Heartland Real Estate Business asked industry leaders in Kansas City, Missouri, to discuss the state of commercial real estate in their fields of expertise.

Office

During 2002, office markets nationwide lost tenants and saw vacancy rates climb to uncomfortable levels. Research by Colliers International placed office vacancy in the United States at 16.3 percent at the end of 2002. Kansas City was affected by the same economic trends as the rest of the country. It also was affected by the downturn in the telecommunications industry. Sprint, the largest private-sector employer in the metropolitan area, has laid off 6,000 employees during the last year and a half. It also moved to its new corporate campus, vacating more than 2.3 million square feet of leased space. As a result, Kansas City surpassed the national trend with vacancy rates that increased 6.6 points during 2002 and that reached 20.9 percent at the end of the year.

Other measures also reflect market conditions. Metro-wide net absorption for 2002 was negative 1.7 million square feet. Sublease availability nearly doubled, increasing from 900,000 square feet to 1.7 million square feet in 2002.

However, activity in early 2003 has been encouraging. Market observers have noted that small- to mid-sized tenants have been enticed by falling rates and inexpensive sublease space. In some cases, looking has led to leasing. By March, available space dropped slightly, to 1.6 million square feet. Vacancy fell to 20.2 percent — a significant movement for the activity of less than one full quarter.

A lack of new development may be the best news because it will help to generate a recovery. Yet, two major projects are underway for completion in 2004. A 620,000-square-foot, Class A building in the Crown Center submarket will be fully occupied by the law firm of Shook, Hardy & Bacon. In the Plaza submarket, the Plaza Colonnade building will have 270,000 square feet of leasable space, and it will be 45 percent occupied by the law firm Blackwell Sanders Peper Martin. Other current office construction totals about 330,000 square feet and offers only 115,000 square feet for lease. The balance will be occupied by owners or by tenants that have committed to the space prior to construction.

With so little space being added to the market, and a few tenants starting to feel squeezed in the space they currently occupy, market conditions should continue to improve during 2003. However, the change will be gradual and there will be less drama in the recovery than there was in the downturn that occurred in 2002.

Industrial

Early in 2003, Kansas City’s 158 million-square-foot industrial market continued to suffer small setbacks. Although the third quarter of 2002 produced some solid absorption gains, activity was neutral in the fourth quarter. The start of 2003 produced negative net absorption, totaling more than 800,000 square feet in less than one quarter, and vacancy rates increased by half a percentage point, to 11.5 percent in March.

However, almost all of the recent slide occurred in Class B distribution space. Other products, including Class A distribution space and manufacturing space, have seen little movement so far this year. The best prospect for near-term improvement is in Class A distribution space, which had a vacancy rate of 8.4 percent in March.

Consistency seems to be the missing factor. During the last year, periodic surges in the number of prospects in the market have produced few transactions. One might speculate that businesses want to be informed and ready to make a move when economic conditions improve, but that they have not yet seen improved business activity, and so do not have the confidence required to make the move.

A lack of industrial construction has been a stabilizing factor. Speculative construction completed in 2002 totaled less than 400,000 square feet, and build-to-suit projects totaled 1.6 million square feet. In the first quarter of this year, there was about 800,000 square feet of space under way, but only about a third of this was speculative space. As long as most prospects continue to bide their time until they lease or buy, developers seem inclined to wait as well.

Kansas City’s industrial market continues to wait for an emerging upward trend. However, early 2003 has not yet produced this positive news.

Multifamily

During the last 2 years, U.S. apartment markets felt the impact of both the bad news and the good news in the U.S. economy. The worst of the economic news has been job loss and rising unemployment. Under this influence, some young renters returned to their parents’ homes or consolidated rent by accepting roommates. The good economic news — the lowest interest rates in decades — converted many renters to first-time home buyers. Both trends pushed apartment occupancy downward.

The Kansas City apartment market has been influenced by the same events. In the 2-year period from the end of 2000 to the end of 2002, occupancy fell from 95 percent to 92 percent. This 3 percent change equates to lost revenue on more than 2,100 market-rate apartments.

To attract renters, landlords have offered an increasing number and variety of concessions. At the end of 2000, just 40 percent of apartment complexes were offering concessions. By the end of 2002, competition pushed this percentage up to 67 percent of all complexes and 97 percent of Class A properties.

Despite the increases in vacancy and concessions, rents in Kansas City climbed 4 percent during the last 2 years. Average per-square-foot rent for all apartment sizes, classes and sub-markets was $0.74 at the end of 2002. The highest rents in the metropolitan area were achieved in the Plaza submarket. Rents there in December of 2002 were $1.09 per square foot on Class A properties and averaged $0.97 per square foot on all properties.

As in the office and industrial sectors, a lack of new construction was a noticeable change in 2002. The number of multifamily permits issued in the metropolitan area fell 35 percent from 5,532 in 2001 to 3,619 in 2002. This was the lowest number of permits issued since 1996. This drop in construction activity is a critical piece of the puzzle for raising apartment occupancy back to more desirable levels.

Johnson County in Kansas and the Plaza in Missouri continue to be the safest bets for apartment investment. However, population growth in the Northland market, which is on the Missouri side of the state line and north of the Missouri River, is attracting increasing notice by apartment developers and investors.

Retail

The focus on open-air centers versus enclosed centers has been a dominant trend in retail development not only in Kansas City but also nationwide. For example, an enclosed mall that is currently being planned in Kansas City has had some difficulty getting started, whereas open-air centers are getting off the ground a little easier in the market. The large focus is on open-air centers with pedestrian-friendly atmospheres. These centers typically have shop space detached from the big boxes, which are located along the project’s perimeter.

RED Development is currently developing Cornerstone of Leawood, a 400,000-square-foot open-air project at 135th and Nall in Leawood, Kansas. This project will be anchored by Ultimate Electronics. In addition, Dial Properties is currently developing Hartman Heritage in Independence, Missouri, at Interstate 70 and Blue Parkway. The project, which will total about 400,000 square feet, will be anchored by Ultimate Electronics and Linens ‘n Things. These centers also follow the trend of having pedestrian-friendly atmospheres.

Another noticeable trend in the Kansas City market is the number of municipalities that are encouraging retail development. There are a few communities that have issued requests for proposals (RFPs) for projects they would like to have developed. For example, Liberty, Missouri, has issued an RFP for a project to be located at Interstate 35 and Missouri Highway 152. Blue Springs, Missouri, is in the process of issuing an RFP for the redevelopment of sections along Highway 7, and Raytown, Missouri, has issued an RFP for redevelopment of a portion of its downtown. Lenexa, Kansas, also has issued an RFP for new development, and St. Joseph, Missouri, just issued an RFP as well.

Municipalities usually do not actively seek out this much retail development. This trend is interesting because not only are municipalities issuing these RFPs to bring development to their communities, but in several instances, they are offering subsidies to encourage or to entice development or redevelopment to the area.

Some of the most active developers in the area are Dial Properties (with its Hartman Heritage project), Block & Company, and RH Johnson Company. Block & Company is currently beginning construction on Phase III of Wilshire Plaza, an approximately 500,000-square-foot center, at Barry Road and I-35 in Kansas City. RH Johnson Company is developing 6th and Monterey in Lawrence, Kansas, which is a 120,000-square-foot center anchored by a HyVee grocery store. Additionally, in a joint venture partnership, RH Johnson Company and RED Development are developing The Shops at North Village, a 500,000-square-foot retail project on North Belt Highway in St. Joseph, Missouri. Johnson and RED were selected in the RFP process to develop the center.

One retailer that is new to the market is Ultimate Electronics. It is probably the newest large tenant to come to the area. The company has committed to four stores so far, including locations at Cornerstone of Leawood and Hartman Heritage. One of the major transactions that has occurred in the past year is Cabela’s lease for 175,000 square feet in western Wyandotte County in the Tourism District at Village West. Nebraska Furniture Mart, which is building 750,000 square feet in the same development, plans to open this August. RED Development is currently developing a 500,000-square-foot open-air center at this location, as well.

Western Wyandotte County is one submarket that has been ignored for years, but it is now getting a lot of attention from tenants. It is experiencing a lot of activity with the Village West project, and there are four different proposals on the table to bring casinos to the area. A new minor league baseball park is also currently under construction in Village West.

The other market to watch is Lee’s Summit. It is an easy community to work with, and it is a pro-development community. As always, southern Johnson County is where everybody wants to be. There will be continued development in this area. In fact, a new mall called The Walk at High Point, is currently being planned for 135th and Metcalf in Overland Park, Kansas. This project is being developed by Copaken, White and Blitt.

- S. Frazier Bell, is managing principal and director of industrial sales and leasing at Colliers Turley Martin Tucker-Kansas City.
- Dan Lowe, partner, project coordination and financing, with Kansas City, Missouri-based RED

 

Kansas City Industrial and Retail Markets Experience Substantial Growth Paul Licausi Industrial development in the Kansas City market has slowed during the past 24 months. Developers are being selective in starting new projects, and flex space has been the only product type that has recently been developed. The typical flex building being developed in Kansas City ranges in size from 20,000 square feet to 50,000 square feet with ceiling heights from 16 feet to 20 feet. Office finish in these buildings ranges from 25 percent to 50 percent. The flex market in Kansas City has been stable over the near term and offers the greatest opportunity for growth. Development continues to occur in the Lenexa, Olathe and Shawnee submarkets on the Kansas side, while on the Missouri side, eastern Jackson County continues to see growth in projects located along Interstate 435, and the M-210 and M-291 highways. Several major projects are coming online this year or early next year, which will further add to the industrial base in eastern Jackson County. Additionally, development continues to occur near Kansas City International Airport in northern Platte County. The concentration of development is in the Airworld development located close to the airport. Flex space has been constructed and is leasing well in this area. Some bulk space has been constructed but on a much more limited basis. These submarkets are seeing plenty of activity because there is available space, land that is zoned and ready to be developed, established industrial markets, and access to the highway system. The name of the game today is speed, and many companies in the market to either lease or purchase land do not have time to pursue existing building or land sites that are not ready to go. They want to move in as soon as possible to existing space or move quickly to construct a building on industrial land that is zoned with utilities available. On the retail side, big box retail center development continues to be an ongoing trend in the Kansas City market. There has been activity in small, unanchored strip center developments, which are located in close proximity to the larger big box projects. Also, in fill and redevelopment sites are showing signs of growth as well. Retail development is occurring in southern Johnson County, western Johnson County, northern Wyandotte County, eastern Jackson County, northern Jackson County and south Kansas City. The Johnson County market continues to experience substantial residential growth, which is driving further retail development. Key land sites are still available and continue to attract retailers to serve the growing residential base in these areas. The Kansas Speedway project is driving development in the northern Wyandotte County submarket. Northern Jackson County development is occurring along the Barry Road corridor and the M-152 highway corridor. Residential growth also is occurring in these corridors, which is driving the retail development. Eastern Jackson County continues to be a strong retail pocket. The area has been under-retailed for several years, and the development that is occurring is to support the existing residential presence in the area. The south Kansas City area is seeing substantial retail development activity in the 135th Street corridor. The newly constructed and revamped M-150 highway is attracting major retailers with new big box projects. The area has been underserved from a retail standpoint and is now experiencing tremendous growth. Retail vacancy stands at less than 10 percent metro wide with average lease rates in the low teens. Paul Licausi is president of LS Commercial Real Estate, based in Overland Park, Kansas.

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