CITY HIGHLIGHT, JANUARY 2009

KANSAS CITY
Justin Kaufmann, Bret Hansen and Olen Monsees

Kansas City Retail Market

For the past several years leading up to 2008, the retail segment of commercial real estate in the Kansas City Metro experienced staggering growth. In 2008, however, there was a marked slowdown that accelerated throughout the course of the year. This can partially be attributed to a necessary market stabilization resulting from overbuilding in previous years.

As space has noticeably sat vacant for several months or more, speculative retail developers have become much less aggressive. Exacerbating the problem has been the nationwide collapse in the financial sector and the virtual disappearance of capital that sent shock waves throughout the economy. The loss of confidence in the economy has caused consumers to cut back considerably on spending. The inevitable result has been a viscous cycle of job loss and reduced consumer spending, which has caused many retailers to miss their projections and cut back growth plans even further.

Despite the slowdown in the economy, Kansas City has shown some signs of resilience, with several retailers entering the market for the first time, especially during the first half of 2008. Several projects that had begun construction or gained strong momentum prior to the economic downturn have slowly edged forward. In Leawood, Kansas, Apple has opened a second area store at One Nineteen, a 120,000-square foot lifestyle center. The high-end center features other retailers that are new to the Kansas City market such as West Elm, Crate & Barrel, and Sullivan’s Steakhouse. Fogo de Chao is nearing its grand opening date on the Country Club Plaza in midtown Kansas City, and Von Maur recently made its long-anticipated metro area debut, opening in the last quarter of 2008 at Corbin Park, Cormac Companies’ 1.1 million-square-foot outdoor regional mall currently under construction in Overland Park, Kansas.

Other projects that opened in 2008 include Tiffany Springs Market Center, which is located at the well-known intersection of Interstate 29 and Highway 152 in Kansas City’s Northland submarket. The center features JC Penney, Target, The Home Depot and Best Buy. At the same intersection, Zona Rosa opened a second phase that is anchored by a new Dillard’s department store. The long-awaited Kansas City Power & Light district, developed by The Cordish Company, opened incredibly strong early last year and continues to draw huge weekend crowds for dining and entertainment.

Still, from a macro perspective, the current state of retail in Kansas City is not what it has been in years past. Many of the projects that were expected to open in 2008 are being pushed into 2009 and 2010, or beyond. In Lee’s Summit, Missouri, RED Development’s Summit Fair lifestyle center is pushing hard to open in late 2009, but it seems likely that many tenants besides Macy’s and JC Penney will not take possession of their space until 2010. The Metcalf South and Metro North mall redevelopments have stalled and are back in the planning stage. The Falls at Crackerneck in Independence, Missouri, successfully opened Bass Pro Shops, but has struggled to gain much of the co-tenancy it had originally anticipated. Additionally, national retailers such as Circuit City and Starbucks Coffee have closed multiple stores in the market.

The outlook for 2009 is that retail activity will continue to be slow. Look for new tenants to open in some of the more affluent and recession-resistant submarkets, but overall, retail experts predict more closures and a very slow lease-up pace for retail centers that are planned or under construction.

— Justin Kaufmann is an associate broker at LANE4 Property Group, a full-service retail real estate firm located in Kansas City, Missouri.

Kansas City Office Market

Beginning with the development of Corporate Woods in the 1970s, the focal point of the Kansas City office market has shifted from the CBD to Johnson County. Metro area trends in speculative office development call for buildings ranging in size from 80,000 to 150,000 square feet that are located in the suburbs and have ample space for surface parking.

It is difficult to spur development downtown, as the 19.4 percent vacancy rate and Class A rents demanding under $20 per square foot on a full-service basis fail to entice many developers to the area. Without some sort of government incentive, the cost of construction is too steep to make the numbers work downtown.

The market fundamentals in Johnson County provide a better opportunity for developers. The vacancy rate is 12.3 percent, with rental rates on newly constructed, Class A buildings in the $22 to $28 per square foot range.

OPUS, developer of the Corporate Ridge Office Park, which is located near Ridgeview and K-10 in Olathe, Kansas, has been one of the more active developers in the metro area. With the completion of their most recent building, Corporate Ridge I, the developer now has three buildings totaling approximately 300,000 square feet in the area.

Other developments in Johnson County include Block & Company Inc.’s Pinnacle Corporate Centre, Park Place and Mission Farms. Park Place and Mission Farms are upscale mixed-use developments with retail and office elements. Melanie Mann and Jeffrey Alpert developed Park Place; Mission Farms’ was developed by Weltner Development. Each property has experienced success in the initial phases and has plans for additional office space in the future.

There are three main reasons that office development tends to occur in Johnson County over other submarkets. The first factor can be summed up in one word: demographics. Johnson County is the best-educated, wealthiest and fastest-growing submarket in the metro area. Companies want to be located here in order to attract the most talent. The second reason has to do with market fundamentals. New construction has been absorbed, keeping vacancy rates low and rental rates among the highest in city. The third reason that development continues to occur here is the availability of land. While the Country Club Plaza has historically been a low-vacancy, high-rent submarket, there is much more green space to develop in Johnson County.

Unless something dramatic happens downtown to lure office users back to the CBD, Johnson County is expected to be the most logical choice for future development. While the downturn in the economy is expected slow the pace of development, it is likely to return to this part of town first.

— Bret Hansen is the research services manager for Kansas City-based Grubb & Ellis|The Winbury Group.

Kansas City Industrial Market

The Kansas City industrial sector is in the midst of a very cautious environment due to the fallout from the national credit crisis and subsequent slowdown in economic activity. These issues were simply too far reaching to think the Kansas City industrial market would not be affected.

That being said, through the first three quarters of 2008, Kansas City fared reasonably well in completing some major projects. This included the Kessinger/Hunter’s construction of the 600,000-square-foot speculative distribution building at 167th and Lone Elm Road in Olathe, Kansas; the 59,000-square-foot American Metals building at 101st and Lackman in Lenexa, Kansas; Corporate Express’ completion of a 250,000-square-foot building in Executive Park in Kansas City; LINC leasing a new 150,000-square-foot warehouse in Kansas City; and Pure Fishing’s 400,000-square-foot, build-to-suit distribution facility at 108th and North Congress in Kansas City.

The notable recent completions and developments now moving forward were initiated and funded before the current financial crisis stalled other projects. One of the more notable projects being delayed is the development of 360 prime acres in Riverside, Missouri, which was under contract with Block and Co. Inc. and scheduled to facilitate construction of more than 5 million square feet of industrial product. Block & Co. has recently terminated its interest and the project is again on the market seeking a developer.

Even with the difficulties in the economy, several new major projects are underway. These are primarily intermodal facilities with substantial development partners in place, such as the 1,000-acre KC Logistics Center in Gardner, Kansas. The project is jointly developed by BNSF Railroad and The Allen Group. BNSF, with its existing rail lines, connects to the ports in Los Angeles and Long Beach, California, and the park stands to benefit from its intermodal offerings. This project is in the engineering phase with roadway, utilities and other infrastructure being planned for 2009, with buildings being developed in 2010.

The second intermodal project is the KCS-CenterPoint Intermodal Center located at U.S. 71 and M-150 in south Kansas City. CenterPoint Properties and Kansas City Southern Railroad have partnered to develop this industrial park. Site work is complete on approximately 390 acres, with grading, streets and utilities in place. The project could see its first buildings constructed on either a build-to-suit or a speculative basis this spring, according to the Zimmer Cos.’ Mark Long, who is serving as leasing agent. This site is connected to deep-water ports in Lazaro Cardenos Mexico, via the KCS Railroad, and is in a position to take advantage of in-bound intermodal shipments from the Asian markets.

Another significant project underway is the 150-acre KCI Intermodal Business Center, which is being developed by the Kansas City Aviation Department and Trammell Crow on KCI International Airport property at Tiffany Springs Road and Interstate 29 in Kansas City.  The project calls for a 480,000-square-foot spec building to begin this year. The site will have direct access to the airport’s tarmac for air cargo shipped direct from planes to trucks or warehouses.

Planning to complement and enhance the KC Logistics Park, the Midwest Commerce Center, which is located at 167th and Old 56 Highway in Gardner, is a new business park that can accommodate up to 2.3 million square feet of product. Developed by LS Commercial and USAA Real Estate Company, an approximately 500,000-square-foot speculative building is in the works within the 151-acre project. Activity at Midwest Commerce Center is expected to kick into high gear soon, with the recent announcement that The Coleman Company of Wichita, Kansas, has selected the park as the location for its new 1.1 million-square-foot distribution center, largely because of its close proximity to the BNSF railhead and surrounding truck access. Jerry Fogel of Kessinger/Hunter brokered the lease transaction for Coleman.

These projects will present challenges as sales and leasing efforts ramp up, due to the current economic climate, but they all have strong ownership and should move ahead as business improves.

The overall Kansas City industrial sector remains in relatively healthy condition, with vacancy reported in the range of 6.4 percent, according to CoStar data. Rental rates for older, Class B industrial buildings of 100,000 square feet or greater measure approximately $3.20 per square foot. Class A, high-bay distribution buildings with excellent truck loading boast rental rates in the range of $4.25 per square foot triple-net. There is a limited availability of these larger buildings (100,000 square feet and up), which bodes well for the new developments’ potential to lease up.

Leasing activity in the first two quarters of 2008 was significant; however, brokers have been reporting a substantial drop-off in transactions in the third and fourth quarters. This is clearly attributable to the financial and economic difficulties that companies are facing at this time. There is a limited supply of large Class A or B industrial buildings, which could push the speculative development in the intermodal parks. Kansas City has missed several deals in recent years because of the lack of available big box warehouse facilities of 500,000 square feet or greater. With Kessinger/Hunter’s 600,000-square-foot project nearing completion and several additional projects due to come online this year, Kansas City will have the opportunity to complete some transactions for major distributors that have not had the benefit of so many high-quality opportunities in the past.

While the economic conditions may temper some activity, local brokers are still reporting several major prospects requiring substantial space in the market. Major transaction of this nature, such as Coleman’s recent lease, will help substantiate Kansas City’s position in the national logistics market and likely promote more activity. With Kansas City’s great location for distribution and the new intermodal centers underway, it is expected that a number of major industrial transactions will occur in 2009 despite the difficult economic conditions.

— Olen Monsees is a partner and president of Karbank Real Estate Company.

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