CITY HIGHLIGHT, SEPTEMBER 2007

KANSAS CITY CITY HIGHLIGHTS
Bob Johnson, Paul Licausi and Timothy Schaffer

Kansas City Retail Market

Retail development in the Kansas City area continues to be very active. There are new projects proposed and under construction in all sections of the city. Although Kansas City has seen a lot of retail development in the past decade, many of the dominant retailers such as Wal-Mart, Target, Hy-Vee, Price Chopper and Best Buy continue to add stores in an effort to increase market share.

One significant trend impacting the market is the introduction of numerous mixed-use projects, in which retail is combined with residential and office components. Heretofore, the Kansas City area has been behind other markets in developing these mixed-use developments.

There are several significant new developments in the Kansas City area. The first is the Power & Light District in downtown Kansas City, which is located near the new Sprint Arena. This retail and entertainment development will open in the spring of 2008 and is expected to be the catalyst to reenergize the downtown area.

RED Development continues to expand The Legends at Village West, an approximately $250 million, 1.1 million-square-foot retail development located in Kansas City, Kansas, near Kansas Speedway.

Likewise, The Legends at Village West, a shopping center located near the intersection of Interstates 70 and 435 in Kansas, continues to expand. In addition to the Legends and the adjoining Kansas Speedway, several new projects are in the works along this retail corridor, including a power center anchored by a Wal-Mart Supercenter and a proposed new casino that was just approved by the state of Kansas.

In the suburb of Leawood, Kansas, Park Place is the first mixed-use project of its kind in Johnson County. This 1.2 million-square-foot, pedestrian-friendly development includes a combination of ground-level upscale retailers and restaurants with boutique office space above, as well as 52 luxury residential condominiums. The first phase is expected to open in early 2008.

In Lee’s Summit, Missouri, the 550,000-square-foot Summit Fair lifestyle and entertainment center is scheduled to open in the fall of 2008.

The 1.2 million-square-foot Park Place mixed-use community in Leawood, Kansas, is the first of its kind in the fast-growing Johnson County area.

All of the submarkets in the Kansas City area currently have projects in various stages of development. The suburban cities have been very aggressive in promoting retail development, and are beginning to see the benefits of these marketing efforts.

New retailers that have either recently opened or are currently negotiating sites in the market include Staples, The Sports Authority, Lifetime Fitness, Von Maur and Crate & Barrel.

The current retail vacancy rate in the Kansas City area is approximately 10 percent, as vacancy has slowly increased during the past 3 years. The average rental rates for new retail construction in the Kansas City area range from $18 to $40 per square foot. With the continued increase in construction costs, expect rental rates to continue to steadily escalate.

All sections of the Kansas City area continue to experience solid retail growth. The submarket that will likely see the most projects in development during the next year is the Northland (encompassing Clay and Platte counties in Missouri). There are a number of new developments, as well as numerous expansions and renovations planned in the Northland. All of the major existing retailers in the Kansas City area are looking at this area for additional locations.

— Bob Johnson is president of the R.H. Johnson Company, a Kansas City-based retail brokerage firm.

Kansas City Industrial Market

The Kansas City industrial real estate sector continues to thrive despite the challenges within the economy (such as the housing sector slow down and credit market softness), and is maintaining consistent growth as it expands.

The Kansas City MSA population has been growing at a brisk pace, as one of the fastest growing markets in the Midwest. During the past 5 years, Kansas City has also experienced significant employment growth, and is ranked in the top 10 nationally in percentage job growth. The expanding economy only helps to attract outside industry and illustrate Kansas City’s strong business climate.

The market’s industrial sector is composed of approximately 239.5 million square feet of industrial space, which is broken down into three categories: warehouse/manufacturing space (203 million square feet), flex space (11.5 million square feet) and subsurface industrial space (25 million square feet). The overall vacancy rate for the area industrial market stands just below 8 percent. Rental rates for warehouse space averages $3.92 per square foot, while flex space rents average $8.53 per square foot.

Typical lease rates for existing buildings are being quoted per the modified gross industrial lease structure, but the majority of the new industrial product coming to market is being quoted on a triple-net lease structure. The Kansas City market has been a little slow to make a wholesale change to the triple-net model. However, with most of the new buildings coming online utilizing triple-net leases, a shift in the market’s lease structure is gathering momentum. The triple-net lease structure will continue to be seen in new buildings, but many second-generation and older buildings will continue to remain on a modified gross lease system.

There is further evidence of Kansas City’s evolution to a top-tier industrial market, coming from corporate users and other real estate professionals located throughout the country. Out-of-state players are acknowledging that the market is now on their radar screen, and are curious to discover what all the buzz is about. There are many elements that factor into Kansas City’s rise to a top-level industrial market, including a large inventory of industrial land available for development; excellent highway accessibility; the presence of major rail service (Kansas City is the second largest rail hub in the country); significant air cargo facilities; and barge service via the Missouri River.

For these reasons, the Kansas City metro area is now on the short list for many major distribution and manufacturing developments, and, more importantly, is landing many of these deals. The increased corporate interest has spurred a new trend, the development of large box distribution space. This was previously all but unheard of in the market, where the average size of large warehouse facilities typically totaled 100,000 square feet. Now, newly built large box distribution facilities range from 400,000 to 700,000 square feet in size.

There have been several large facilities constructed in the last 24 months, including the 702,000-square-foot Musician’s Friend distribution center in the north submarket; FedEx Ground’s 250,000-square-foot facility, which is expandable to 500,000 square feet; Pacific Sunwear’s 400,000-square-foot facility in Olathe, Kansas; the 500,000-square-foot CNH facility; and Kimberly-Clark’s 500,000-square-foot development that is currently under construction in Gardner, Kansas.

There are many more companies considering the greater Kansas City area for similar large box facilities. One challenge for the market is the lack of large-scale speculative product that could meet the growing demand; the majority of the recently completed and current projects are build-to-suit. This creates a competitive challenge for the market, as it competes against markets such as St. Louis, Chicago, Indianapolis and Memphis, Tennessee, for these large box users.

Kansas City has long been a very conservative development market, but that is about to change, as two recently announced projects will provide some much-needed speculative large box space to the southern part of the metro area. Midwest Commerce Center is a 151-acre business park located in Gardner that is being developed by LS Commercial Real Estate. When fully developed, the park will contain six large box distribution buildings with a total size of more than 2.2 million square feet. The speculatively built first building in the park, a 520,000-square-foot, cross-docked distribution facility, is scheduled to be complete late summer 2008.

Kessinger-Hunter Company has announced another large box distribution facility in Olathe. The company is developing a 601,829-square-foot spec distribution facility with an anticipated delivery of mid-2008. Additionally, Trammell Crow, which recently signed a master development agreement with the city of Kansas City for the Kansas City International airport intermodal development, has announced plans to build a 350,000-square-foot distribution facility. The company’s master plan includes several large to mid-sized box distribution projects, including several air cargo facilities. These projects will jump-start the production of much-needed spec large box space, and enhance the area’s chances of drawing more large-space users.

In addition to large box distribution facilities, both flex and smaller box warehouse facilities are being constructed throughout the market. Active submarkets include Kansas City North, Riverside, Platte County (KCI Airport), Eastern Jackson County and Lee’s Summit on the Missouri side. On the Kansas side, Shawnee, Edwardsville, Wyandotte County, Lenexa, Olathe and Gardner all are seeing new development. Each of these markets benefit from available industrial land that is already ready zoned for development or master planned for industrial use. The infrastructure is in place, or located in close proximity to the sites, and the cities are very interested in bringing further development into their communities.

The outlook for the Kansas City industrial sector is strong for the foreseeable future. The transformation of this market from a regional distribution location to a super regional and national distribution location will continue as more large-scale businesses recognize and enter our emerging intermodal hub. 

— Paul Licausi is president of LS Commercial Real Estate, a full-service commercial real estate firm based in Overland Park, Kansas.

Kansas City Office Market

Although the suburban office markets are relatively active, tenants seem to be taking a more conservative path to leasing space by choosing high-quality Class B office buildings. This trend is evidenced by the absorption of only 61,000 square feet of Class A space during the first quarter of the year, compared to more than 500,000 square feet of Class B space. During the market’s last building cycle beginning in 1998, vacancy rates were similar to the current rates — however, the dynamics of the economy and the quality of the available Class B product was substantially inadequate to accommodate the growing infrastructure needs of tenants.

All things being equal, and given the existing conditions of today’s Class B supply, the only reason to move is to take on more space that can’t be delivered by an existing landlord. With moving costs escalating to more than $10 per square foot, the rental rate needs to be $3 to $4 less per square foot to make a lateral move financially neutral. Given the fact that national companies are not in the market to the same extent they were in the last cycle, a good portion of the market activity is with local and regional companies that take a more conservative approach regarding their rent-to-revenue ratio. 

New buildings delivered in the last cycle provided increased parking ratios to allow for higher densities and provided the necessary mechanical systems to accommodate these densities. The buildings were also designed with more power and capacity, with the developers providing the technology required to keep pace with the changing business climate. Existing product was not keeping up with the needs, and therefore moving to new space drove the market. That dynamic doesn’t exist this time around.

There will be continued pressure on rate growth as new office space continues to be developed in western cities such as Shawnee, Olathe and Lenexa, Kansas. The pro-growth attitude found in these markets comes at a time when Kansas City, Missouri, is at a standstill due to its reevaluation of tax incentives, while the Overland Park and Leawood, Kansas, submarkets continue to increase property taxes. Given the other submarkets’ pull back from a pro-growth stance, Olathe, Shawnee and Lenexa have created a competitive advantage, and tenants are willing to change their geographic parameters when choosing a new location to include these emerging municipalities. Once thought of as fringe areas too far from support services and high-end neighborhoods, these submarkets have now outgrown such labels. The demographics for the western suburbs are now reflecting similar income-per-household numbers to the more mature, high-end neighborhoods located further east, just outside of Kansas City proper.

Growth in the western part of the county continues to radically change the dynamics of the marketplace. Overland Park and Leawood set up the infrastructure in the late 1970s, which created a 20-year exodus of major companies from Kansas City to the inner-ring Missouri submarkets. That trend seems to have played itself out. Look now for a shift to the west as the same dynamics are establishing a base for strong growth in the western metropolitan suburbs.

— Timothy Schaffer is an executive vice president with Kansas City-based RED Brokerage.

RETAIL, MIXED-USE DRIVE KANSAS CITY REAL ESTATE TO NEW HEIGHTS

Lenexa City Center

Lenexa City Center

In suburban Kansas City, Kansas, the city of Lenexa is making strides in its efforts to develop a strong central downtown community. Lenexa City Center is an expansive collaboration between public and private interests focused on bringing a modern development to the area, including a mix of retail, hospitality, residential and office uses.

The 203-acre site comprises all four corners of Renner Boulevard and 87th Street Parkway, and when fully built out, will house 1.1 million square feet of retail; 1.2 million square feet of office space; 1,500 residential units; 784 hotel rooms; and 90,000 square feet of civic and municipal space.

Copaken, White & Blitt is master developer of a large portion of the site located around the southwest corner of Renner and 87th. This component of City Center will feature 431,000 square feet of retail, 434,000 square feet of office space, 150 hotel rooms and 603 residential units.

George Butler Associates (GBA) is involved in the development of a number of the project’s components, including the East, North and Northeast Villages. Varnum Armstrong Deeter is developing the East Village, while Embrey Partners, Tom French Construction and North Village LLC are developing the North Village. GBA is providing planning, landscape architecture, environmental, and civil engineering design for these efforts. The firm is also providing architectural design for a seven-story building in City Center East Village that will contain condominium, retail and parking uses (pictured below). Infrastructure work for East Village and grading for North Village are nearing completion, and the project is ready to take off.

The Power & Light District

The Power & Light District

The 9-block, $850 million Kansas City Power & Light District is nearing completion downtown after years of development. The buzz surrounding the project is peaking, with the $276 million, 18,500-seat Sprint Arena set to open next month, and the retail and entertainment tenants coming March 2008. The retail component’s opening coincides with the Big 12 Conference’s Men’s Basketball Tournament next spring, and the excitement is palpable.

The developer, Cordish Company, recently announched six new retail tenants are joining the existing tenant roster, including McFadden’s Sports Saloon, Latteland, GNC, The Fudgery, Polished and Plaza Ford Ideal.

Chapman Farms

Green Development & Consulting is building a city within a city along Highway 7 in the Kansas City suburb of Blue Springs, Missouri. The firm is developing Chapman Farms, a master-planned community that will offer a huge variety of residential properties, as well as significant retail, office and senior housing components. Work has been underway on the 860-acre site — which represents more than half of the developable land in south Blue Springs — since 2003, and the infrastructure is in place. The project will feature more than 7 miles of walking trails, two lakes and 100 acres of open green space.

According to Tom Williams of Green Development, “the project is a mixed-use venture that touches all socioeconomic groups.”

The project is divided into distinct districts: Chapman Farms, the 500-acre heart of the development; Chapman Woods, a 60-acre, 128-unit upscale residential community; Chapman Ridge, a 100-acre mixed-use community; and The Village at Chapman Farms.

The Village is a 160-acre mixed-use project that will serve as the town center, according to Williams. It will feature 360 residential units, commercial pad sites, walking trails and town square with retail, condos and offices.

The developer was awarded a $25 million neighborhood improvement district, the largest ever given in Missouri, to help finance the project. One way Chatham Farms will give back to the community is through its senior housing projects, which will include assisted-living services among other offerings. In a similar vein, a regional hospital is checking the community out with interest in building medical offices.

The residential component will include an array of price points, and feature a mix of condominiums, apartments, townhomes, duplexes, patio homes and single-family houses. Williams expects the diverse mix of homes to draw an equally diverse mix of residents, spanning  many different ages and income levels. There are currently 13 residential neighborhoods planned, nine of which are already underway.

Chapman Woods will feature 128 homes, ranging from $270,000 to more than $400,000. The community is situated adjacent to the Missouri Conservation Project and Fleming Park.

Chapman Ridge will feature 254 residential units with prices exceeding $200,000. The community will feature neighborhood parks, soccer and softball fields, a dog park, and a pool.

The neigborhoods in Champan Farms will include homes starting from $160,000 and going up to $500,000. It will include space for a retail strip center, a 35-acre lake and 5 miles of walking trails.

Retail will anchor the Highway 7 and Colburn Road intersection. Among the many retailers that will be included in the development is Wal-Mart, which purchased 25 acres at the site’s northeast corner. Two banks, Garden City Bank and the Bank of Lee’s Summit have purchased sites and are building branches in Chapman Farms. Williams is speaking with many of Kansas City’s retail brokers to identify and sign tenants. The developer is looking for office goods retailers, electronic and entertainment retailers, pet stores, men’s and women’s clothing stores, hair salons, fitness centers, and other home goods and service retailers.

Deer Creek Woods

Greenleaf Properties is developing Deer Creek Woods, a mixed-use community at 135th Street and Metcalf Avenue in a bustling commercial corridor in Overland Park, Kansas. The 56-acre site is adjacent to more than 1 million square feet of office product, as well as the 4.2 million-square-foot U.S. headquarters of Sprint.

The 220,000-square-foot Deer Creek Woods Corporate Centre features direct access to the Highway 69 interchange. The business component features office condominiums and covered parking, and is centered around restaurants, a 127-room, extended-stay hotel and residential condos. Build-to-suit pad sites are available, with offices developable for users needing space from 5,000 to 60,000 square feet.

The Shoppes at Deer Creek Woods totals 185,000 square feet. On the ground floor of the 119-unit residential development, there is approximately 28,000 square feet of retail space One block away, a 1 million-square-foot mall has been approved for development, which will draw even more shoppers to the corridor.

CORPORATE RIDGE DELIVERS FOR OFFICE USERS SEEKING LARGE BLOCKS OF SPACE Corporate Ridge’s first building serves as the headquarters for the NBRC. Opus Northwest is bringing large-block office space to the suburban Kansas City market in the form of the 110-acre Corporate Ridge office park located along the K-10 Corridor in Olathe, Kansas. The project is drawing immense interest from office tenants seeking large blocks of space of 50,000 square feet or greater. The high demand met at the start of the development spurred Opus to accelerate the schedule for two new buildings, which broke ground in February simultaneously, rather than being built sequentially as originally planned. The first building — a 74,000-square-foot facility for the headquarters of the National Board for Respiratory Care (NBRC) and Applied Measurement Professionals — opened in January. The two buildings now underway will total 218,000 square feet and have each secured notable anchor tenants. The second building, the 116,000-square-foot Opus II, will serve as the new headquarters for Terracon Consultants, which will occupy the third floor. It is scheduled for completion in the fourth quarter of the year. Opus III will be anchored by Farmers Insurance Group. The 102,000-square-foot building is situated on a 9-acre site and is expectd to be finished this winter. Two buildings for Network Integration Services are also currently underway, and INTRUST Bank is scheduled to start construction on a new facility in Corporate Ridge in the near future. HealthRidge, a high-end fitness facility, is already open and serves as a valuable amenity to the park’s tenants and the surrounding community. Opus originally planned for slightly more than 1 million square feet of office space in the park upon build-out, but is now looking to acquire another 20 acres adjacent to the site, which could open up the park for an additional 200,000 square feet of space.

KCADC POSITIONS KANSAS CITY FOR GROWTH The Kansas City Area Development Council has high hopes for the Power & Light District, The Cordish Company’s expansive mixed-use development downtown, which features the headquarters of H&R Block. The Kansas City Area Development Council serves the economic development needs of a large area surrounding and including Kansas City, encompassing 18 counties in both Kansas and Missouri. Bob Marcus, president of the KCADC, believes that this array of varied municipalities gives his organization a competitive advantage over other markets. “Our territory includes a very urban center in Kansas City, as well as many suburban markets and urban areas,” he explains. “We believe that gives our clients options that they cannot find in other organizations.” The KCADC must embrace total objectivity when scouting locations for potential clients, and the organization works hard to bring new businesses and industries to many of the region’s submarkets. “We are the broker,” Marcus says. “The needs of the clients are always changing, just as the communities’ business climates are constantly changing, as well. The KCADC’s job is to bring the proper parties together.” Marcus cites the improving business climate in both states as a catalyst for the area’s recent growth. In Missouri, a significant piece of legislation was passed this year to deal with the cap on the state’s quality job program. “There is a lot more money available now in that program, and a lot of companies are going to take advantage of it,” Marcus says. In Kansas, there has been a reduction of taxes on businesses. The two major sectors bringing the most economic growth to the Kansas City area are the logistics and animal health industries. A lot has been made of the major intermodal parks being developed in the area, including the Logistics Park – Kansas City that the Allen Group and Burlington Northern Sante Fe is developing in Gardner, Kansas, as well as the Kansas City Southern rail and Kansas City International Airport projects. Even before this new wave of development, Kansas City was a major intermodal hub, as the Number 1 city for rail traffic (measured in tonnage; the city ranks Number 2 when rating by value) and the Number 3 truck center in the nation. To encourage more growth in the sector, the KCADC has established an affiliate organization SmartPort, which is solely focused on growing the community’s logistics and transportation business. “A major distribution center project totaling 250,000 square feet would have been a big deal 10 years ago,” Marcus notes. “Today, we are seeing 500,000 to 1 million-square-foot centers. And we are actively competing against major distribution centers like Memphis, Tennessee.” The second industry bringing new business to Kansas City is the animal health sector. “Kansas City, without a doubt — we have done the research — is the national center of animal health in the United States,” Marcus asserts. “We are putting a lot of emphasis on growing that market.” A number of companies have expanded in the market, and the KCADC has succeeded in bringing new businesses from across the country and the world to the burgeoning corridor. The council has created an association stretching from the University of Missouri in Columbia, Missouri, to Kansas State University in Manhattan, Kansas, that hosts a concentrated majority of the area’s animal health industry. There are more than 125 animal health companies located along this corridor, most of them in or around Kansas City. With aggressive branding and strong customer service, the KCADC has created a strong pro-business environment for greater Kansas City, and significant growth is expected on the heels of the major intermodal development currently underway across the market. — Kevin Jeselnik

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