CITY HIGHLIGHT, JANUARY 2006

KANSAS CITY CITY HIGHLIGHTS
Brent W. Roberts, Michael Johnson, Paul Licausi and Bill Powell

Kansas City Office Market

It is still unclear if the Kansas City metropolitan commercial office market has recovered from a 5-year drought. Overall, across all classifications and areas, it has been a very static market, without much positive absorption or rental rate growth during the past year. On the other hand, there are pockets of the market, as well as various projects, that have bucked the market conditions and shown early success.

Despite a downtown vacancy of more than 1.5 million square feet of Class A space and 1.5 million square feet of Class B space, both H&R Block and HOK have built or are building new headquarters (500,000 square feet and 90,000 square feet, respectively) at annual leasing costs approximately $10 to $15 per square foot higher than lease rates found in existing buildings.

In the Northland submarket, the office component of the Zona Rosa mixed-use community has had positive absorption and is expected to be 100 percent leased by the end of the first quarter. This 48,000-square-foot speculative office project has been able to lease at some of the highest lease rates in the submarket, despite that area having the highest submarket vacancy rate in metropolitan Kansas City.

Briarcliff Village is a new mixed-use office/retail project that is nearly 80 percent pre-leased. It is expected to be 100 percent leased by its grand opening in approximately 3 months. In addition, Briarcliff Development Company plans on developing two new Class A buildings, with views of downtown Kansas City.

In the Johnson County submarket, steady growth has led to a vacancy rate of 11 percent versus the 14 percent rate found a year ago. One of the largest leases signed in the city in 2005 was the 175,000-square-foot lease by Prescription Solutions at the Overland Park International Trade Center. Other significant leases in this submarket were South & Associates (38,000 square feet), QC Holdings (39,000 square feet), Compass Minerals (35,000 square feet) and several Sprint transactions (totaling 80,000 square feet).

The area's two major office parks, Corporate Woods and Southcreek, have vacancy rates significantly higher than the rest of the market. According to the property Web sites for each, Corporate Woods has more than 400,000 square feet vacant for an 18 percent vacancy rate and Southcreek has 150,000 square feet of available space for a vacancy rate of approximately 17 percent.

The Kansas City office market will need significant job growth for landlords that are desperate to get lease rates back to pre-2000 levels. Early rate pushes have been rejected by the market as tenants can still find good deals in alternative buildings. Expect rates to go up slightly in 2006, but not dramatically, as metropolitan Kansas City tries to fill more than 10 million square feet in vacancies.

— Brent W. Roberts is a first vice president in the Kansas City, Missouri, office of CB Richard Ellis.

Kansas City Industrial Market

The Kansas City metro area industrial real estate market performed well during 2005. As the market continues to strengthen, this same trend will continue through this new year.

During the last recession, Kansas City was affected much more than has been seen in recent years. The local economic base is weighted towards manufacturing and distribution-based operations. Positive market absorption has been strong and inventory levels have been trending downward through the past 24 months. Overall, the industrial real estate market is very healthy; vacancy levels are hovering just above 9 percent, and new development in both bulk and flex warehouse commenced again during 2005.

The market is tracking on par with the growth in the overall economy, but there are some other factors at work that are influencing the growth. Kansas City has a tremendous transportation infrastructure, including major highways such as Interstates 35 and 70 that allow access across the United States (as well as Canada and Mexico) and rail access from all of the major rail providers. Kansas City is the second largest rail hub in the nation and is home to three major intermodel facilities. Also, the market is now utilizing air cargo, which is quickly becoming a major part of the transportation chain in Kansas City. Air cargo traffic has increased steadily during the last 3 years and is expected to continue increasing. Kansas City also has significant barge traffic located along the Missouri River, which is utilized to move products to major and secondary markets. With this level of transportation infrastructure and the favorable transportation rates on shipments originating from this market, Kansas City continues to see an influx of new companies joining the market.

The total size of the industrial real estate market in Kansas City is roughly 234 million square feet. The majority of this space is used for manufacturing and distribution, with flex space representing a little more than 4 percent of the overall market at about 10 million square feet. Kansas City has not experienced the level of big box bulk industrial development that many other major and secondary markets have experienced in the last several years. The average building size is 100,000 square feet or less, with typical tenants using 5,000 to 25,000 square feet. Access to a larger user base has been limited due to the lack of big box bulk space development. To compete with other markets for the larger users, the Kansas City market will need to develop big box warehouses in much larger size ranges.

New development projects are under construction in several parts of the metro area. In the Johnson County submarket of Lenexa, Block & Company is developing two new bulk warehouse buildings (69,000 and 44,400 square feet, respectively) in the College Crossing Business Park. In the downtown submarket, a new 424,000-square-foot production facility is nearing completion for the Kansas City Star Newspaper; in the Wyandotte County submarket, Rapid Built Properties is constructing a 127,000-square-foot bulk warehouse for a national tenant; in the eastern Jackson County submarket, A. Epstein & Sons is constructing a new 400,000-square-foot bulk warehouse for Medline; and in the southern Johnson County submarket, a new 265,000-square-foot bulk warehouse is being constructed for System Material Handling, which will own the building upon completion. Additionally, in the Wyandotte County submarket, Prime Investments has constructed a new 100,000-square-foot bulk warehouse on a speculative basis and a new major distribution facility is being constructed by FedEx in the North Kansas City (Clay County) submarket.

In addition to these projects, several other smaller buildings are under construction throughout the metro area, ranging in size from 10,000 to 65,000 square feet.

One product type unique to Kansas City is subsurface industrial space. Kansas City is home to the largest concentration of developed subsurface industrial space in the United States. With more than 25 million square feet of developed space, this product type is certainly a force in the market. These projects are developed within former subsurface mines that produced limestone and are very successful, with historical vacancy averages of less than 5 percent. Some of the more notable subsurface projects in Kansas City include Carefree Industrial Park, Hunt Midwest (Subtropolis), GeoSpace, Space Summit, Meritex and the Downtown Underground Industrial Park. Most of the lease transactions completed in these properties are for larger blocks of space, but space is available to accommodate users of almost any size. Lease rates average from $1.50 to $3 per square foot, with a modified gross industrial lease structure. Utility rates are much lower in these projects, and they offer a great savings opportunity for those users who do not require ceiling heights in excess of 16 to 18 feet. The activity level for subsurface space will be up during 2006 and it is likely that there will be some new construction occurring at these properties. LS Commercial Real Estate will be constructing, on a speculative basis, a 250,000-square-foot warehouse building at Carefree Industrial Park, which is scheduled for completion by mid-2006. Development of new buildings should occur at Hunt Midwest, Geospace and Meritex during 2006 as well.

The most active development areas within the Kansas City metro area are the northern and southern Johnson County submarket, the eastern Jackson County submarket and the North Kansas City submarket. Development will continue in these areas during 2006 as more product is added in these submarkets.

Rental rates for industrial space within the Kansas City market have been very stable. Average rental rates for new bulk warehouse spaces average $4.50 per square foot and the lease structures offered are both triple-net and modified gross industrial. Lease structure for industrial space within the Kansas City market is still predominantly quoted on a modified gross industrial basis, with some triple-net lease structures being offered on new buildings. The Kansas City market has been slow to embrace the triple-net lease structure, but there is a shift moving in that direction. Lease rates for second generation bulk warehouse space average from $3.22 to $3.36 per square foot and this space is typically offered on a modified gross industrial lease basis. Vacancy rates in this product type have dropped to approximately 8.5 percent, so the climate is right to add more product. Interestingly, even though the vacancy rate is low, lease rates have been stable with little upward movement. However, there are no longer any lease incentives being offered, which is an indication of possible upward movement in rental rates. The flex industrial market has not fared as well as the bulk warehouse market. The vacancy rate for this project type stands at 16 percent, which sounds very high in comparison to the bulk warehouse market. But, given the performance of this product type during the last 3 years, the current vacancy rate is encouraging. Historically, vacancy rates for this product type in Kansas City in the last 3 years have averaged more than 20 percent. This sector was hardest hit during the last recession, but is recovering very well at this time. The vacancy rate has been declining each month and is expected to continue to decrease, which is positive news. Rental rates for this product type are averaging $7.21 per square foot and should remain stable throughout 2006.

Kansas City's industrial real estate market should continue to perform well this year, and there will be some new and exciting opportunities as many of these new development projects come online during the year.

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

Kansas City Retail Market

The Kansas City metropolitan retail real estate market is as strong as ever with the combination of traditional power centers, lifestyle centers and the resurgence of urban projects. With the recent surge in residential condominium conversions in the urban areas, the need for urban retail development has risen to serve the increased population in the area, mainly between the Country Club Plaza and downtown Kansas City. The conversion trend has also been prevalent in retail. Blue Ridge Mall, Kansas City's first enclosed mall, is currently being demolished and replaced by a Wal-Mart Supercenter and other retailers. Enclosed malls are on the way out, while power centers and lifestyle centers are still highly successful. Urban development is very much on the rise, as the in-town population steadily increases.

One significant project on the west side of the city is The Legends at Village West. Located near Interstates 70 and 435, the center just opened in the expansive Village West mixed-use community. The Legends encompasses approximately 800,000 square feet of retailers, restaurants and entertainment venues. Other attractions within Village West include the 780,000-square-foot Nebraska Furniture Mart, a 175,000-square-foot Cabela's and the Kansas City Speedway. The Legends is anchored by a 14-screen movie theater and a Dave & Buster's.

On the east side of the Kansas City metro area, Bass Pro Shops is opening its fifth store in Missouri and its first Kansas City area location on the southwest corner of Interstates 70 and 470 in Independence, Missouri. The 161,000-square-foot Bass Pro Shops will anchor a 180-acre lifestyle development that will include 500,000 square feet of traditional retail, restaurants and specialty stores.

The most prominent urban development in Kansas City is The Cordish Company's Power & Light District. The Baltimore-based company is redeveloping nine city blocks in the heart of downtown Kansas City into a mixed-use district comprising retail, entertainment, office and residential components. The project is anchored by the new 700,000-square-foot H&R Block world headquarters and the 20,000-seat Sprint Center Arena.

For existing space, the vacancy rate for the Kansas City metro area is 9.05 percent. Retail vacancy in Kansas City proper is approximately 6.5 percent. In the submarkets, the lowest vacancies are in Liberty and Lee's Summit in Missouri. Both markets register retail vacancy at less than 2 percent. The highest vacancy rates are recorded in Southland and Blue Springs, Missouri, which have vacancies of approximately 20 and 21.5 percent, respectively. The average asking rental rates in the Kansas City metro area are $18.31 for Class A space and $13.32 for Class B retail.

A number of national and regional retailers have entered the market in the past year, including Lifetime Fitness, Crate & Barrel, Pei Wei, Bass Pro Shops, Ross Dress For Less and Dave & Buster's.

The submarkets to watch in the near future include Johnson County, Kansas, to the southwest of the city, Wyandotte County, eastern Jackson County in Missouri and North Kansas City. These areas have all continued to experience great retail growth. Regional development continues to thrive in all four directions in the Kansas City metropolitan area.

— Michael Johnson is a sales associate with The R.H. Johnson Company of Kansas City, Missouri.

Kansas City Multifamily Market

JP Morgan purchased City Place, a 288-unit complex, located in Kansas City, that was completed in 2002.

JP Morgan purchased City Place, a 288-unit complex completed in 2002. It was developed by Chicago-based Lincoln Properties. RREEF purchased Windsor on the Plaza, a 396-unit property completed in 1999 by JPI Development of Dallas. The price and terms are undisclosed but the value at both properties exceeds $100,000 per unit. CB Richard Ellis handled the sale of both properties.   

Rents and occupancy in the Country Club Plaza and historic Westport district led the metro area recovery in 2005, with multifamily occupancy rates rising to more than 95 percent in January. Strong demand led to rents averaging $1.15 to $1.25 per square foot throughout the year. The Plaza/Westport neighborhood is an established mixed-use neighborhood where new supply is constrained by development costs and condo conversion has depleted the availability of upscale rental living, setting the stage for rising rents.   

Near the Plaza/Westport area, two new projects will open in 2006. Reservations are now being taken for the one- and two-bedroom units in developer Bob Frye's new project. Founders at Union Hill is a 9.2-acre mixed-use, luxury urban development located on the southern edge of Hallmark's Crown Center mixed-use campus. Don McKenzie of Denver-based McKenzie House Development is building 4600 Madison, a 132-unit mid-rise over a parking structure located on the western edge of Westport. It will offer one-, two- and three-bedroom luxury rental units. The condo conversion trend has entrenched itself in the market as well. Approximately 900 Class A, B and C apartment units in the Plaza/Westport area have been converted from rental to condominium ownership since 2001.   

RREEF has purchased Windsor on the Plaza, a 396-unit property completed in 1999 by Dallas-based JPI Development.

— Bill Powell is a vice president in the Kansas City, Missouri, office of CB Richard Ellis.

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