CITY HIGHLIGHT, JANUARY 2005

KANSAS CITY’S MARKET CONTINUES TO IMPROVE
Paul Licausi, Debra Fields, Owen Buckley, Lou Steele, Jerry Miller, Rosie Kiene

Kansas City’s downtown office and multifamily development is looking up this year, sparked by such big name projects as Kansas City Live, H&R Block’s headquarters and the Sprint Arena, all of which have either broken ground or are breaking ground in 2005. In Kansas City’s retail sector, approximately 1.25 million square feet of new shopping center space is set to come on line by the end of 2005. Industrial development is also showing promise, as an average of 200,000 to 300,000 square feet have been developed during the last two quarters, and the trend is expected to continue through this year.

Industrial

Kansas City’s industrial market continued to improve during 2004.

The vacancy rate continues to trend downward, and at the end of the third quarter of 2004, the vacancy rate was 9.4 percent compared to 9.8 percent at the end of the fourth quarter of 2003. These figures represent the overall blended vacancy rate for bulk and flex space.

Lease rates for bulk space were averaging $3.36 per square foot and lease rates for flex space were averaging $8.27 per square foot at the end of the third quarter last year. Lease rates will remain flat for the first half of 2005 but will trend upward in the second half of the year as the inventory of available space continues to lessen.

At the end of the third quarter of 2004, the Kansas City market had a total industrial building inventory of approximately 231.2 million square feet, with bulk space having approximately 220.7 million square feet of space (including subsurface space) and flex space having 10.5 million square feet of space.

Development in the Kansas City metropolitan area is expected to increase during the next 12 to 18 months. Newly constructed industrial space in Kansas City has been averaging roughly 200,000 to 300,000 square feet during the last two quarters. That level is expected to stay consistent during the next year. The development activity during 2004 has been most active in downtown Kansas City, Missouri; south Johnson County, Kansas; eastern Jackson County, Missouri; and KCI Airport/Airworld (Missouri). Expect for further activity to occur in these submarkets during the next 12 months.

Development during the last 12 months has been predominately bulk distribution space and manufacturing space. In downtown Kansas City, Missouri, a 424,000-square-foot production facility is being constructed for the Kansas City Star. In the south Johnson County submarket, a new 110,000-square-foot distribution facility has been built for Silpada Design. In the Grandview submarket, Big Industrial LLC is redeveloping a former 282,520-square-foot warehouse facility into a new production facility for Saint-Gobain Calmar. Hunt Midwest Enterprises has built a new speculative 154,000-square-foot bulk warehouse in the eastern Jackson County submarket. Jones Development Company is building a new 86,000-square-foot distribution center for Bunzl Distribution in the Airport/Airworld submarket. Additionally, in the eastern Jackson County submarket, LS Commercial Real Estate has built a new 42,000-square-foot production facility for Farmland Foods at Carefree Industrial Park.

The developers who are pursuing new projects in the Kansas City metropolitan market are B.A. Karbank & Company, Block & Company, LS Commercial Real Estate, Watkins Commercial, Schock Investments, Midwest Terminal Warehouse/Industrial Park Realty and Hunt Midwest Enterprises.

The subsurface sector of the industrial real estate market in Kansas City is significant with 28 million square feet of current inventory and close to another 75 million ready for new development. Activity in the subsurface market has been trending up, and the subsurface parks will be adding new industrial space during the next 12 to 18 months. Many of these projects, including Carefree Industrial Park, GeoSpace, Hunt Midwest and Meritex, will be commencing new construction during the next year.

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

Office

Kansas City’s downtown is in the midst of revitalization, with office development playing an integral role.

Two major office projects are under way on the southern edge of downtown on Pershing Road. The former Main Post Office building is undergoing a $370 million redevelopment to create a 1.4 million-square-foot IRS Service Center. It will be one of two centers in the country where the IRS will process paper tax returns. The designer is Kansas City, Missouri-based 360 Architecture. Between Main and Wyandotte streets, a 15.7-acre site is being cleared for a $200 million headquarters for the Federal Reserve Bank of Kansas City. The 14-story, 600,000-square-foot building was designed by Pei Cobb Freed & Partners and Ellerbe Becket.

In September 2004, ground was broken on the 500,000-square-foot H&R Block Center, a new corporate headquarters for H&R Block Inc. The building is being developed by Houston-based Hines and is being designed by 360 Architecture.

The downtown area is also seeing destination projects that will increase its pedestrian traffic. Block Center is in a key location that is adjacent to an exciting new entertainment district named Kansas City Live, which is under development by Baltimore-based The Cordish Company. Groundbreaking is expected for this spring. The site for Sprint Center, a planned 18,000- to 20,000-seat arena, is just east of Kansas City Live. Firms on the design team are Ellerbe Beckett, 360 Architecture and HOK Sports + Venue + Event. Sprint Center is also expected to break ground this spring.

One major project was just completed in the Plaza area outside of the downtown market. Copaken, White & Blitt of Kansas City and Highwoods Properties Inc. of Raleigh, North Carolina, developed the 320,000-square-foot Plaza Colonnade, which opened in November 2004. The law firm Blackwell Sanders Peper Martin occupies 120,000 square feet. Bernstein-Rein is developing the West Edge, which will include 205,000 square feet of office space. Bernstein-Rein has yet to announce when it will break ground. Bernstein-Rein plans to occupy part of the office building upon completion.

Kansas City’s leased office market lags behind much of the nation in its recovery. Metrowide vacancy was 21.6 percent at the end of the third quarter in 2004. But, in recent months, there has been some renewed activity. In south Johnson County, which is Kansas City’s dominant suburban market with 40 percent off all suburban office space, vacancy fell by 1 point to 18.8 percent in 2004. Economic improvement is beginning to impact the small- and medium-sized firms and regional headquarters that lease much of the space in the metropolitan area. For landlords, 2005 should be a transition year with modest activity. Significant improvement may not occur until 2006.

— Debora Field is director of office sales and leasing, as well as senior vice president and principal, in Colliers Turley Martin Tucker’s regional office in Kansas City.

Retail

From Olathe to Liberty, and everywhere in between, Kansas City is experiencing a healthy balance of shopping center development. Traditional power centers, grocery-anchored centers, lifestyle centers, entertainment projects, in-fill remodels and New Urbanism projects help round out an interesting landscape in the making. The R.H. Johnson Company 2004 Shopping Center Report tags Kansas City’s anchored shopping center vacancy rate at 8.1 percent. This compares favorably to vacancy rates in the 10 percent range in 2002 and 2003.

More than 1 million square feet of new shopping center space has opened during the past 12 months, with an additional 1.25 million square feet slated to open by the end of 2005. Wal-Mart Supercenter, Target, Hy-Vee, Price Chopper, Lowe’s Home Improvement Warehouse, The Home Depot, Kohl’s, Sam’s Club and Costco have dominated retail development in Kansas City during the past decade and continue to lead the way. Mid-range and smaller retailers are basking in the wide range of opportunities to locate near these customer-generating big boxes in almost every corner of the market. Retailers new to the market include Bass Pro Shop, CVS/pharmacy and Ross Dress for Less.

While many of the new shopping centers throughout Kansas City are of the traditional format, innovative projects are on the horizon as well. In August 2004, Kansas City voters approved construction of the new downtown Sprint Arena which, along with H&R Block’s new world headquarters, will help anchor more than 200,000 square feet of new retail space called Kansas City Live, which is on the Missouri side of the city. Store and restaurant openings are planned for early 2007.

Wyandotte County is celebrating the success of its new NASCAR race track along with the 780,000-square-foot Nebraska Furniture Market and 190,000-square-foot Cabela’s Sporting Goods store that opened in 2003. Next door, Kansas City, Missouri-based and Scottsdale, Arizona-based RED Development broke ground last October for The Legends, a 750,000-square-foot entertainment/specialty store destination development.

Interstate 29 and Highway 152 are home to several new projects. Zona Rosa, a New Urbanism project, features more than 1.1 million square feet of specialty retail, restaurants, office, hotel and residential uses situated along pedestrian-friendly streets and public plazas. At the same intersection, R.H. Johnson Company and RED Development combined their specialties to create the 500,000-square-foot Barry North Center anchored by Wal-Mart Supercenter, Lowe's Home Improvement Warehouse and a lifestyle center called The Shoppes At Boardwalk.

At 50th and Roe in northern Johnson County, Kansas City developer West Star Companies has broken ground on a $35 million project that will include the complete demolition and resurrection of Venture Plaza in Roeland Park.

In southern Johnson County, eyes are on the proposed 100-acre Corbin Park development located at the southeast corner of 135th and Metcalf. Cormac Companies, headquartered in Omaha, Nebraska, hopes to attract an exciting slate of specialty retailers, including many new names to the market.

— Owen Buckley is president of Kansas City, Missouri-based The R. H. Johnson Company.

Multifamily

The depth of the attraction to urban living in Kansas City has exceeded the expectations of even the most optimistic urban core advocates. There recently has been an explosion of condominium sales between downtown and the Country Club Plaza with both new construction and conversions of high-rise apartments.

The question of whether the public would accept high-rise downtown living in Kansas City was quickly answered when 90 of 144 units in the Wall Street Tower were sold in 9 weeks last fall. The velocity of sales in the conversion of the former U. S. Bank office tower also caught everyone by surprise.

Construction is underway downtown for the new Sprint Arena, H&R Block’s World Headquarters, the Kansas City Live entertainment district, the new consolidated IRS office facility and a new regional Federal Reserve campus. This activity has resulted in The Cordish Company accelerating the development of a residential tower, which is now under construction. The new jobs, expanded restaurants, and entertainment are attracting both young professionals and empty nesters. Rentals range from small affordable units to high quality corporately leased units.

While interest in suburban development has cooled during the last several years, two new market rate developments are expected to start early this year in Western Wyandotte County near the NASCAR track, Nebraska Furniture Mart and Cabelas’s. Ft. Smith, Arkansas-based ERC Development is developing a 280-unit apartment project near 126th and State streets. Just east of that location, a 200-unit apartment community developed by Overland Park, Kansas-based Rodrock Development should follow. Projects in Lee’s Summit, Missouri, also are expected to start this year. Interest is strong for infill, niche market locations.

Occupancy rates have improved during the last year, but the rental market remains soft. The Apartment Association indicates that overall occupancy throughout the city is about 89 percent. The Plaza and Johnson County sub-markets are showing occupancies around 90 percent while the downtown, South Kansas City and North Kansas City sectors are running occupancies in the upper 80th percentile. Conversion of both suburban and Country Club Plaza apartments, and the potential of higher single-family mortgage rates, should help bring the market back to equilibrium.

There remains strong interest in multifamily investment property. Investor interest from outside Kansas City is expanding.

— Lou Steele is principal of Prudential CRES Commercial Real Estate and
Prudential Signature Property Management. Jerry Miller is principal of Prudential Signature Property Management. Rosie Kiene is vice president of Prudential CRES Commercial Real Estate.



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