CITY HIGHLIGHT, JULY 2005

KANSAS CITY CITY HIGHLIGHTS
R. Lee Harris, Emily Gallagher, Joseph Accurso, Brent Hansen

Kansas City Office Market

The Kansas City office market is slowly rebounding with three consecutive quarters of declining vacancy rates. Rates quickly jumped from 17.8 percent at the end of 2003 to 20.1 percent in the second quarter of last year. After surpassing the 20 percent mark, however, office vacancy rates have been declining slowly since.

The 17-story, 525,000-square-foot H&R Block Center will serve as the company’s world headquarters. The building, which was designed by 360 Architecture, will be located at 13th and Grand streets in Kansas City.

An area wide recovery will need to be led by either the downtown or South Johnson County submarkets or a combination of both. These two submarkets make up more than 56 percent of the office space in the metropolitan statistical area (MSA).

The downtown submarket is the odds-on-favorite to lead the revival of the Kansas City office market, with construction underway on Sprint Arena, the H&R Block Center, Kansas City Live!, the Federal Reserve Bank and the new IRS Building, as well as unprecedented residential development. The vacancy downtown at the end of the quarter was 20.9 percent, an increase from 18.2 percent at the end of last year. The upsurge was largely due to AT&T vacating space within Town Pavilion.

The South Johnson County submarket also has a tremendous affect on the overall market. It is no coincidence that the Kansas City MSA and South Johnson County trends tend to mirror one another. This is evidenced by the vacancy rate in South Johnson County, which also has been on the decline after peaking at 23.2 percent in the third quarter of last year. Since then, vacancy has dropped to 21.2 percent as a result of the absorption of nearly 270,000 square feet. The trend of 3 straight quarters of decreased asking rents appears to be slowing, but likely will continue for the next few quarters as the market tightens.

The most desirable of locations remains the Plaza/Midtown submarket. Vacancy in this submarket is 9.7 percent with Class A asking rents of nearly $25 per square foot. The 270,000-square-foot Plaza Colonnade building was added to the supply in the fourth quarter of last year. This submarket responded with a combined absorption of just less than 300,000 square feet during the past 2 quarters.

While the Plaza absorbed space and increased rents, the Kansas City North submarket did just the opposite. The Class A asking rents fell from $19.32 per square foot a quarter ago, to only $17.92 in the first quarter. This was a result of the asking rents on the largest space in the submarket being reduced to $17 per square foot from $20 per square foot. The 230,000-square-foot vacancy in the Farmland Building, off Interstate 29, represents more than 34 percent of the vacant space in the submarket. Due to the small size of this submarket, the recovery could be much quicker, as one large tenant can make a remarkable impact.

— Emily Gallagher is marketing services manager with Kansas City, Missouri-based Grubb & Ellis|The Winbury Group.

Kansas City Industrial Market

More build-to-suits are being sought out as an alternative to existing space. This is due to upgrades in quality amenities such as clear heights, truck turnarounds and cross-docks. Kansas City has seen a lot of this trend, especially in the 100,000-square-foot plus distribution spaces. Through mid-year 2005, slightly more than 1.4 million square feet of space has been added or is under construction in the Kansas City metropolitan area. The new construction has minimal speculative development.

Some of the more notable developments include the Kansas City Star production plant in Jackson County, Kansas, totaling 425,000 square feet and the Medline Distribution facility located in Executive Park totaling 400,000 square feet. The Herf Jones production facility in Edwardsville, Kansas, is under construction with a total of 130,000 square feet and Premier Investments is developing a new 100,000-square-foot speculative building at 1st and Kansas avenues in Armourdale. In Johnson County,  Block & Company is developing Phase II of College Crossings, which is comprised of two buildings totaling 115,000 square feet of office/warehouse space.

Since most of this development is build-to-suit, there will be little impact on the market and little space to absorb. Johnson County is ready for some limited speculative development and Armourdale has low vacancy rates, especially for Class A-type distribution buildings.

Johnson County always has been the most active in terms of speculative development of office/warehouse and distribution product. Most of the growth follows Interstate 35 to the southwest into Johnson County. Currently, a high percentage of total square footage developed has been concentrated in Jackson County due to size of the Kansas City Star’s printing facility and Medline’s distribution facility.

Current vacancy rates for the metropolitan area hover around 9 percent. Specifically, Johnson County is at 8.8 percent; Wyandotte is at 7.7 percent; Jackson is at 9.9 percent; Clay County is at 8.6 percent; and Platte County is at 8 percent.

Areas to watch for future activity include Riverside, depending on what happens with the proposed development at Interstate 635. Plans originally called for office/warehouse space and light industrial, but the city of Riverside now is trying to explore a retail project similar to Zona Rosa in an attempt to capture the sales tax. Also, Johnson County will continue to be active in the foreseeable future.

— Joseph Accurso, SIOR, is a senior sales associate with Kansas City, Missouri-based Kessinger/Hunter & Company, a Cushman & Wakefield Alliance firm.

Kansas City Multifamily Market

From 1997 through 2002, the Kansas City multifamily market saw the construction of 23,600 multifamily units. In 2003 and 2004, multifamily permits dropped to approximately 5,400 but the saturation point already had been reached. Occupancy in 2003 was difficult, particularly with the overall market economic occupancy factor dropping to 87.92 percent. The market began to rebound last year with year-end economic occupancy pushing to 88.82 percent, and during the first six-months of 2005, economic occupancy is projected to reach 90 percent. A strong single-family market along with apartment saturation in selected sectors contributed to the softness. Johnson County, Kansas is leading the recovery with Class A physical occupancy increasing nearly 5 percent during the past 18 months. Low interest rates continued to fuel single-family home sales in this submarket, further widening the imbalance between rents versus principal and interest payments on a home mortgage. As a result, rental rates declined in 2004 and have remained flat during 2005. 

Downtown Kansas City, Missouri has been a hotbed of activity with more than $3.5 billion in construction underway. Numerous office buildings have been converted to loft apartments and condominiums. The new residential product has been popular but supply continues to outstrip demand. Downtown economic occupancy rates are still below 85 percent causing many projects to suffer from negative cash flow. A number of historic conversions have been completed with the strategy to maintain the properties in a rental mode for 5 years then convert to condominiums. The 5 year rental configuration protects the historic tax credits that are used as a funding source. Many of these projects are designed to lose money during the rental phase with developers anticipating recovering their losses when they are sold as condominiums. 

A few apartment sales occurred last year and early this year with Class A capitalization rates in the 7 percent range. There were Class B and C sales with capitalization rates ranging from 8.75 percent to 11 percent. A few transactions were completed involving 1031 tax-deferred exchanges; however, so many apartment investments have traded during the past 5 years that few opportunities remain — a condition experienced in many markets across the country.

The Country Club Plaza is in the midst of its largest condominium conversion boom ever. One developer paid more than $200,000 per unit for a high-rise rental property that is being converted to condominiums. Conversions of long-time rental properties are bringing prices of $300 per square foot and higher. The reduced supply of rental housing is putting upward pressure on rental rates in this area.

The 2005 outlook is for continued improvement in economic occupancy as rental concessions are reduced. It is doubtful that the market will see much of an increase in rental rates with the exception of the Country Club Plaza. Condominium conversions on the Plaza and Downtown will continue and a few apartment sales will occur. New construction will continue at a slower but steady pace. As a whole the Kansas City multifamily market is strengthening and continues to be the real estate investment of choice.

— R. Lee Harris, CRE, CPM, is president of NAI Cohen-Esrey Real Estate Services, Inc.

Kansas City Retail Market

Lifestyle centers have increased in popularity in recent years. The submarkets that do not have them want them, and those that do have one want another. Considering the popularity of the Country Club Plaza, it’s surprising that this craze did not catch on earlier. Now, nearly every submarket in the city has one under construction or planned.

Zona Rosa, the most significant addition in Platte County, continues to add stores. The Majestic Theatres and Comedy Club will have its grand opening this month, and Sharper Image recently opened a store. This development has had a negative affect on Metro North Mall retaining and attracting quality tenants. The mall has not been able to attract an anchor since Montgomery Wards left years ago. The food court that was planned was never completed and the mall has grown increasingly dark.

While the Plaza represents the past and present of Kansas City retail, Kansas City Live! represents the future. The Cordish Company is responsible for the development, and has been successful in similar projects, including The Power Plant in their hometown of Baltimore. Cordish has yet to announce any tenants for the 450,000-square-foot project.

Bass Pro Shops will be constructing its fifth Missouri location at the southwest quadrant of Interstate 70 and Interstate 470/Highway 291 in Independence. Bass Pro will include a lodge-themed hotel and will serve as the anchor for a 180-acre lifestyle center that will consist of an additional 500,000 square feet of retail and restaurant. The retailer’s first Kansas store, located on Interstate 35 at Renner and 119th in Olathe, will include a 3-acre lake and 110,000 square feet of space.

It’s only natural that the retail market in Johnson County is the strongest in Kansas City. The impressive Johnson County demographics fuel retail growth as this county has the area’s highest household median income and a population base that is always expanding. The retail performance in Johnson County has led to a demand for additional space as there is a variety of centers in the construction phase or in the planning process including; Merriam Pointe, Mission Farms, Nall Valley Shoppes, Cornerstone, Park Place and One Corbin Park.

The image of Wyandotte County is being transformed by The Legends, a retail development surrounding the Kansas Speedway. Dave & Buster’s, an arcade, bar and restaurant combination and the 14-screen Legends Theatre are a couple of the many new tenants of The Legends. Piper Plaza, a 55,000-square-foot retail center next to the Legends, is another development that is in the planning stage. Ten million people are estimated to visit this area each year.

Class A shops asking rents have remained in the $17 per square foot to $26 per square-foot range for triple-net leases depending on submarket, while Class B average asking rents are in the $9 to $16 range. Lease rates for a Big Box retailer are $4 to $8 range. 

With retail expansion occurring throughout Kansas City, consumers may be less likely to drive across town to visit the traditionally strong retail centers. This coverage potentially may reduce traffic at destinations such as the Plaza and Oak Park Mall. Also, older strip centers are going to feel the squeeze, which will push vacancy rates up.

— Brent Hansen is research services manager with Grubb & Ellis|The Winbury Group.

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