CITY HIGHLIGHT, SEPTEMBER 2006

SUBURBAN KANSAS CITY CITY HIGHLIGHTS
David Block, Pat Murfey, Phillip James and Mac Crouther

Suburban Kansas City Retail Market

The suburban Kansas City retail market has experienced continued, strong growth on the heels of the market’s explosive residential growth during the past decade. According to David Block, a principal at Kansas City-based Block & Co. Inc. Realtors, this housing boom has spurred the development of numerous power centers and lifestyle concepts.

“All areas are seeing a substantial amount of new development, both residentially and commercially,” says Block. “There is a little more vacancy this year than last year because of the volume of new construction, which has been very, very strong for the last 10 years.”

As a result of the influx of retail into the market, Block notes that “rental rates have really skyrocketed, for both the price of pad sites and retail shops.” For pad sites on well located, Class A sites, ground prices are in the $20-per-square-foot range. Retail space has experienced a $10 bump over the past few years, with Class A space fetching rents in the mid-$20s per square foot.

One thriving area that Block points out among all the hot submarkets is the retail corridor springing up around the Kansas Speedway in the western area of the city. RED Development’s 855,000-square-foot open-air center, The Legends at Village West, is showing great sales and occupancy numbers. The two department store anchors, Target and JC Penney will open this fall.

A number of other projects are in the planning stages around the racetrack. Block is teaming up with Becky Goodman, a vice president at Block & Co., and a handful of investors from Chicago-based First National Development Ltd. to develop a $200 million, 1 million-square-foot retail center on a 100-acre site across Parallel Parkway from The Legends. The Plaza at the Speedway will include retailers that will complement, not compete with The Legends, according to Block. It could open as soon as 2007, and will include approximately 65 tenants and 10 restaurants. The types of anchors and junior anchors Block expects to take space in the development fit the power center mold, such as Kohl’s, PetSmart, T.J. Maxx, and Bed Bath & Beyond. Other users could include a grocery store, a drugstore or cleaners. The area around the Speedway remains a mystery, as retailers continue to see impressive returns without an established residential base in the area. As long as the numbers continue to justify it, development will continue around the racetrack.

Block and Goodman are working on other retail developments in various areas of the Kansas City market. North of the city, they are building two centers in the Shoal Creek area along Barry Road near its intersection with Flintlock Road. Shoppes at Shoal Creek and Shoal Creek Plaza will together measure 425,000 square feet at a total cost of approximately $80 million. The 125,000-square-foot Shoppes at Shoal Creek is on a 15-acre tract of land northwest of Flintlock and Barry roads; OfficeMax and a national furniture retailer have already signed on to take space in the development, says Block. Negotiations are underway with Old Navy. Construction is nearing completion and Block expects that tenants will begin moving in by the fall. Shoal Creek Plaza will total approximately 300,000 square feet on the south side of Barry Road. The $55 million center will contain a series of freestanding restaurants and retailers within a pedestrian-friendly streetscape design. The developers have leased space to Commerce Bank, a small grocery store and several fast food restaurants. Construction on that project will begin in the fall, with occupancy beginning in 2007.

Development is also hot on the south side of the market. Block and Goodman have teamed up with Jeff Kieffer, a local banker, and Steve Corwine, a local real estate investor, to develop Raymore Galleria in Raymore, Missouri. The $115 million three-phase retail development will total approximately 700,000 square feet near the intersection of U.S. Highway 71 and Missouri Highway 58. It will be anchored by an existing Wal-Mart Supercenter and a just-completed Lowe’s Home Improvement Warehouse, which is the project’s first store. The first phase will include approximately 60 acres, with Office Max and Bed Bath & Beyond in talks to come on board as junior anchors. The second phase will feature seven smaller buildings that will form a convenience-oriented center on 15 to 20 acres. The third phase calls for approximately 12 buildings ranging from 11,000 to 28,500 square feet to the south of the first phase.

Two new Bass Pro Shops are underway in the suburbs of Kansas City, one in Olathe, Kansas, and the other in Independence, Missouri. As is typically the case when a destination retailer comes to town, other ancillary retail is expected to crop up along side both projects, and will further strengthen the east and west suburban submarkets.

Suburban Kansas City Industrial Market

Kansas City is located near the true geographic and population centers of the country, making it the nations most centrally located city. The city’s designation as the “Heart of America” is an appropriate nickname for our city and the 18-county two-state metropolitan area that it encompasses.

Prime Investments recently developed a state-of-the-art, 104,000-square-foot industrial facility at 625 Adams in Kansas City.

Major employers include Kansas City’s homegrown companies: American Century, Hallmark, H&R Block, Russell Stovers Candies, and Sprint. Other large employers include DST Systems, Ford Motor Company, Honeywell FM&T, Aquila Inc., Cerner and Yellow Corp.

Modern distribution space is, and will continue to be, in demand in the Kansas City metro area. Net absorption of modern distribution space totaled approximately 1.9 million square feet in 2005, making it the most active year in a decade. Nine of the twelve major construction projects for 2005 were distribution facilities. All but one of these, the state-of-the-art 104,000-square-foot 625 Adams building built by Prime Investments in Kansas City, Kansas, was a build-to-suit project. Area build-to-suit distribution projects include Amerisource-Bergen, a pharmaceutical supplier, building a 350,000-square-foot facility; Medline Industries’, a manufacturer of medical supplies, 360,000-square-foot project in Executive Park; Systems Material Handling’s, a manufacturer and distributor of safety equipment for material handling and industrial equipment, construction of a 230,000-square-foot property in Johnson County; OfficeMax’s 180,000-square-foot facility in Wyandotte County; Herff Jones Year Book Printing Division moving into a 130,000-square-foot build-to-suit in Wyandotte County; Asian Foods, an importer and distributor of Asian foods, recently built a 100,000-square-foot facility in the KCI Submarket; American Food Service completed 100,000 square feet in Jackson County; and Long Motor Corp., a supplier of auto and truck parts, added 80,000 square feet to its existing 100,000-square-foot facility in Johnson County.

Prime Investments industrial facility at 625 Adams in Kansas City. Ceiling heights of 30 feet or greater and wide column spacing are increasingly becoming deciding factors for industrial tenants when they are shopping for space.

Panattoni Development is building the largest build-to-suit project in the metro area, a 702,000-square-foot distribution center for Musician’s Friend, a division of Guitar Source, in Northland Business Park in Missouri. The building is designed to be expandable to 1 million square feet.

Pacific Sunwear, an Anaheim, California-based retailer, recently purchased a 73-acre site in Lenexa, Kansas, to build a 400,000-square-foot distribution center. This facility is will be expandable to 800,000 square feet. The project is expected to be complete in spring 2007.

These companies are continuously improving operational efficiencies, as well as expanding offerings and programs. They require the most efficient warehouse operations possible to meet their client needs and maximize profits. The Kansas City metro area gives them this in a central location.

These facilities provide the physical structure that is either customized to fit the business operation or is included in the developer’s master plan. These Class A structures provide modern attributes including at least 32 feet of clear ceiling height; wide (50- to 60-foot) column spacing; an abundance of dock doors (minimum of 1 per 10,000 square feet); early suppression fast response (ESFR) sprinkler systems; ample auto and truck trailer parking; easy access to the area highway system; and concrete and steel construction.

Other developments that are of interest in the Kansas City industrial market include two planned intermodal centers and a new customs facility. BNSF Railway is planning a $1 billion, 1,000-acre intermodal transportation facility and logistics park near Gardner, Kansas.

Outside of Grandview, Missouri, KC Southern, Hunt Midwest and CenterPoint Properties Trust are planning an intermodal center and underground warehousing at the 1,400-acre former Richards Gebaur Air Force Base. The intermodal hub will integrate truck and rail traffic on its line into Mexico. The deep-water port at Lazaro Cardenas on Mexico's west coast could become a main conduit for shipments from the Pacific Rim. The trade from Asian business already has inundated ports such as Long Beach, California. Shippers have been seeking alternatives.

These intermodal hubs have enormous potential, and are significant projects to further strengthen the metro area’s distribution capacity. Chris Gutierrez, president of Kansas City SmartPort Inc., which is promoting Kansas City as an inland port, said an intermodal park will help recruit distribution and manufacturing centers.

SmartPort, a division of the Kansas City Area Development Council, with help from Senator Kit Bond, is actively moving forward with plans to open a customs facility that would clear trucks for export to Mexico. The facility, a joint effort with U.S. and Mexican officials, would be the first customs house run by a foreign country inside U.S. boundaries.

Kansas City will function much like a dual U.S.-Mexican port at the border. Mexican and U.S. officials would work side-by-side processing trucks. Once the export goods were inspected, the trucks would be electronically sealed and sent back out onto the North American Free Trade Agreement corridor.

The $3.1 million operation is designed as an alternative to Long Beach, California, where bottlenecks are causing companies to explore shipping freight through Mexico rather than through seaports.

— Pat Murfey is a principal of Kansas City, Missouri-based Grindstone Industrial Properties.

Suburban Kansas City Office Market

The Kansas City office market appears poised for a significant rebound, and has many positive qualities to attract companies. Downtown is in the middle of a renaissance, with available and affordable office space. Johnson County is one of the most highly educated populations in the country, with a high standard of living — traits that are attractive to the majority of employers. There are vacant buildings in the Northland that could serve as company headquarters, with close proximity to the airport and a quality workforce. What Kansas City needs are several large office users that are new to the market to come in and get the ball rolling.

One good sign for the Kansas City office market is an improvement in the downtown area. The vacancy in the central business district (CBD) is still one of the highest in the city, but the 21.7 percent vacancy rate following the second quarter is a 90 basis point improvement from the first quarter, and the recovery has to start somewhere. One of the larger new tenants coming to the CBD is the law firm of Berkowitz Oliver Williams Shaw and Eisenbrandt. The law firm has leased more than 22,000 square feet within 2600 Grand in Crown Center and will occupy its new space in the fourth quarter after vacating its current location on Country Club Plaza.

While the metropolitan area is spread across the Missouri/Kansas state line, the region tends to fall under Missouri’s “Show Me” attitude. Individuals want to see the resurrection of downtown prior to jumping on board. The 500,000-square-foot H&R Block headquarters is nearing completion and the first wave of employees has moved in. The Sprint Center is taking shape and there is banter of the possibility of either an NHL or NBA team to anchor the arena. Cordish Company has been delayed slightly with the construction of the Power & Light District, but still plan to open the first phase in the summer of 2007. The new IRS Service Center is coming along, as is the new Federal Reserve Bank. These projects signal a change in the downtown environment, but it will still take a solid four to six quarters to turnaround.

Plaza-Midtown, the prominent office submarket in the city, has an average asking rent of $25.05 per square foot for Class A properties and $18.28 per square foot for Class B. The vacancy rate increased by 90 basis points in the second quarter, but it is not expected to take long to backfill the vacated space.

Some factors that could impact the Plaza-Midtown submarket are the pending vacancy of H&R Block’s 144,000-square-foot current headquarters and several buildings that are either under construction or in the planning phase, which, combined, would add in excess of 600,000 square feet of Class A office space to the Plaza. Included in this figure is the 220,000-square-foot West Edge development currently under construction, with completion expected in August 2008.

The relatively high vacancy and lack of rent growth in the past few years has limited construction in the south Johnson County submarket. Despite increasing construction costs, there are some projects underway and additional planned projects; more than 500,000 square feet could be added in the near term. In Leawood, the Park Place development could add up to 290,000 square feet of Class A office supply. Opus has plans for two buildings along the K-10 corridor that would add an additional 210,000 square feet. This addition of space into what is still a relatively soft market could slow recovery in terms of vacancy, but should not have a negative impact on averaging asking rents.

For three consecutive quarters, the office market has maintained a 17.6 percent vacancy rate, making it difficult for landlords to sustain any rent growth. The second quarter provided a 10-cent per square foot increase in Class A average asking rents and a 4-cent increase in the average asking rents of Class B properties.

—  Phillip James is a senior vice president at Grubb & Ellis|The Winbury Group in Kansas City.

Suburban Kansas City Multifamily Market

“Bottom line, the Kansas City area multifamily market is strong,” says Mac Crouther, a principal in the Kansas City office of Apartment Realty Advisors. “The market is attractive to investors, both institutional and private buyers, even when the fundamentals are a little soft.”

On the investment side, demand far exceeds supply. “Even though cap rates are still pretty low, investors want to be here because the market is steady, predictable,” Crouther says.

Thanks to steady positive job growth, the market did not experience a recession like some areas of the nation during the last economic slump. However, according to Crouther, overbuilding is becoming a problem for the area, with a glut of residential product being delivered to a crowded marketplace. He attributes the overbuilding to low rents and strong job growth, as well as the strong school systems in the suburban counties around Kansas City. The school systems in areas such as Johnson and eastern Jackson counties, as well as the Northland (Clay and Platte counties in Missouri), have spurred increased development, as families seek to locate in these markets for their children.

Lee’s Summit and Blue Springs have experienced an explosion in terms of population and multifamily development. In the Northland, the area around the Kansas City International Airport is rivaling Johnson County in terms of desirability for potential residents.

New construction has dropped off a lot recently, which will help stem the tide. The Kansas City market has seen approximately 2,500 to 3,000 new units come online annually for some time, but only 1,800 to 2,000 units are in the planning or final lease-up stages for this year.

Even with heavy development, occupancy levels have remained in the mid-90s, currently in the 93 to 96 percent occupied range. Concessions are the exception, not the rule now. The market is experiencing strong rent growth. Crouther expects growth of 5 or 6 percent, saying 4.1 percent would be the worst-case scenario for the year.  Rental rates for Class A space ranges from 90 cents to $1.25 per square foot.

Suburban Kansas City Development Highlight Mixed-use communities are spreading across suburban Kansas City, as municipalities work with developers to create viable economic drivers in burgeoning suburban markets. Lenexa City Center; Lenexa, Kansas Lenexa City Center The city of Lenexa, Kansas, is working hard with developer Copaken, White & Blitt to catalyze the development of City Center, a new mixed-use development with a first phase that would cover approximately 84 acres of city-owned property on the southwest corner of 87th Street Parkway and Renner Boulevard. Phase I of the development will include at least 250,000 square feet of commercial space. The entire 200-acre project will include at least two other components. City Center East Village is underway on a 17-acre site at 87th Street Parkway and Renner Boulevard. Varnum Armstrong & Deeter is developing that project, with Walton Construction as general contractor. The first phase is almost complete. City Center North is located at the same intersection and has been approved for development; the site will feature most of City Center’s residential development. The Gateway; Mission, Kansas The Gateway Cameron Group, a developer out of Syracuse, New York, is redeveloping the former Mission Center Mall located on the corner of Roe Avenue and Johnson Drive in Mission, Kansas, into a $380 million, 1.3 million-square-foot mixed-use community. The Gateway will include 350 condominiums and row houses; 500,000 square feet of retail; 180,000 square feet of office space, entertainment and restaurant concepts, and a 150-room hotel within its 17-acre site in northeast Johnson County. Kansas City-based Walton Construction is the general contractor and began demolition of the existing buildings in May. The Gateway is scheduled for completion in summer 2008. City Walk; Lee’s Summit, Missouri City Walk In Lee’s Summit, Missouri, Greenpoint Development is developing City Walk south of Missouri Highway 291 and U.S. Highway 50. The $319 million project features an 860,000-square-foot shopping center, along with 20,000 square feet of additional office space and residential lofts. Taxpayers are covering approximately 40 percent of the project’s cost, $127.5 million, and tax increment financing, which uses local taxes to reimburse developers, will be utilized as well.

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