CITY HIGHLIGHT, SEPTEMBER 2009

KANSAS CITY
Trip Ross, Kyle Henning, Pete Stadler, Brandon Sifers, Robert Keatley, R. Matthew Kiehne and Olen Monsees

Kansas City Retail Market

As many had predicted, 2009 has seen the patterns of 2008 exacerbated by the woes of flagging consumer confidence and capital markets on life support. With many of the catalyst retailers and big box anchors sitting on the sidelines, the retail commercial real estate landscape appears to be a case study for Darwinian fundamentals. As these trends play out on a national scale, the Kansas City metro has taken its fair share of decline while still maintaining a sense of stability. In this climate, the focus has turned to daily necessities, value and well-established trade areas.

Developments in all quadrants of the Kansas City metro have experienced delays as tenant demand has slowed. RED Development’s Summit Fair lifestyle center in Lee’s Summit, Missouri, is one example of a project that is battling this trend despite an impressive tenant lineup that includes Macy’s and a recently opened JCPenney. Cousins Properties’ Tiffany Springs Market Center has also been an exception, as they continue to fill small shop space in the Target-, The Home Depot- and JCPenney-anchored center in the northern trade area of Kansas City, Missouri. The long-awaited Plaza at the Speedway in Kansas City, Kansas, will begin welcoming tenants in 2009. The center will feature a Wal-Mart Supercenter, Best Buy, Office Max and Michael’s, and is being co-developed by Block & Company and First National Development. Located adjacent to The Legends at Village West retail development, Nebraska Furniture Mart, Cabela’s and the Kansas Speedway, The Plaza at the Speedway is the most recent addition to this very active trade area.

As the high-end segments of the retail market retract under the strain of limited consumer spending, the value and quick-service segments seem to be taking advantage of opportunities that were previously unavailable to them. Culvers and Chick-fil-A have both increased their presence by two locations in 2009. Other active concepts include Firehouse Subs, Snap Fitness, Burger King and Firestone Complete Auto Care. In addition, Dunkin’ Donuts will enter the Kansas City market in 2009. Dunkin’ has one active franchisee in the market, and they have secured their first location in south Overland Park, Kansas.

With the amount of retail transactions dropping significantly, one local transaction that has garnered national attention is the recent sale of three grocery-anchored centers. In May of 2009, principals at LANE4 Property Group and several local investors acquired Prairie Village and Corinth Square Shopping Centers in Prairie Village, Kansas, and the Fairway Shopping Center in Fairway, Kansas, from Highwoods Properties, a public REIT based in Raleigh, North Carolina. The more than 570,000-square-foot portfolio of centers was 94 percent occupied, compared to the average metro neighborhood center occupancy rate of 86 percent.

In this unstable climate where only the strong have an opportunity to survive, a return to the basic retail fundamentals of proven trade areas and value-oriented merchants will be integral to battling the bell curve of this cycle. While the Kansas City metro has experienced its fair share of this slump, many developers and tenants have had success by relying on creativity, persistence and patience. With 2009 almost behind us, the outlook for 2010 seems brighter, as the market continues to adjust and a resilient development community continues to push forward.

— Trip Ross is an associate with Kansas City, Missouri-based LANE4 Property Group Inc.

Kansas City Multifamily Market

The Kansas City apartment market continues to hold its own despite economic challenges and uncertainties. While occupancy and rental rates have remained steady, development has been tempered by a tight lending environment.

The pace of planned construction has slowed dramatically as a result of market fundamentals. The first half of 2009 showed the lowest level of permits, a mere 78, in the past 20 years. The lack of liquidity and tougher underwriting standards are halting development. The uncertainty in asset values plays a part in this as well as lenders underwriting deals more conservatively. As a result, banks are requiring developers to contribute a greater amount of equity, thus decreasing project risk for both parties. 

Market fundamentals have remained steady.  Rents are averaging $0.79 per square foot, unchanged from the start of the year. Rates vary widely from $1.14 per square foot at the Country Club Plaza, which has 95 percent occupancy, to as low as $0.64 per square foot for Class C apartments in the Northland submarket.

These rates, though, are offset by concessions. At the end of June, nearly three-fourths of the area’s multifamily properties offered concessions, up noticeably from the 56 percent that used concessions to attract renters at the start of the year. This trend will no doubt continue until the economy stabilizes and shows signs of strength.

Occupancy remains relatively strong at 91 percent, unchanged since the start of 2009.  In contrast, other markets throughout the United States have seen substantial declines in occupancy. This is attributable to the fact that many college graduates are moving home rather than relocating for new jobs, current renters are consolidating with additional roommates, and the shadow supply of single-family homes has increased rental competition.  

Still, some developers are forging ahead. There are two noteworthy infill projects. The Morgan Group is building Market Station Apartments, a 323-unit luxury apartment complex on 5.3 acres just north of the downtown loop. One of the largest multifamily developments in the downtown area in some time, rental rates are projected at $1.30 per square foot. As such, Market Station will test the top end of the spectrum in a submarket that already has a number of condominiums that have moved to the rental arena.

Briarcliff Development Company also announced plans for The Briarcliff. The 263-unit luxury midrise apartment complex should break ground before year’s end in the 600-acre master planned community. This will be the first luxury rental housing of its kind in the Northland submarket.

Developers still remain focused on the suburbs, preferring these areas for the concentration of employers and growth, favorable demographics and readily available land.

Stockbridge, Georgia-based Davis Development followed this pattern when it entered the Kansas City multifamily market a couple of years ago. The company has since built three garden-style apartment projects, bringing more than 800 Class A units online in the suburbs.

These garden-style apartments appeal to young professionals – single and married – as well as older adults preferring the convenience of maintenance-free apartment living.

Additionally, developers are building complexes that offer options in floor plans to accommodate the differing needs of renters. Newer projects also come with amenities such as resort-style pools, upscale interior finishes, business centers and modern fitness facilities in the hopes of continuing to attract new renters.

The current economic cycle remains a challenge for the multifamily market. Job losses are expected to continue throughout the balance of the year, but at a slower pace.

On the positive side, the inventory of existing homes is down 13 percent from June 2008 to June 2009, and the inventory of new single-family homes has decreased by a third in the same timeframe. Coupled with this, economic forecasts suggest that Kansas City may recover from the economic downturn sooner than other areas in the nation.

While we anticipate that the multifamily sector will remain stable throughout the rest of the year, we expect that conditions will improve during the first half of 2010.

— Kyle Henning, Pete Stadler and Brandon Sifers are part of the Apartment Advisory Group in Colliers Turley Martin Tucker’s regional office in Kansas City.

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