Retail Market Shines Brightest in Kansas City
Debora Field, Olen Monsees, Ronald Castle and David Block

Like much of the country, the office market in Kansas City’s suburbs has been experiencing low levels of activity and high vacancy rates. However, interest from prospective tenants is picking up, and deals are expected to follow later in the year. Due to little speculative construction, vacancy rates in the industrial market have remained steady at 10 percent to 11 percent. High residential growth in the suburbs has led to overbuilding in the multifamily market, and supply has outperformed demand. As a result, vacancy rates in Kansas City’s multifamily market are in the 80 percent to 90 percent range. The good news is that this high residential growth in the suburbs is spurring retail development.

Office

In the first half of 2003, vacancy rates in Kansas City’s office market fluctuated between 20.6 percent and 21.2 percent. According to first-quarter data from Colliers International, a vacancy rate of more than 20 percent puts Kansas City in the company of “high-flying,” first-tier markets such as Dallas, Boston and San Francisco. While these cities have vacancy rates of more than 20 percent, they are also high growth markets that historically have experienced boom periods with plenty of construction and significant increases in rental rates.

By early spring, the Kansas City market appeared to have stabilized at this level. There was a low volume of activity early in the year, which produced little change in the market. However, in recent weeks, the level of interest from prospective tenants has picked up. Deals should follow toward the end of 2003 and into 2004, but this does not guarantee improved market conditions.

Even though Sprint vacated more than 2.5 million square feet of leased space in its move to its corporate headquarters, it still has excess capacity. The company will probably return an additional 750,000 square feet of leased space to the market by the end of the year. Most of the space to be vacated is in the College Boulevard Corridor or in South Kansas City. Additionally, Farmland Industries may add 200,000 square feet of vacancy near Kansas City International Airport in the Northland market.

In today’s market, new projects require a tenant’s commitment for a substantial part of the planned space. At the end of 2003, the law firm Shook Hardy & Bacon will occupy an entire new 620,000-square-foot Class A building in the Crown Center market. In the move, the firm will vacate 350,000 square feet in One Kansas City Place, a Class A building in the downtown loop. Crown Center is located south of downtown.

The Federal Reserve Bank is considering a similar move. Its 21-story building downtown is the oldest in the Federal Reserve system. The architectural firms of Ellerbe Becket and Pei Cobb Freed & Partners have been selected to design a new building of about 600,000 square feet. Although civic leaders encouraged the Federal Reserve to select a location on the eastern edge of downtown, it chose a site at 29th and Main streets, in the Crown Center area.

Despite these two substantial moves, downtown boosters are not glum. The law firm Stinson Morrison Hecker plans to move 250 lawyers and staff from the Crown Center area, and consolidate the firm into 160,000 square feet in the 1201 Walnut building. The architectural firm of HOK Sport+Venue+Event has committed to 80,000 square feet in a 180,000-square-foot building in the River Market on the north side of downtown. Furthermore, in May, the Missouri General Assembly passed a Downtown Economic Stimulus Act, which will allow up to one-third of new state sales taxes and half of new state income taxes generated by new downtown development to be returned to the downtown area.

Residential and entertainment developments are also occurring in downtown and Crown Center. For example, a $250 million renovation of Union Station was completed in 1999. It now includes an interactive museum called Science City. In addition, new downtown apartments include 118 units in Library Lofts East, completed last year, and 161 units in Library Lofts West, to be completed this year. A planned renovation of the 35-story Fidelity Bank & Trust Building will include 180 apartments. The former Western Auto headquarters building, which now contains 99 residential condominiums, was reopened early in 2003. In recent years, suburban markets have been vigorous, but Kansas City’s urban markets currently are experiencing the greatest activity.

— Debora Field is vice president, principal and director of office sales and leasing in the Kansas City, Missouri, office of St. Louis-based Colliers Turley Martin Tucker.

Industrial

The Kansas City industrial real estate market has been experiencing a low level of leasing and development activity for the past 2 years. However, according to brokers in the area, conditions are improving.

For example, the consolidations, mergers, plant closings and bankruptcies that started in late 2000 and 2001 have slowed. With little speculative development underway, the market is holding in the 10 percent to 11 percent vacancy range as reported in the Society of Industrial and Office Realtors’ Comparative Statistics for 2002. However, this is up from a normal vacancy rate of 6 percent to 7 percent experienced through much of the 1990s.

Speculative development has been limited to a few projects. One is a 100,000-square-foot distribution building constructed by KC West Bottoms. This location at 750 Wyoming in Kansas City, Missouri, is a redevelopment in the central industrial district. The building has a 26-foot clear height and is priced at $3.90 per square foot on a gross basis. Jon Hitchcock, real estate leasing agent for MC Lioness, says that interest in the location has picked up in the last 60 days with most prospects looking at spaces in the 40,000-square-foot to 60,000-square-foot range, but no leases are signed.

Another speculative development — a 90,000-square-foot distribution and office building at 10960 N. Congress in the Airworld Business Park — is being completed in Kansas City, Missouri, by Watkins & Company. It is being offered at $4.75 per square foot net. Rick Watkins, president of the company, indicated that activity has been good, but that tenants have been reluctant to commit to space.

Some of the traditional speculative developers in the Kansas City market, Karbank Investment Company — Industrial Park Realty, Trammell Crow Company, and Block & Company — have continued to be on the sidelines for the past year.

Speculative buildings in Kansas City have always been modest in size. With Kansas City being located somewhat in the middle of St. Louis, Minneapolis, Denver and Dallas, the area has not attracted the big box distribution facilities (300,000 square feet to 500,000 square feet) that have been common in other markets.

Second-generation midsize distribution buildings that range between 25,000 square feet and 50,000 square feet being offered for lease currently have a shelf life of 9 months to 1 year. These properties are being offered for rent in the range of $3.50 per square foot to $4.50 per square foot on an industrial gross basis plus free rent incentives. These are still functional buildings for many companies, but there has not been enough tenant interest to lease much of this inventory due to the slow activity in the area.

The, suburban industrial parks in Lenexa, Kansas, are showing the strongest activity with several recent deals. American Metals Company leased 28,000 square feet in the Lackman Business Center with the lease negotiated by Jack Allen of B.A. Karbank & Company and David Hinchman of CB Richard Ellis. DaVinci Materials leased 31,000 square feet at Kansas Commerce Center with a lease negotiated by Mel Haken of Block & Company and Dan Jensen of Kessinger/Hunter. The transactions ranged from $4.25 per square foot to $4.55 per square foot net. Tenants are finding a variety of buildings to preview and landlords who are willing to negotiate on fairly reasonable terms.

The Kansas City area has seen interest in development of owner/users and build-to-suit projects. Serilogical has purchased 12 acres in East Hills Business Park in Lawrence, Kansas, and plans to develop a 47,000-square-foot industrial/tech building. Bids are out for construction of two build-to-suit projects — a 100,000-square-foot warehouse facility, and an approximately 250,000-square-foot distribution and office facility — at the Congress Corporate Center at 112th Street & N. Congress in Kansas City, Missouri.

With a limited number of national corporate headquarters in Kansas City, the homegrown companies are most likely to generate future activity. Some national companies wanting regional distribution and warehouse facilities to serve this Midwest market also will provide activity in the area. Broker open houses and “price-reduced” flyers are indicating a buyer/tenant market for the near future, and while the market is improving, it may be a long road back to the activity level of the ‘90s.

— Olen Monsees is president of Kansas City, Missouri-based B. A. Karbank & Company.

Multifamily

Through the past decades, Kansas City, and its surrounding area, have been characterized by a steady but slow growth in population. The majority of the growth has occurred in the southern Johnson County area, the Lee Summit/Blue Springs area and, most recently, in the North of the River area, which has resulted in new multifamily developments in all of these areas.

Many of the new multifamily projects are Class A properties. They offer amenity packages that include individual attached garages; in-unit, full-sized washer/dryers; raised ceilings; crown molding; built-in microwaves; intrusion alarms; and high speed Internet access. These units command rates starting at 90 cents per square foot. Along with these projects — which are primarily two-bedroom apartments — several new duplex and townhouse communities have come online in all areas of the market. While these offer many of the same conveniences, their rents are lower per square foot in order to be competitive.

The Kansas City downtown area has experienced the development of several new loft units through the complete rehabilitation of old buildings. Many of these projects have been made possible with various government tax incentive programs. These units are competitive with rental rates comparable to suburban properties, which has helped revitalize multifamily living in the downtown corridor.

All of these new and rehabilitated properties have added, expanded and modernized the Kansas City multifamily portfolio of available housing. However, this expansion has come at a price to vacancy rates.

The overall occupancy rates for multifamily units in Kansas City is in the upper 80 percent and lower 90 percent range in most areas of the city. Three factors have combined to create the current, high vacancy situation. First, the number of new units in the market has exceeded the demand, which will produce a domino effect through all of the classes of units until these units are filled. Second, the record low interest rates have enticed many renters to buy single-family homes with monthly mortgage payments slightly above current rental rates. Third, the city’s unemployment rate has increased during the weakened economy. Work force reductions, such as layoffs at Sprint, have softened both the apartment and the office markets.

To improve these occupancy rates, the professionals in the industry have offered a variety of incentives to prospective residents including trips and free rent. However, the causes of this situation are still in place, and it will take time and economic improvement to fill the excess units. The future of the rental market will depend on improvements in the economy, the creation of new jobs and a slowdown in new apartment construction.

— Ronald Castle is senior vice president for Kansas City, Missouri-based Curry Investment Company.

Retail

In the past, Greater Kansas City has been labeled as the “Cow Town of the Midwest.” In terms of retail development, Kansas City is actually the “Cash Cow Town of the Midwest.” With regard to land area, Kansas City is one of the largest cities in the United States, encompassing all or parts of 14 counties. Kansas City straddles the state line between Missouri and Kansas, and it includes more than 35 individual cities. Retailers have been active in the suburbs of Olathe, Lenexa, Overland Park and Shawnee on the Kansas side, and in Lee’s Summit, Blue Springs, and Liberty on the Missouri side, to name a few.

The Kansas City market, throughout the history of shopping center development, has been balanced, consistent and virtually unaffected by fluctuations in the national economy. During the past 24 months, the majority of retail development has been focused on big box power shopping centers, small neighborhood retail centers and lifestyle shopping centers. The majority of the retail growth in the suburbs has been on the major commuter collector streets, and the typical super box, big box and junior box retailers continue to locate around each other on the major intersections of the individual suburbs. Kansas City, during the past year, has seen a number of large big box shopping centers developed with small amounts of speculative space or small shops constructed. Because of this trend, there is little small shop vacancy, if any, in the new suburban shopping centers.

For the past decade, Johnson County, including Lenexa, Overland Park and Olathe, has been the hottest suburban areas for shopping center and commercial development. With the continued fast-paced residential growth in the majority of Kansas City’s other suburbs, commercial shopping center and restaurant development is continuing to grow in greater Kansas City. This includes Kansas City, Kansas, which has seen little new commercial development in more than 20 years.

Some of the anchor retailers driving this continued retail development include Costco, Super Wal-Mart, Wal-Mart Grocery, SuperTarget, Target, Lowe’s Home Improvement Warehouse, The Home Depot, Linens ‘n Things, Best Buy, T.J. Maxx, Bed Bath & Beyond, Pier 1 Imports, Cost Plus World Market, OfficeMax, Office Depot, Dick’s Clothing and Sporting Goods, Ultimate Electronics, Whole Foods Market, Borders Books & Music, and Barnes & Noble. Ultimate Electronics, Whole Foods Market and Cost Plus World Market are a few of the big box retailers that have recently entered the Kansas City market.

The vacancy rates in the new commercial areas of the suburbs are low because there has been little shake out of new retailers or big box users. Overall, the greater Kansas City area has low vacancy as well. The overall average is less than 6 percent, and the majority of the vacancy is in older Class B and Class C shopping centers, which have a significant amount of small shops. Some of the vacancy has been caused by bankruptcies and/or closings including those by large national retailers such as Kmart, Phar-Mor, Payless Cashways and Wards. Many of these vacant buildings have been re-occupied or redeveloped, leaving few big boxes available.

Land prices and lease rates are continuing to inflate in many of the suburbs on major intersections, which are planned for future retail development. Ground prices for pad sites now sell between $15 to $25 per square foot, and lease rates on small shops range from $17 to $30 per square foot on a triple net lease basis. Big box retailers’ prices are based on building costs but are typically in the low to middle teens on a turnkey basis. Rates in the past have been averaging between $12 and $16 per square foot. It has only been during the past 24 months that these rates have significantly inflated due to the demand for quality co-tenancy on popular corner intersections in strong fast-growing suburbs.

The suburbs of greater Kansas City reflect the majority of new retail development. However, there are sporadic redevelopments of centers in the inner core of greater Kansas City, but they are few and far between. The majority, if not all, of these new suburban developments in greater Kansas City are enhanced by available financing vehicles in different municipalities — including tax increment financing and transportation development districts — which have significantly reduced the developer’s expenditures thereby allowing the developer to pass these savings on to retailers.

The movement to the suburbs of greater Kansas City should continue for at least the next 24 months. Low vacancy rates and strong residential growth makes the overall market attractive to retailers.

— David Block is senior vice president at Kansas City, Missouri-based Block and Company, Inc., Realtors.

©2003 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.