CITY HIGHLIGHT, SEPTEMBER 2008

SUBURBAN KANSAS CITY
Michael Johnson, Robert Schock, Michael Block and Greg Swetnam

Kansas City Retail Market

Retail development in Kansas City continued at a brisk pace during the first half of 2008. There are a number of exciting new projects under construction and on the drawing board around the metropolitan area. Developers are being more cautious (as are retailers) during these times, but continue to develop shopping centers that are attracting new retailers to the market. In the past year, various retailers have opened in the Kansas City metropolitan area for the first time including, Von Maur, Staples, The Sports Authority, West Elm and Sullivan’s.

The most active area this year is the Northland. The intersection of Interstate 29 and Highway 152 continues to blossom with the addition of Cousins Properties’ Tiffany Springs Marketplace — which is anchored by Target, The Home Depot, JC Penney and Best Buy — on the northeast corner and Steiner & Associate’s Dillard’s-anchored second phase of its well-received Zona Rosa project at the southwest corner. The intersection of North Oak and Vivion also received a big boost with the addition of North Oak Village, a new shopping center that features Lowe’s Home Improvement Warehouse, Office Depot and a host of pad sites.

The highest profile opening this year is Cordish Company’s Power & Light District in downtown Kansas City. With the opening of the 18,000-seat Sprint Center, along with the combination of restaurants, retailers and entertainment venues, Kansas City’s downtown has been revitalized and has attracted millions of visitors during its first year.

The Legends in Kansas City, Kansas, continues to grow with the announcement of The Plaza at the Speedway, which will be anchored by a Wal-Mart Supercenter. Construction has begun on the Schlitterbahn Vacation Village, which includes a waterpark, retail space and resort lodging. The state of Kansas is expected to select a developer to build a casino/resort that has been approved for the area.

Park Place is a mixed-use development underway at 117th and Nall in Leawood, Kansas. The project will feature a mix of retail, restaurants, hotels and office space.

There are three upscale projects currently under construction in south Johnson County, Kansas. RED Development’s 160,000-square-foot One Nineteen lifestyle center, which is anchored by Kansas City’s first Crate & Barrel, is adding a nice mix of restaurants and retailers to the already strong high-end tenant mix at the intersection of 119th and Roe in Leawood. Park Place, also located in Leawood at 117th and Nall, is the latest true mixed-use center and features a combination of retail, restaurants, two hotels and office space. Cormac Company’s Corbin Park, which is anchored by Kansas City’s first Von Maur department store, is under construction and will be a great addition to one of the market’s most dynamic intersections (135th and Metcalf in Overland Park, Kansas).

There are three exciting projects under construction on the east side of the metropolitan area in Missouri, including Adams Dairy Landing at Interstate 70 and Adams Dairy Parkway in Blue Springs (anchored by Target and Lowe’s); RED’s Summit Fair in Lee’s Summit (anchored by Macy’s and JC Penney); and the Falls at Crackerneck Creek in Independence (anchored by Kansas City’s second Bass Pro Shop).

The Kansas City retail market continues to experience solid growth across every submarket, even with the current market conditions. The current retail vacancy rate in the greater Kansas City retail sector is approximately 11 percent, as vacancy has increased the past couple of years. The average rental rate across the city is $14.20 per square foot on a net basis, with the average rental rates for new construction ranging from $18 to $45 per square foot. With the continued increase in construction costs and materials, expect rental rates to continue to steadily escalate.

The outlook for Kansas City retail looks strong for years to come. When the housing market picks back up, there will be more demand for even more retail developments to serve the new growth areas.

— Michael Johnson is a sales associate with The R.H. Johnson Company, a full-service commercial real estate firm based in Kansas City, Missouri.

Kansas City Multifamily Market

The greater Kansas City market continues to have a healthy apartment sector, if you can find the financing to enter. The general economy continues to move along, which is typical for Kansas City — there are no real high peaks and no real low valleys.

Job growth over the past 12 months has measured approximately 2.4 percent, which means that just fewer than 19,000 jobs were added to the economy in the past year. So far in 2008, job formation continues to be strong.

In addition, the housing supply is falling, according the local Board of Realtors, meaning there has been a drop year-to-year for both new houses and the inventory of houses that are up for sale. This is good news for KC, and supports the thought that the market dodged the bullet regarding the sub-prime woes.

That being said, the biggest headlines have related to the sub-prime lending woes and the condominium market. Five years ago, when the rental market was losing residents in droves to the home buying sector, we wondered how the buyers were making it work based on the economic information we knew about them. We expected to see a number of those former residents coming back; they were good renters before and they will be good renters again, if they must come back to the multifamily market. However, this flight back to rental product has not happened in any big way, and probably won’t, since Kansas City has been impacted less by sub-prime lending problems than other high-growth cities that to its slow-but-steady job growth during this period, which absorbed some of the oversupply.

Kansas City’s condominium market is characterized as demand-driven, not speculative, so there is no looming collapse or “shadow market” impact on the apartment sector. Condos and lofts have played an important role in downtown’s resurgence but still remain a relatively small market segment, accounting for only 2 to 3percent of annual home sales in the metro area. In 2007, lofts and condos also became part of the multi-family development mix in the suburbs. Overland Park and neighboring Leawood, Kansas, now have upscale ($500,000 and up) condos for sale, while the Northland offers “new urban” lofts and condos at The Ravello in Briarcliff Village and the Zona Rosa Lofts.

In the metro area in 2007, multifamily permits were issued for 1,207 multifamily units (including apartment and condominium units), down 62.5 percent from the 2006 total of 3,214 units. However, it should be noted that the 2006 figure was the highest annual total recorded since 2001. This year, construction has continued to be sluggish, mainly related to the financing woes the market is experiencing.

Downtown

The Kansas City apartment market began 2008 in relative market equilibrium, with sound market economic fundamentals and supply in check, and that has continued throughout the year. The downtown urban living trend gained significant momentum in 2007 and has continued through 2008 with the opening of the Sprint Arena and the Power & Light District, a dynamic nine-block mixed-use district. In 2007, downtown had an estimated population of 17,000 people, which is up by approximately 3,900 from just 4 years earlier, according to the Downtown Council.

Johnson County, Kansas

The southwest suburbs continue to grow at a quick pace, fueled by steady job growth in Overland Park, home of Sprint-Nextel and a host of Fortune 500 companies. Other growth hot spots in Johnson County include south Olathe, western Lenexa and Shawnee. Apartment developers are also eyeing western Wyandotte County, Kansas, to add new affordable housing near the Kansas City Speedway and the new Legends shopping and entertainment district.

Northland (North Kansas City, Missouri)

When you land at Kansas City International Airport in the Northland, and get directions from your Kansas City-manufactured Garmin GPS device, you may be heading to one of many new developments such as Zona Rosa, located at Interstate 29 and Barry Road, which has combined retail, entertainment and residential loft space in a 500,000-square-foot urban center. The Steiner Company selected the Northland in 2001 because of its fast growth rate and high-income housing boom.

Many local observers feel Kansas City’s Northland is the next big development market, as years of public investment in infrastructure between downtown and the Kansas City International Airport begin to pay dividends. There are new highways and plenty of land for residential growth. The Northland consists of Platte and Clay counties, which boast a combined population of approximately 286,600 and a growth rate of about 2.1 percent per year over the last 3 years.

Combined, Clay and Platte counties have only 170 apartment units under construction. We have found North Kansas City to be one of the more challenging markets to be in, especially if you are not located along the Barry Road corridor. If you are, rents will most likely be flat along with occupancy rates.

South Kansas City, Missouri

The submarket’s average vacancy rate of 8.5 percent was the highest in the metro area, unchanged from a year earlier. Rent growth in this area was a minimal 0.6 percent. The average vacancy rate for the Grandview/Raymore (far south) submarket was 7 percent in the second quarter, also virtually unchanged from a year ago, in contrast to improving vacancy rates across much of the rest of the region. Rent growth, however, measured 2.5 percent for this period, but only on very select properties, mostly farther south into Cass County.

South Overland Park, Kansas

Overland Park boasts the highest rents and effective rent increases. This area had an average rent of $901 per month, the highest of any submarket in the Kansas City area. This figure was 32 percent higher than the overall average market rent of $682 and was up 3.3 percent from the year prior, ranking this submarket fifth overall in terms of rent growth. The submarket will be in lease up mode for this year, with 1,100 units in various stages of construction.

North Overland Park, Kansas

The average vacancy rate for this submarket has steadily declined each quarter from the beginning of 2006. The average rent in Overland Park North rose 4.9 percent in 2007, reaching $755 per unit. This was the highest rent growth rate of any submarket last  year. However, the farther north you go, especially north of 95th Street, vacancies are still stubbornly high and the area has experienced little or no rent growth.

Also performing well is Wyandotte County, which had an average vacancy rate of 5.0% in the second quarter, the lowest of any submarket (this figure was down from 7.3% a year prior). Like Overland Park North, this submarket has experienced steady declines in vacancies since the beginning of 2006 and the opening of the NASCAR Race Track and the surrounding Legends retail area. Rent growth measured 3.1% in the third quarter, putting the average rent at $565. Expect this area to be a focus of more attention during the next couple of years.

In terms of completed construction, the city of Lee’s Summit, Missouri has been one of the most active areas, with more than 500 units entering lease-up in 2007 and 2008. Olathe, Kansas, experienced more than 300 new units over this period, while south Overland Park received 288 units, with more to come. The downtown market experienced the completion of the 228-unit Founders at Union Hill project in addition to the Cold Storage Lofts.

In the third quarter of 2007, the average vacancy rate for the greater Kansas City region measured 6.5 percent, its lowest point in 5 years, thanks to an absorption rate higher than amount of new construction delivered during the past few years. This improvement trend has continued through 2008 and most likely into 2009, with the average vacancy rate declining to about 6.2 percent. Factors aiding in this improvement include a reasonable amount of new construction, strong job growth and a slowdown in home sales. New apartment construction is expected to hold steady at approximately 1,200 units in both 2008 and 2009. However, on the proposed construction list, there are approximately an additional 2,600 units that developers are considering building, so if financing loosens up, 2009 could get pretty interesting fairly quickly.

Kansas City rent growth for 2007 was 2.7 percent, the highest year-to-year gain in 6 years. Coupled with tightening vacancy rates, this trend bodes well for stronger rent growth this year, which will probably measure closer to 4 or 5 percent by the end of year for Class A properties. Rent growth for Class B and C properties has still been lagging around 2 to 4 percent, depending on their location and condition.

For the next 12 months, we expect continued job growth. The Kansas City will probably continue to perform better than the overall national picture. Demographics just keep getting better and better for apartments, especially with growth in the Generation Y, immigrant and baby boomer pools continuing. The condo market and sub-prime market have crashed as much as it they are going to, occupancies should continue to increase and rent growth will continue to follow at a decent rate again this year (4 to 5 percent at best).

— Robert Schock is senior vice president and director of property management for The Yarco Company, a Kansas City based multifamily investment and management company

Kansas City Industrial Market

Until recently, Kansas City has not been considered by big box industrial users as a regional distribution hub, in spite of it being home to four rail lines, having become the largest rail server in tonnage moved; three major interstates; the third largest trucking center in the nation; an international airport; and access to barge traffic on the Missouri River. Rail has a significant advantage in energy efficiency, capacity and cost effectiveness, and Kansas City is starting to see the big box users that for years were locating in other major metropolitan markets.

Story after story in the national press and trade magazines are now discussing Kansas City because the metro area now has approximately 2,000 appropriately zoned acres and four major industrial parks ready to hit the market in the next 6 to 24 months. With a population of more than 2 million and one of the faster growing metro areas in the Midwest, Kansas City is on the move. It has stable growth and approximately 255 million square feet of manufacturing, warehousing, distribution and flex industrial product, including its rather unique underground offerings. Currently, the industrial vacancy rate for the greater Kansas City market measures 7 percent.

The development community has been very conservative during the last few years and speculative development has occurred at a very measured pace. However, at mid-year, distribution centers that were targeting the Kansas City region included 19 large prospects, with six users seeking sites of more than 400,000 square feet and two whose space requirements exceed 1 million square feet.

Several new parks are coming online, with the first being the new Burlington Northern Santa Fe (BNSF) Intermodal Freight Hub in Gardner, Kansas. The Southwest Johnson County hub is to be located on 400 acres and accommodate 7 million square feet of warehouse space. In addition, The Allen Group will develop an additional 1,000 acres, which can accommodate between 8 million and 10 million square feet of distribution space. In addition, other related developments include the Sun Life Insurance Company, which with its fee developer, Kessinger/Hunter, is developing a new 600,000-square-foot, state-of-the-art warehouse and distribution center in Olathe, Kansas, just 7 miles from the Gardner intermodal project. Scheduled for occupancy this month, it is the largest speculative building of its kind to be developed in Kansas. Also planned for development in Gardner is the Midwest Commerce Center, which LS Commercial Real Estate is developing in conjunction with USAA Real Estate. The industrial park’s first building, a 517,000-square-foot spec distribution center, is scheduled to break ground soon. When fully developed, Midwest Commerce Center will contain approximately 2.3 million square feet of bulk warehouse product.

The second major project is the Kansas City Southern (KCS) Intermodal Center, punctuated by KCS’s quest to develop a NAFTA-driven rail corridor from Kansas City to Mexico’s Pacific Coast. Being developed in conjunction with Chicago-based CenterPoint Properties, the rail-served intermodal facility will be situated on 340 acres, with 11,340 feet of rail track. In addition, CenterPoint, which acquired the former Richards Gebaur Air Force Base from the Kansas City Port Authority adjacent to KCS’s property, plans to build 5 million square feet of freight storage space on an additional 970 acres. The developer’s site is currently being upgraded and having infrastructure completed.

The third major project is the KCI Intermodal Business Centre, which is being developed by Trammell Crow Company on land owned by the Kansas City Aviation Department that is located adjacent to the Kansas City International Airport. In a related development, the SkyPort Business Park is underway near the Business Centre; its owners began grading 160 acres and have already sold 47 acres to Pure Fishing, which will construct a new 400,000-square-foot distribution center. With its prime location on airport property, including some parcels with on-ramp access, and Foreign Trade Zone status, the business center will appeal strongly to logistic users that may benefit from a close proximity to an international airport, as well as nearby Interstate 29.

In Riverside, Missouri, in the center of the metro area, Block & Company is developing the Horizons Business Park. Situated on 400 acres at Interstate 635 and Highway 9, the park will feature more than 5.3 million square feet of industrial space when complete. Unlike the other developments, it will be a mixed-use, master-planned business park community, offering an array of services. The park’s central location will help draw labor amid the area’s growing proliferation of industrial development. Some land will be available for sale; however, the majority will be for speculative development for lease.

Other active developments in the Kansas City metro area include the city of Olathe joining forces with Kansas State University to catalyze the development of 92 acres at K-7 and College Boulevard. The project, recently named the Kansas Bioscience Park recently secured its first tenant; Fort Dodge has plans to build a 150,000-square-foot research and development facility within the park. This region is supported by some of the top animal health education programs in the nation, with a collection of universities in Missouri, Nebraska, Kansas and Iowa playing key roles and having some of the top animal health programs in the country. Growth in this industry will be another catalyst for future growth for the warehouse and flex market in the area.

OPUS Northwest, Watkins & Company and Prime Investments are all developing, or have recently completed, new buildings in the Kansas City market. Prime’s building at Interstate 70 and 7th Street in Kansas City, Kansas, has been leased by Linc, a supplier to the nearby and highly successful GM Fairfax plant, where the Chevy Malibu is built.

MIXED-USE DEVELOPMENT MOVES BEYOND KANSAS CITY

Discovery

Nestled between Kansas City and St. Louis, Columbia, Missouri, is an established destination with a great central Missouri location. Forum Development Group is taking steps to bring to Columbia the retail and commercial amenities every growing market seeks.

The developer is building Discovery, a 220-acre mixed-use community located at the Highway 63 interchange at Discovery Parkway. The project will incorporate retail, office and residential space that will serve the local shoppers and business community.

The site is bordered by the city’s new A. Perry Phillips regional park and lake, and across from Discovery Ridge, a multi-phase life science research park developed by the University of Missouri.

Plans currently call for a lifestyle center, a power center, retail pad sites, two office districts, and upscale apartment and condo communities overlooking the adjacent lake and park.

The developer is also planning a hotel and convention center for the community, which will offer area businesses a high-end meeting place.

East Hills

East Hills

MD Management, Inc. is redeveloping East Hills, a shopping center that originally opened in 1964 in St. Joseph, Missouri, which is north of the Kansas City metro area. In conjunction with Hollis+Miller Architects and Boulder, Colo.-based ComArts, the developer is add a lifestyle component to the project, remodeling the existing center, and renovating the entire site.

The project involves  interior design, civil engineering, structural engineering, revamping of the HVAC system, brand new high-level finishes, a new food court, and new graphics and signage. The design is seeking to create a modern, clean look, with clean cut lines, glass exterior canopies, new mall entry towers, more than $1 million in new lighting, and a huge fireplace in a new “sunporch café” eating and lounging environment. 

The center has a history of being remodeled several times with different themes, and this effort presents a unique opportunity to re-energize a longstanding anchor of the retail community, remedy the conditions that burden this property and reestablish the corridor as one of the most vital gateways to the St. Joseph area. Prior to the design and redevelopment, 40 percent of the center’s space was vacant.

Kansas City Office Market

In the midst of an overall office market slowdown on a national basis, which has a trickle-down effect on secondary markets like Kansas City, and although spotty by location, transactions and moderate activity have continued in the metro area.

Of the nine specific submarkets tracked by Kessinger/Hunter & Company, north and south Johnson County on the Kansas side and the Country Club Plaza and south Kansas City submarkets on the Missouri side continue to show some signs of continued growth and activity.

Although small blocks of leased space remain readily available, specifically in south Johnson County, large blocks of space of 50,000 square feet and greater are more scarce. These larger blocks of space tend to be speculative, new construction, and show significant disparity in rental rates due to high construction costs when compared to existing product. Consequently, depending on timing and need, the majority of tenants in these markets are continuing to work hard with their existing landlords, often exchanging term for reduced rates. This is especially evident given the ever-increasing cost of tenant improvements, down time and lease-up; the concessions and ending rental rates; operating expense adjustments; and competition. Landlords are more astute than ever to lock up existing lease terms as quickly as possible.

In contrast to the modest activity in the Johnson County and south Kansas City, Missouri, submarkets, the downtown market remains flat with much less activity. The overall vacancy rate in the CBD remains among the highest in the city, ranging from 16.6 percent for Class A product to as high as 48 percent for smaller, now obsolete Class C space. The approximately $4 billion of public and private investment over the last 36 months has helped to revitalize downtown, and is attracting retail tenants to the city’s core, but office users have been slow to follow. The overall office market shows little signs of recovery due to the cloud of three to four rather large blocks of vacancy. One Kansas City Place, City Center Square, Two Pershing Square and Town Pavilion all have the ability to accommodate large users of over 100,000 square feet. As the Power & Light District, Sprint Arena and residential boom continue to change the landscape, downtown remains an incentive-laden opportunity with very competitive rental rates with which brokers and landlords can attract large employee users.

The suburban submarkets are not immune to vacancy, as the north Kansas City, Missouri, area, which includes the Airport submarket, has shown little or no significant activity. While mixed-use projects such as Zona Rosa’s small office availability and Briarcliff’s office park show signs of demand and are leasing fairly rapidly, the older second and third-generation space near and around the Tiffany Springs Parkway Circle remains soft, but still provides a competitive environment with fairly depressed rents for small and large tenants.

On the plus side, the Country Club Plaza continues to play its role, as on a whole, it features the highest-quality office product in the metro area. Surrounding the renowned Country Club Plaza shopping district, demand has generally been fulfilled in the past by build-to-suits. Not until recently have large blocks of space been available. Due to their consolidation to the recently purchased former H&R Block headquarters, American Century’s has left a large vacancy at One Main Plaza, and through the upcoming completion of West Edge, Highwoods Properties Plaza West has a large block of nearly 100,000 square feet of office space available. These vacancies, along with a lack of available infill opportunities, will continue to keep this submarket in check and somewhat impervious to overbuilding.

Compared to other Midwestern markets, the Kansas City office sector has experienced some strengthening through the middle of the year. However, continual fallout in the mortgage industry, a lack of overall capital chasing real estate, and Sprint’s continued consolidation should continue to drive a slow market through mid-2009. Consequently, credit tenants will continue to be in position to take advantage of landlord concessions, especially for the mid-size tenant market, which is most prevalent in the Kansas City metro area.

— Gregory Swetnam is a principal and director of office brokerage Kansas City, Missouri-based Kessinger/Hunter & Company, a Cushman & Wakefield Alliance.

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