%

11.8%

10.2%

8.2%

ClassC

15.9%

15.5%

12.8%

12.6%

7.3%

13.5%

21.9%

Milwaukee

Tulsa

Oklahoma City

Omaha

Madison

Little Rock

Des Moines

Average