CITY HIGHLIGHT, JANUARY 2007

KANSAS CITY CITY HIGHLIGHTS
Jeffrey Berg, Kevin Nunnink, Paul Licausi and Brent Roberts

Kansas City Retail Market

During the next 3 years, retail development in the Kansas City metro area is expected to grow at a pace unmatched in recent history. According to Property and Portfolio Research Inc., Kansas City has 17.6 million square feet of new retail space in the planning, bidding or post-bidding stage. This ranks second in the nation, exceeded only by Phoenix.

Much of this growth is involves product that is replacing outdated and underperforming malls. CBL & Associate’s 1.5 million-square-foot Oak Park Mall in Overland Park, Kansas, and Simon’s 1.2 million-square-foot Independence Center in Independence, Missouri, remain strong. However, most of the city’s other regional malls are in the process of either complete tear-downs or major reconfigurations.

Alberta Development Partners is redeveloping Metcalf South, a traditional mall property in Overland Park, Kansas, into The Streets at Metcalf, a 1.3 million-square-foot mixed-use community.

Alberta Development Partners has joined with a local owner to completely recast two traditional mall properties. Metcalf South in Overland Park, Kansas, anchored by Sears and Macy’s, will become the Streets at Metcalf, a 1.3 million-square-foot mixed-use project featuring retail, office and residential components. Metro North in Kansas City’s Northland, which is anchored by Dillard’s, Macy’s and JC Penney, will become the Streets at Barrytowne. The reconfigured center will offer 2.3 million square feet of retail, office and residential space. Redevelopment of both centers will begin this year.

Eastdil’s Antioch Center, a retail destination located in Kansas City’s Northland and anchored by Sears, has received approval from the city and will commence a ground-up reconstruction sometime this year. Similarly, the 1960s-era Blue Ridge Mall on the Missouri side of the city has been completely demolished and replaced by a Wal-Mart Supercenter — opening this month — along with national junior anchors, restaurants and additional shop space.

The Streets at Barrytowne, another redevelopment of a traditional mall from Alberta Development Partners, will feature 2.3 million square feet of retail, office and residential space in Kansas City’s Northland when it is complete.

One of the more ambitious mall makeovers involves the former Mission Mall in Mission, Kansas. Previously home to two Dillard’s stores, this center was purchased and demolished by the Cameron Group, which is building a mixed-use project on the site that will feature specialty and big box retail, apartments, condominiums and office space in this centrally located inner ring suburb.

New retail construction is prevalent in nearly every pocket of the city, including several areas that until recently were considered retail laggards. The Cordish Company will open the first phases of its massive Downtown Kansas City Power and Light District in 2007, bringing new retail, restaurant and entertainment venues to an area that was desolate only a few years ago, but now boasts an influx of more than $2 billion in new investment. RED Development’s Legends project at the Village West continues to add premier tenants to an area that had almost no retail services a few years ago, but now draws from a 250-mile radius.

Traditional suburban development continues unabated, with more than 6 million square feet of major projects in the final planning or construction stages, including Cormac’s 1 million-square-foot Von Maur/JC Penney-anchored regional center in Overland Park, Kansas; RED Development’s Summit Fair lifestyle center and Developers Diversified Realty’s (DDR) City Walk power center, both in Lee’s Summit, Missouri; the second phase of Steiner & Associate’s Zona Rosa lifestyle center, Cousins Properties’ Target and Home Depot-anchored Tiffany Springs MarketCenter and the Lowe’s Home Improvement Warehouse-anchored Liberty Triangle project, all in Kansas City’s Northland; Block and Co. and RED Development’s Target and Lowe’s-anchored center in Blue Springs, Missouri; First National Development’s Plaza at the Speedway power center in Kansas City; and DDR’s Merriam Village in Merriam, Kansas.

— Jeffrey Berg is a vice president with Kansas City, Missouri-based Lane4 Property Group.

Kansas City Office Market

The majority of new office development in the Kansas City metro area is almost exclusively of the build-to-suit variety. Recent activity has included custom projects for Pharmaceutical Research, Quintiles, Capital One, Applebee’s, Grundfos and Farmers Insurance.

One significant build-to-suit project in the metro area is a $41 million, 185,000-square-foot office building developed by Opus Northwest off Highway 69 and 127th Street in Overland Park, Kansas. The five-story, Class A building was constructed for McLean, Va.-based Capital One Financial Corp., which will locate its home-loan division within the building. Capital One established a stake in the Overland Park market in 2006 when it acquired eSmartloan.com for approximately $155 million. The facility is expandable by up to 50,000 square feet over three new floors and features a 98-car parking deck.

Other notable office projects in the works in 2007 is Briarcliff Development’s 210,000-square-foot, Class A office building at Broadway and Highway 9. The building is set to break ground this winter for an early-2008 delivery. Park Place, a new mixed-use development in Leawood, Kansas, that is adjacent to Town Centre, will have a 7-story office tower featuring 235,000 rentable square feet, along with an additional 118,000 square feet of office product above the lower-floor retail space in multiple buildings.

Most of the new development activity for office product appears to be in the Johnson County submarket. This is the largest submarket in the metro area and offers a significant supply of undeveloped land at reasonable prices.

Sprint and Embarq may be the growth tenants of the future. Both companies seem to have a growing appetite for more space in the Kansas City market.

Very little speculative development has take place in the past few years, while positive absorption of existing product has helped to reduce the glut of vacant office space in the market. Rental rates have climbed approximately $1.50 per square foot since a year ago, but not to the levels needed to sustain new development. The Class A rental rates average approximately $20 per square foot, with a high of $30 per rentable square foot in the Country Club Plaza submarket and a low of $17 per square foot in the central business district.

Medical office buildings are still a strong sector, commanding the highest rents in the market at $26 to $30 per square foot. The development of new bank buildings has slowed down dramatically after serving as a significant catalyst in the development market the past few years.

The average vacancy rate for the Kansas City metro area office market is 14 percent, with a high of 21 percent in the south Kansas City submarket and a low of 9 percent in southern Johnson County submarket.

The Northland submarket, north of the Missouri River is a market to watch for future activity. The proliferation of executive housing projects is leading to new office developments, and spurring a run of redevelopment ventures, including work on the 11500 Building at 11500 NW Ambassador Drive and the 260,000-square-foot Ambassador Building at 11125 NW Ambassador Drive near Interstates 29 and 435.

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

Kansas City Industrial Market

It is interesting to see what real estate executives, brokers and other professionals involved in the industrial sector think of Kansas City. Many still think of Kansas City as a small-town market with little to offer. However, once these professionals visit the Kansas City market, their view of the area’s industrial marketplace changes dramatically. Kansas City is one of the fastest growing cities in the Midwest, and is quickly becoming a market of choice for distribution and manufacturing operations. The greater Kansas City area is now on the radar screen for major corporations that are looking for new facility locations.

The industrial real estate market in Kansas City has been very stable for some time; the vacancy rate during the past 12 months has been in the 8 percent range. Throughout 2007, the vacancy rate is expected to remain in this same range. It is typical, with vacancy rates this low for a prolonged period of time, to see a high level of new development. There has been new development in Kansas City, but, given the market’s conservative tendencies, the new development has occurred at a very controlled pace, which has helped keep the industrial real estate market very stable. The development trend for bulk industrial warehouse space has been 80,000 to 150,000-square-foot buildings that are designed to be divisible into 20,000 to 25,000-square-foot increments. These unit sizes are being widely built to match the typical tenant space requirements found in the Kansas City industrial market. Lease rates for this type of new product are ranging from $4.00 to $4.65 per square foot. You will find lease structures being offered on either a triple-net or modified gross industrial basis, depending on the location of the project.

Some of the new speculative projects that have been constructed or will come online in 2007 include a new 150,000-square-foot bulk warehouse that is being developed by Prime Investments and will be located off Interstate 70 in the Wyandotte County submarket; Hunt Midwest Development’s recently completed 154,000-square-foot bulk warehouse known as Hunt Midwest Business Center I in the Kansas City north submarket; and Block & Co.’s two recently completed distribution buildings totaling 140,000 square feet in its College Crossing Business Park located in the Lenexa, Kansas, submarket. More projects in the same size range are expected to come online this year. Look for increased development of bulk warehouse product to occur in the Kansas City north submarket, and in communities located on the Kansas side of the market such as Shawnee, Olathe and Gardner. These areas are garnering interest due to the availability of industrial land ready to build on and excellent highway access to these western and northern parts of metro Kansas City.

The majority of available space among existing industrial properties in Kansas City is primarily class B and C product. Rental rates range from $2.50 to $3.75 per square foot for these existing properties; the lease structure for these properties is modified gross industrial. This year, there will be minimal vacant space to choose from among existing Kansas City industrial properties, which is reflected in the market’s low vacancy rate.

The flex space sector in Kansas City has experienced higher vacancy levels in the past 24 months compared to the bulk warehouse market. However, the vacancy rate for flex space is now down to 9 percent and new development has started on flex product. Watkins & Company completed a new flex warehouse building in the Kansas City International Airport submarket and LS Commercial Real Estate has completed a new 25,000-square-foot flex warehouse in its Lenexa Commerce Center in Lenexa, Kansas. Lease rates for new flex product range from $6 per square foot on a triple-net lease structure to $11 per square foot on a modified gross industrial lease structure. Continued development of flex space will continue during 2007, with new projects occurring in the Shawnee, Lenexa and Olathe markets on the Kansas side and in Kansas City north, Liberty and eastern Jackson County markets on the Missouri side.

Big box distribution centers make up a significant new tenant class entering Kansas City. This is a new trend and the development of big box industrial facilities is expected to pick up during the next 24 months. Some of the new big box distribution projects under development in the area include a 702,000-square-foot distribution center for Musicians Friend; a 500,000-square-foot distribution center for CNH Case New Holland; and a 400,000-square-foot distribution center for Pacific Sunware. These projects represent a growing trend in the market; corporate users are finding Kansas City to be a desirable location for large big box distribution centers. These users are drawn by the outstanding transportation options, large labor pool and central location. Couple these new projects with the major announcement by BNSF Railroad regarding the development of a major rail center in Gardner, Kansas, in the southwestern part of the metro area, and this really adds to the allure of the market for these types of users.

New speculative developments of big box industrial facilities (more than 400,000 square feet) are very limited at this point — all of the big box facilities mentioned are either build-to-suit projects or will be owned by the corporate user. The first speculative development of a big box facility in the market could be by LS Commercial Real Estate, which is in the final design stage for a 500,000-square-foot speculative big box facility that is expected to break ground this year in the southwestern part of the metro area. It is likely that one or more national developers will be constructing big box facilities in the Kansas City market during the next 24 months. Given all this activity, it is evident that the greater Kansas City area is quickly becoming a market that is in demand.               

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

Kansas City Multifamily Market

It is no secret that when interest rates rise, many would-be homebuyers are priced out of the market and forced into apartments. While interest rates are still historically low (rates were as high as 16 percent in 1982), the apartment market during the past year has been the beneficiary of a faltering housing market. According to the Home Builder’s Association of Greater Kansas City, single-family residential permits were down 18 percent through September 2006 when compared to the same period in 2005, while multifamily permits for rental units were up more than 150 percent (1,994 permits issued through September 2006, as compared to 780 through September 2005). The submarket showing the most growth is Clay County; while only 16 permits were issued through September 2005, nearly 800 permits were issued through September 2006. Also showing remarkable growth is Johnson County, where five times more permits were issued through last September than during the same period in 2005. See the chart below for more details on the growth:

The apartment market in Kansas City is gaining momentum; occupancies and rents are increasing, while concessions are decreasing. A rise in employment in the past 12 months has also helped the apartment market. Unemployment fell from 5.3 to 5.1 percent and 7,900 jobs were created during the 12-month period ending September 2006. Additionally, job growth has continued in the Kansas City metro area for 31 consecutive months. The Country Club Plaza residential area remains the strongest submarket, with Class A rents of approximately $900 per unit and a vacancy of 5.5 percent. The eastern Jackson County submarket has the highest vacancy at 9.4 percent and average Class A rents of $678. Overall vacancy for the Kansas City metro area is 7.4 percent and the average rental rate for a Class A apartment is $759. See the chart at the top right of the page (a) for more details.

According to research provided by Real Capital Analytics (RCA), apartment sales volume is up 170 percent to $636 million through the 12-month period ending September 2006. RCA also reports that the average sales price per unit across the metro area is $67,178, with an average cap rate of 7.1 percent. The largest group of buyers has been private out-of-state investors, with 37 percent of the purchase volume, followed by private in-state investors with 24 percent of sales volume. The largest group of sellers has been REITs with 29 percent of sales volume, followed by private in-state investors with 24 percent. Across the United States, the largest buyers are private out-of-state investors (22 percent) followed by condo converters (21 percent); the largest sellers are private in-state investors, with 40 percent of sales volume, and private out-of-state investors, with 21 percent.

There were a number of major transactions closed in the second half of 2006, including the $37.5 million sale of Cornerstone, a 420-unit apartment complex at 3950 S. Jackson Drive in Independence, Missouri. America First Investors is closing on the acquisition of the property from an undisclosed seller. The price per unit totaled approximately $89,823 for that transaction. Other transactions include Timberland Partners JV Sterling’s acquisition of the 317-unit Heritage Hills complex in Mission, Kansas, from Mission Associates for $21.5 million; OPV Associates’ $9.73 million dispostion of the 181-unit Overland Park Village to Preston Court LLC; and Plaza Garden Partners’ $25.65 million purchase of the 250-unit Plaza Gardens South community in Overland Park.

Overall, the market seems to be in the later stages of recovery and moving into the expansion phase. The investor market is active and building permits have increased drastically during the past year. Boasting rising rents, decreasing vacancies and strong employment, the apartment market in Kansas City shows promise.

— Kevin Nunnink is the director and principal, and Carrie Coulson is an analyst, with Integra Realty Resources in Westwood, Kansas.

DEVELOPMENT PLAN TAKES OFF AT KCI

The development initiative at the Kansas City International Airport (KCI) that was put in action by the Kansas City Aviation Department (KCAD) in 2004 is in full swing now. The airport implemented a $258 million terminal improvement project in 2004, which added 50 percent more space for restaurants and retail stores, created wider and more secure department lounges, updated restrooms and added more Skycap stations. On the airport grounds, a $400 million infrastructure improvement plan was completed in 2005, giving KCI the necessary tools to become a major cargo aviation hub in the United States.

KCI, which sits on approximately 10,000 acres and has more than 7,000 acres available for development, is specially suited to meet the needs of freight cargo and logistics users, with a major interstate network and the nation’s second largest railway system at its disposal. On site, KCI has six air freight facilities totaling more than 300,000 square feet of office and warehouse space.

To manage and maximize the airport’s future growth potential, KCAD created a comprehensive master plan for the development of the airport’s expansive available land parcels. Also, KCI sought out and has recently found a development partner for the KCI Business AirPark, a 640-acre tract offering direct runway access.

Dallas-based Trammell Crow Company, with extensive experience in airport-based industrial developments, has been hired as master developer for the AirPark, which is located on the southeast corner of the airfield. Trammell Crow is aiming to attract a collection of industrial tenants to the park, including air cargo facilities, logistics firms, distribution facilities, light manufacturing and commercial space. To accelerate on-airport development, the KCAD has plans to extend Tiffany Springs Parkway westward from Interstate 29 along the southern boundary of KCI to make the AirPark more accessible to tenants.

With a strong master plan in place and an experienced partner leading the development, KCI’s Business AirPark is set to lead the way for steady growth and increased occupancy in the airport’s industrial submarket in Kansas City.

— Kevin Jeselnik



©2007 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.




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