FEATURE ARTICLE, APRIL 2004

The Future of Kansas City
Seminar produces vital information about the Kansas City market.
Kevin Nunnink

Integra Realty Resources (IRR) recently held its annual forecasting seminar in Kansas City. Several leading real estate developers attended the event, and they participated in panel discussions about the four main property types (office, industrial, retail and multifamily) in Kansas City.

OFFICE

During the presentation, Ken Jaggers, senior analyst with IRR, noted that Kansas City’s overall office vacancy rate is currently 20 percent. This rate is higher than the national average vacancy rate, which IRR reported to be 16 percent in Viewpoint 2004 (the company’s annual publication that analyzes U.S. real estate markets across all four property types). Kansas City continues to feel the hangover of the Sprint layoffs, which totaled approximately 10,000 employees. These layoffs came in the wake of Sprint’s relocation to its 3.5 million-square-foot corporate campus in Overland Park, and landlords were left scrambling to re-tenant their once-occupied buildings.

According to IRR, the office submarkets have vacancy rates that range from 10 percent to 25 percent. The Country Club Plaza remains the healthiest submarket, but South Kansas City is experiencing vacancies in excess of 25 percent when shadow space is included.

The big news in the Kansas City office sector is the speculative construction of the Plaza Colonnade building, anchored by the law firm of Blackwell Sanders, and the revitalization of downtown. In addition, H&R Block has agreed to anchor the Cordish Entertainment District with its 500,000-square-foot corporate headquarters, and the merged law firm of Stinson Morrison Hecker will occupy the majority of the 1201 Walnut Building.

The boundaries of downtown have been extended to the Crown Center submarket with the Internal Revenue Service planning to occupy the soon-to-be-redeveloped Main Post Office (developed by MC Realty/DST) and with the construction of the new Federal Reserve Bank located south of the Liberty Memorial. Both of these developments reflect significant vitality in Mayor Kay Barnes’ River Crown Plaza development plan.

The panel of office developers featured Rick Baier, managing director of CB Richard Ellis; Barry Brady, senior vice president of Highwoods Properties; Keith Copaken, principal of Copaken White & Blitt; and Ken Block, senior vice president of Block and Company.

During the discussion, panelists were asked why many institutional investors have taken Kansas City off of their radar screens. According to Brady, Kansas City is perceived as a second-tier market with slow to moderate job growth. “Real Estate Investment Trusts (REITs) are looking for revenue growth, which includes annual rent bumps,” he said. “Currently, the Kansas City office rent market is flat to declining, with bumps every 5 years. Furthermore, REITs are concerned about their exit strategies. Thus, Kansas City does not fit their current acquisition profiles.”

Panelists also were asked if there is a possible structural change in office leasing. Copaken noted that companies have downsized during the recent recession, and that they are becoming used to their smaller sizes. “No matter how strong the job growth is in 2004, it is likely they will lease fewer square feet per person in the future,” he said.

“The structural change is real, and it is cutting some sliver of the demand,” Block added. “I am experiencing both hoteling of office space and companies using virtual workers and not leasing as much space.”

RETAIL

Retail continues to be the healthiest property sector in the Kansas City metropolitan area. The current vacancy rate is approximately 10.6 percent, again higher than the national average of 7.95 percent, as reported by IRR in Viewpoint 2004.

SummerWoods Crossing, a 735,000-square-foot shopping center located at U.S. 50 and Chipman Road in Lee’s Summit, Missouri, combines traditional big box retailers, such as SuperTarget and Kohl's, with smaller lifestyle tenants like Bath & Body Works, Starbucks Coffee and Borders Books & Music.

The Village West development in western Wyandotte County continues to set new records. Retail sales at Nebraska Furniture Mart and Cabela’s are setting new highs in the metropolitan area. In January, the Unified Government of Wyandotte County/Kansas City, Kansas, announced that Phoenix Theaters has been selected to operate a 14-screen movie theater that will anchor the entertainment component of The Legends at Village West. However, Cordish will develop the Kansas City Live District adjacent to the H&R Block corporate headquarters. This project may provide competition to RED Development’s Legends at Village West entertainment district.

Neither of these two districts will likely affect the two crown jewels of Kansas City: the Country Club Plaza and Oak Park Mall. Retail sales at both of these centers average $400 per square foot. In the suburbs, SummitWoods Crossing continues to dominate southeastern Kansas City and has all but driven the last nail in the coffin of Bannister Mall.

An Interstate 70 duel will likely be the story in 2004 because Blue Springs must choose between a proposed Adams Dairy Parkway development and the redevelopment of U.S. 40 Highway and Missouri 7 Highway. The big news north of the river is the Zona Rosa lifestyle center, at Barry Road and Interstate 29, developed by Steiner + Associates.

In the northeast, the city of Liberty is aggressively developing the Liberty Triangle. Assisted by tax increment financing, the city has attracted Lowe’s Home Improvement Warehouse to this 88-acre tract. In south Kansas City, Developers Diversified Realty recently acquired Ward Parkway Shopping Center. In conjunction with the demalling of the development, a Target store has been added and several new junior anchors have successfully revitalized the aging center.

In Johnson County, the most significant news is the re-tenanting of the Jacobsen’s space at Leawood Towne Center with the Jones Store. Further south, Cormac Group has announced the development of a 1 million-square-foot lifestyle center at 135th Street and Metcalf Avenue.

The panel for the retail portion of the seminar included Dan Lowe, partner with RED Development; Bob Johnson, CEO of The R.H. Johnson Company; Dan Carr, vice president of CB Richard Ellis; Bill Knoth, president of the Knoth Company; and Jon Copaken, principal of Copaken, White & Blitt.

MULTIFAMILY

Kansas City’s multifamily property sector currently maintains a 9.8 percent vacancy rate, which is also higher than the national average of 6.9 percent as reported by IRR.

The central business district (CBD) currently boasts the lowest vacancy rate of 6 percent, while southern Johnson County currently has a 12.9 percent vacancy rate (the highest in 10 years). Eric Enloe, senior analyst with IRR, reported several reasons for the weakness in the multifamily property sector, including low mortgage interest rates, oversupply and the weak economy. Concessions equate to as much as 2 months of free rent, and credit loss is an issue for the first time in 10 years.

The hot multifamily news in Kansas City is the demand for CBD housing in converted industrial buildings in the River Quay, CBD and Mid-Town areas. The Library Lofts Apartment building, located at 10th and Baltimore streets, is one noteworthy multifamily project in Kansas City. Another is the Western Auto Building located at 21st Avenue and Grand Boulevard. These redevelopment projects, coupled with loft condominium conversions, are providing a new face to Kansas City’s inner core.

The Country Club Plaza submarket also continues to maintain its stalwart status. In fact, condominium conversions continue to decrease supply, thus putting upward pressure on current rents. Recent conversions include Sulgrave, Regency House and Plaza Pavilion. New construction on the Plaza includes MC Realty/DST’s Kirkwood Circle, which has attracted many of Kansas City’s most prestigious Kansas residents to Missouri for the empty-nester lifestyle.

The multifamily panel consisted of Rick Oddo, president of Oddo Development Company; Kent Price, president of Price Management Corporation; Ward Katz, president of Dunes Residential Services; and Don MacKenzie, president of MacKenzie House.

When asked why Kansas City has seen substantially less merchant building and institutional activity during the years than other markets of similar size, MacKenzie replied, “Kansas City is perceived by institutions on a national basis as being a lower growth, more stable market. In terms of some of the urban product in Kansas City, it has not been a great experience for some of the merchant builders that [were involved with] that product. Also, most of the large REITs have tried to classify what markets they consider to be primary and secondary, and they have pretty much made a determination to exit the secondary markets.”

Panelists also were asked how a developer and owner could get apartment developers to a market with current conditions such as flat rents, and taxes and insurance outpacing inflation. “It is important to note that there is a differentiation between the vacancy that Integra has referred to in the report and an overall apartment vacancy of, say, 9.8 percent,” Katz said. “That is a physical vacancy rate. There is an economic vacancy rate that is at least double that. This figure takes into account the empty apartments and the concession dollars that are given away, which can amount to 2 months’ rent in many cases, and also bad debt loss and credit loss that is at least 2 percent higher than historic levels in this market.”

Panel members were asked about changes in tenant preferences and city planning requirements that have altered the kind of property that has been produced during the past few years. They were also asked about what will be available in 10 years.

“In the last 8 or 9 years, the single-family market has been very strong and has been our biggest competition,” Price said. “People are having a choice to buy a home, with mortgage rates very similar to rental rates. Apartment developers now are adding the crown molding, the nicer countertops, the bigger bathrooms and direct access garages.”

Finally, panelists were asked how the tenant base in south Johnson County has been affected by the layoffs at Sprint. “What we found was that 5 years ago, we had 18 percent of our tenants that were independent subcontractors or direct employees of Sprint,” Oddo said. “Now we are down to 3 percent to 4 percent. Most of Sprint’s employees are still staying in the marketplace, so even though they are not Sprint employees, they are still our tenants.”

INDUSTRIAL

Jeff Pelegrin, managing director of IRR’s Chicago office, presented the industrial overview at the annual forecast meeting. He noted that while this sector in Kansas City was experiencing a 10.3 percent vacancy rate and outperforming the national average, the outlook was anything but bright. One specialty development in the College and Renner Corporate Center is 3 years old, and it has yet to land a tenant.

The panel of industrial developers featured Jerry Fogel, co-chairman of Kessinger/Hunter & Company; Fred Coulson, president of Coulson & Company; Olen Monsees, president of B.A. Karbank & Company; and Dick Ringer, director of real estate development for Hunt Midwest.

The panelists were asked what they considered to be a modern industrial building in 2004. According to Monsees, the functional building in today’s marketplace is a cross-docked facility approximately 360 feet deep with a 32-foot ceiling. “The pre-engineered insulated building will have an ESFR sprinkler system, and dock doors will be 10 feet by 10 feet allowing dual loading and unloading,” he said. “One of the most significant changes in today’s design is the size of the truck court. The 53-foot trailers with sleeper cabs require trailer courts with a depth of 135 feet to 150 feet. More importantly, additional on-site storage is a must. Logistics operators drive the design.”

Kevin Nunnink is chairman of Integra Realty Resources Inc. He is based in the Kansas City office.

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