HEARTLAND SNAPSHOT, DECEMBER 2004

Kansas City Office Market

Two trends stand out in the Kansas City office market, according to Gibson Kerr, vice president of Kansas City-based Tower Properties Company. Larger tenants are opting out of multi-tenant buildings and, instead, building their own headquarters properties. Among the Kansas City firms joining this trend are Shook Hardy & Bacon Law Firm, HOK Sport, H&R Block, Bernstein Rein and Kansas City Power & Light. A second trend is the return to downtown and the historic revitalization of Kansas City’s urban core.

An example of both of these trends is H&R Block’s new 500,000-square-foot office tower being built downtown. The building, which will be the company’s new headquarters, is under construction at 13th and Main streets. Hines is the developer.

Surrounding H&R Block’s new headquarters is Kansas City Live, which is being developed by The Cordish Company. The 400,000-square-foot entertainment development is adjacent to the convention district.

Accompanying these two projects is the Sprint Center, a new arena that was approved by voters in August. The arena, which will be located at 14th and Grand, also will include a national college basketball coaches hall of fame.

Some other significant upcoming developments include the Kansas City Performing Arts Center, a proposed $300 million project that will be located at the south end of the Bartle Hall Convention Center; a new 90,000-square-foot headquarters office building being developed by Opus for HOK Sport in the River Market; The Internal Revenue Service’s $400 million service center, which includes the historic restoration of Kansas City’s main Post Office across Pershing Road from Union Station; and a new 600,000-square-foot headquarters for The Federal Reserve Bank of Kansas City on Hospital Hill, near Crown Center and the Liberty Memorial.

“The impact of these developments is that downtown is ‘cool’ again, not just among the younger population, but among the baby boomers who, as empty-nesters, are spending money on upscale downtown condominiums,” Kerr says. “As more people choose to live downtown and the entertainment options improve, it becomes a more attractive place for businesses as well.”

Cerner, H&R Block and DST continue to lead Kansas City in terms of growth and space absorption. In suburban Johnson County, Kansas, (Olathe, specifically), Garmin Industries is building a new headquarters building and continues to experience phenomenal growth.

Kansas City office Class A rental rates range from $18 to $22 per square foot, depending on location, tenant improvement allowance and length of lease term. “For newly constructed Class A office properties, rental rates are closer to $26 to $28 per square foot,” he says. Vacancy rates for Class A and B office buildings are 16 percent downtown, 14 percent in South Johnson County and 8 percent in Country Club Plaza.

The largest blocks of available space exist in South Johnson County and downtown. “Tenants will find their best deals in these submarkets, which currently have more than 5 million square feet of vacant space,” Kerr says.

In spite of all the great new development activity, owners of existing office properties are likely to face several more years of depressed rental rates and occupancy rates. “The total Kansas City office market has more than 10 million square feet of available space, which, given historical absorption rates of 1 million to 1.5 million square feet, represents a 6- to 10-year supply of space,” he says.

The hardest-hit properties are those with large blocks of vacant space on big single-tenant floor plates. “These building owners are hunting for big tenants, and not having much luck,” Kerr says. “These properties are struggling as large tenants choose to build their own buildings.”

However, buildings that cater to smaller-sized tenants are already experiencing a comeback. “Small businesses are leading the economic recovery, creating new jobs and filling up the multi-tenant office properties,” he says.

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