The Kansas City commercial real estate market, like many others in the Midwest, has experienced ups and downs. The multifamily market has been suffering from overbuilding that began in 2000 and from the increase in single-family home sales due to low interest rates. However, absorption should increase during 2004 with a full recovery in the multifamily market by mid-2005. The industrial market is starting to improve, and more prospects are starting to seek properties that are 50,000 square feet or larger. Most of the industrial development has been bulk distribution space, mid-size lower cube space and flex/tech space. The retail market has been performing the best, with big box expansions leading the way and triggering additional retail development. The office market has been suffering from high vacancies, but it is starting to show signs of increased demand.

Multifamily

The Kansas City multifamily market weakened during 2003 as a result of the strong single-family market and moderate apartment overbuilding in selected sectors. More than 14,000 apartment units have been constructed since 2000.

In Johnson County, Kansas, which has long been one of the most dynamic submarkets in the metropolitan area, developers completed new product that competed fiercely for the luxury sliver of the market. Meanwhile, low interest rates fueled single-family home sales in this submarket creating an imbalance between rents versus principal and interest payments on a home mortgage. Normally, in a healthy market, rental rates are $75 to $150 below loan payments. Currently, conditions exist in Johnson County where rents — in a number of instances — are actually higher than loan payments. Johnson County occupancy is a little less than 90 percent, and the Olathe submarket occupancy stands at 88 percent.

Another dynamic submarket has been downtown Kansas City, Missouri, where for-sale and for-rent loft conversions have been extremely popular. For the last 2 to 3 years, small numbers of units have been added to the loft market at one time. Forty or 50 units were easily being absorbed at rents of about $1.05 per square foot per month. However, as is usually the case, the loft conversion concept was overdone in 2003, with hundreds of units being brought on the market during the year. As a result, occupancies are slipping, concessions are being offered and rental rates have been reduced. Downtown lofts are still a pioneering concept in Kansas City so accurately assessing the level of demand is quite difficult. Occupancy downtown is hovering around 85 percent.

Apartment sale activity was moderate in 2003 with a couple of notable projects changing hands, including the 432-unit Lincoln Highlands Apartments and the 356-unit Lakes at Lionsgate, both in Overland Park, Kansas. The lowest capitalization rate seen in the market was 6.75 percent with Class A product typically trading in the 7 percent to 8 percent range.

Overall citywide physical occupancy has slipped to less than 90 percent, and economic occupancy is a full 2 percentage points lower than that — reflecting significant concessions in some submarkets. The strongest submarket is South Kansas City, which is experiencing occupancy rates of about 95 percent. Composite rental rates have dropped to 75 cents per square foot for a one-bedroom unit, 65 cents for a two-bedroom unit and 65 cents for a three-bedroom unit. On a positive note, absorption trended sharply upward during 2003.

The outlook for this year is for more of the same trends with new multifamily construction continuing to slow and absorption climbing upward. Apartment sales should continue at a moderate pace with more focus on Class B and Class C properties. Rents should stabilize, although concessions are expected to remain in place for most of the year. Assuming that the regional and local economies maintain their recovery, the Kansas City multifamily market should complete its recovery by mid-2005.

— James Beverlin is senior vice president for Kansas City-based NAI/Cohen-Esrey Real Estate Services.

Industrial

It has been 3 years since there has been any notable activity in the Kansas City industrial market. If developers or building owners had a shot at a prospect, it was no slam-dunk; rather they had to be razor thin with margins to get the deal. The prospects were well aware of the state of the market, and they closed some aggressive sales and leases.

However, things are starting to improve in Kansas City. Even with the historically high vacancy rate, activity in the marketplace has been increasing since the start of 2003. This trend should continue into the foreseeable future. There are more prospects in the market right now than there were in the last 18 months combined. In addition, more prospects are leasing space as opposed to purchasing existing buildings, which is the opposite of the past 2 years. The average prospect in the Kansas City market is looking for 50,000 square feet or less. However, this trend is starting to change with square footage requirements exceeding 50,000 square feet becoming more common.

Development in Kansas City has been tempered during the last 2 years with little new development occurring. New projects are bulk distribution space, mid-size lower cube space and flex/tech space. However, activity is more submarket-driven where demand is occurring in specific areas.

New bulk distribution space in Kansas City is typically 80,000 square feet to 150,000 square feet with 28- to 36-foot ceiling heights. During 2003, bulk distribution space was developed in the northern part of the metropolitan area and in the Downtown, Kansas City North and Eastern Jackson County submarkets on the Missouri side. Some notable new speculative bulk distribution buildings that are currently under construction or that were completed in 2003 include the 154,000-square-foot building by Hunt Midwest Real Estate; a 90,000-square-foot building by Watkins & Company located in the Airworld Business Center next to the Kansas City International (KCI) Airport; and a 100,000-square-foot building by Landmark Mortgage in the Downtown submarket.

Activity on the Kansas side has been limited with only one significant speculative bulk distribution project being constructed in the Perimeter Business Park in Shawnee, Kansas. There were two significant single-tenant facilities that started construction during 2003: the Kansas City Star Newspaper is constructing a 424,000-square-foot production facility in the Downtown submarket and Ford Motor Company is having a 223,000-square-foot bulk distribution facility constructed to serve as a parts distribution center.

New projects scheduled to start this year include a bulk distribution building in Edwardsville, Kansas, in a new park being developed by Rapid Built Properties. Even with new projects being announced, activity will be tempered by the level of vacancy in the bulk warehouse market, which at the end of the third quarter was 9.2 percent with lease rates averaging $3.48 per square foot.

The standard lease structure in Kansas City is a modified gross industrial lease type. The current vacancy rate is high compared to historical averages for the Kansas City metropolitan area, but it is still below the national average, which stands at more than 10 percent. The spike in the vacancy rate was due to large spaces opening up in the market. Fleming Companies vacated 504,438 square feet in the Wyandotte County submarket; USCO Distribution vacated 304,840 square feet in the South Johnson County submarket; and McKesson Corporation vacated 275,123 square feet in the Downtown submarket.

While vacancy rates will affect the decision-making process for new building starts this year, activity should pick up in this project type during the next 18 months. Given the current activity level, stronger leasing activity should also occur, which will take a good portion of the vacant space off the market.

The lower cube space consists of building sizes of less than 50,000 square feet with ceiling heights ranging from 16 feet to 20 feet, which includes both surface and subsurface projects. Development has been occurring on both the Missouri and Kansas sides of Kansas City in this project type. On the Missouri side, surface project development is occurring in Lee’s Summit, Blue Springs and Kansas City North. On the Kansas side, surface project development is occurring in Lenexa, Shawnee and Olathe.

However, activity has been limited in this project type during the last 24 months. These projects are typically single-tenant buildings — some contain two to three tenants — that cater to small distribution companies or related service business types. The typical bay size is 15,000 square feet with drive-in or dock-hi loading. The activity in surface project development has been typically speculative, but some build-to-suit activity has also occurred.

The other product type in this category is subsurface space, and average occupancies in Kansas City are at about 90 percent, which is a testament to the stability of the subsurface market.

During the next 18 months, new buildings will come online in several of the subsurface projects. For example, LS Commercial Real Estate — the developer of Carefree Industrial Park — is planning a new 225,000-square-foot building. In addition, Hunt Midwest has recently completed new distribution space, and Space Center/GeoSpace and Meritex are planning expansions at their projects during 2004.

The subsurface market offers lease rates averaging around $2 per square foot and utility costs averaging 50 percent less than surface properties. As the activity level increases in the market, look for significant development activity in the subsurface market to occur.

Flex space has been suffering during the last 24 months, but the tech market showed signs of life during 2003. Limited development has occurred in the flex project type, which was experiencing a 24 percent vacancy rate in Kansas City at the end of third quarter 2003.

On the Missouri side, development in this project type is occurring in the Lee’s Summit and Kansas City North submarkets. On the Kansas side, limited development is occurring in Lenexa, Shawnee and Olathe. The flex projects are typically multi-tenant buildings catering to service business types. The building sizes are averaging 25,000 square feet or less with a typical bay size of 2,500 square feet with either drive-in or dock-hi loading. The average lease rate for the metropolitan area is $7.47 per square foot, which is based on a modified gross industrial lease type.

New project starts have been market-area driven and based solely on localized demand. Given that development has been limited during the last 2 years, existing space is being absorbed. This absorption will help push the vacancy rate down significantly during the year and allow for new development to occur in selected submarkets.

Tech space development has been occurring in the Kansas City North submarket near KCI Airport on the Missouri side and in the Olathe market on the Kansas side. Karbank Development has been driving the development in this product type with new projects such as the 62,550-square-foot tech building in the Airworld Business Center near KCI Airport and the 145,834-square-foot tech building in the Interstate 35/119 Tech Park in Olathe. These buildings are single-story structures consisting predominantly of office space or conditioned production space with limited storage space.

One current trend in the Kansas City market is the redevelopment of existing facilities. Kansas City has been a major manufacturing center for many years, and many older facilities have been vacated for state-of-the-art facilities located within the area. Some of the more notable redevelopment projects, mostly large- to mid-sized buildings, include the Leeds Building (formally a General Motors plant), the Wire Rope building (a steel cable processing facility), the AGCO building (an agricultural equipment facility), and several Armco Steel buildings (former steel manufacturing facilities).

LS Commercial Real Estate is redeveloping the former Wire Rope building, which consists of 640,000 square feet of manufacturing space. The building is being subdivided for use by manufacturing and distribution companies. The Leeds building has been subdivided, and is being leased to manufacturing, distribution and transportation companies. These buildings offer benefits including heavy power, excellent access to the highway system, oversized utilities and a low-cost lease structure that is averaging less than $2 per square foot based on a modified gross industrial lease type. These projects are drawing tenants taking advantage of the benefits but, typically, these projects do not compete with new space. This trend will continue as more older buildings become available.

Current industrial vacancy rates for each submarket in the Kansas City area are 9.7 percent in Kansas City North; 9.6 percent in East Jackson County; 15 percent in South Jackson County; 9.9 percent in Downtown; 13.4 percent in Midtown; 6.3 percent in Wyandotte County; 13.6 percent in North Johnson County; and 7.8 percent in South Johnson County. During the coming year, look for a general downward trend in overall vacancy rates. There will be increased activity on the Kansas-side submarkets, and in the Kansas City North and Eastern Jackson County submarkets on the Missouri side.

Kansas City continues to demonstrate stability even during recession times. The market is well supported by a strong manufacturing base and significant transportation infrastructure. Kansas City will see continued growth during the coming year as more companies discover the many benefits of doing business in the community.

— Paul Licausi is president of Overland Park, Kansas-based LS Commercial Real Estate.

Retail

Kansas City’s retail market remained strong for 2003 and should continue with solid growth through this year. Much of Kansas City’s retail growth is led by big box expansions. Wal-Mart, Target, The Home Depot and Lowe’s Home Improvement Warehouse continue to build new stores and trigger the development of adjacent retail centers.

Nearly every submarket will experience substantial new retail development this year. The Northland submarket has been particularly active. The first phase of Zona Rosa, a lifestyle center developed by Steiner + Associates in the Northwest submarket, will open this spring and, when finished, will consist of nearly 600,000 square feet of retail tenants in a Main Street-type setting. RED Development recently opened its Shops at Boardwalk with a full complement of lifestyle tenants. Retail growth continues to be strong on the east side of the Northland market due to junior anchors such as Bed Bath & Beyond, Borders Books & Music and PetsMart joining Target and The Home Depot in the rapidly growing Liberty, Missouri, trade area.

Central Kansas City’s only regional shopping venue, the Ward Parkway Center, was purchased by Coventry, which plans to continue with a successful de-malling project. Recently, Target, T.J. Maxx, Pier 1 Imports and 24 Hour Fitness have been added to the center.

South Johnson County has traditionally been the strongest of Kansas City’s retail submarkets, and this trend should continue throughout this year. New construction along the 135th Street corridor will total more than 1 million square feet. Cormac Companies is completing the first phase of a Target-anchored community center at 135th Street on the Missouri side of the state line. Cormac’s center joins a new center, anchored by Lowe’s Home Improvement Warehouse and Wal-Mart that was developed by the R.H. Johnson Company, at the same intersection. An enclosed regional mall planned for a key intersection in south Johnson County had been delayed, because Cormac companies only recently acquired the rights to the land. The 1.2 million-square-foot project is now scheduled to open in 2006.

Eastern Jackson County has emerged as a hot retail zone, with significant new development in Lee’s Summit and Independence. In Lee’s Summit, the successful SummitWoods project — an 800,000-square-foot combination power center and lifestyle center developed by RED Development — has spawned two competing plans for a regional lifestyle center nearby. The Pavilions, a community center in Independence, Missouri, developed by Dial Realty, will be fully operational in the first quarter and features mostly national anchors new to this trade area.

Development in previously retail-barren Kansas City, Kansas, was the largest retail story for 2003, and it will also dominate the retail scene in 2004. In conjunction with a new NASCAR track and Tourism District, Cabela’s opened a 250,000-square-foot retail store, which quickly became the largest tourist attraction in Kansas. Nebraska Furniture Mart followed suit by opening a 750,000-square-foot store on an adjacent property. RED Development broke ground for an 850,000-square-foot retail center in the Tourism District. This project, which will open this year, will consist of a mix of destination and entertainment retailers, along with traditional and outlet stores.

— Jeff Berg is senior vice president of Kansas City, Missouri-based Cohen-Esrey Real Estate Services Inc.

Office

The Kansas City Metropolitan Statistical Area (MSA) contains approximately 85 million square feet of office space divided into eight submarkets. The most active submarkets in the region are the Central Business District (CBD) and South Johnson County.

In 2003, the office market in Kansas City experienced negative absorption, thereby increasing vacancy rates. The vacancy rate in the MSA rose to a current overall vacancy rate of 13.5 percent from 12.4 percent at the end of 2002. This vacancy rate does not take into account the 1.09 million square feet of office space available for sublease, which increases the current vacancy rate to approximately 14.8 percent. The average full-service lease rate for all building classes in the MSA fell from $17.30 per square foot to $17.10 per square foot.

The change in the vacancy rate is due in large part to the relocation of Shook, Hardy & Bacon from several buildings in the CBD to its new 598,000-square-foot, Class A headquarters at 2555 Grand in Crown Center. This relocation contributed to a negative absorption of approximately 338,000 square feet throughout the MSA. In comparison, the MSA has only seen two quarters of positive absorption in the previous 3 years.

Besides the new space that was developed for Shook, Hardy & Bacon, an additional 300,000 square feet of office properties were completed in 2003 (largely consisting of 20,000- to 40,000-square-foot build-to-suit buildings in the South Johnson County submarket). The overall market should remain consistent in 2004 with the delivery of approximately 900,000 square feet of new development.

The outlook for the area is for modest to stable growth in jobs and population, and Kansas City should continue to be attractive to investors and businesses alike. Overall, the Kansas City office market remains healthy and is starting to see signs of increased demand, not only from within but also from companies wishing to relocate from outside the metropolitan area.

— Matthew Spachman is vice president/broker salesperson for Kansas City-based MC Lioness Realty Group.

©2004 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.