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CITY HIGHLIGHT, SEPTEMBER 2011
KANSAS CITY HIGHLIGHTS
Nathan Anderson, Matthew Eckert, John Foudray and Matt Vaupell
Kansas City Office Market
Kansas City’s 48 million-square-foot office market had a productive second quarter with 110,000 square feet of positive net absorption. The total for the first half of the year was 169,000 square feet. This was great news after two years of falling occupancy.
Metro-wide vacancy remained high at 22.1 percent. While vacancy has probably peaked, it may shift within a range of 21.5 to 22.5 percent for several months before trending decidedly downward. The national average vacancy at the end of June was 16.4 percent. Cassidy Turley research estimated the national office market to be two to three years away from full recovery.
Nationally, Class A space is recovering much more quickly than Class B. However, in Kansas City there has been more activity in Class B space. Its net absorption totaled 216,000 square feet for January through June, while the total for Class A was negative 46,000 square feet. Space offered for lease on the Sprint Nextel campus was a major factor. During the last two years leasing on the campus totaled 640,000 square feet. This suburban campus has been very competitive in the metro area, in addition to attracting new tenants to the metro area.
One notable point is the recent drop in the amount of sublease space on the market. Kansas City’s office sublease space peaked at 1.7 million square feet in the third quarter of 2010, then it began to decline. By the second quarter of this year it was down to 1.1 million square feet. This was a drop of more than 30 percent in just three quarters.
Some of the change was the result of successful subleasing, but some of the subleases simply “burned off.” The original term expired and the space became available as a direct lease with the landlord. Therefore, a drop in sublease space does not always translate to lower vacancy. Even so, the drop is good news. Subleases are usually offered at a discount to the direct lease rate. Less sublease space may mean less downward pressure on lease rates.
There is very little construction taking place. A 126,000-square-foot build-to-suit will open soon for John Deere & Company, and 40,000 square feet is under construction for Generali USA Life Reassurance. A 26,000-square-foot speculative building is under construction in the Briarcliff development.
The largest recent moves have been relocations within the market, but prospect activity has been picking up. With little pressure from new construction, existing properties should benefit from gradually building activity. The vacancy rate should decline in 2012.
— Matthew Eckert is a vice president with the Kansas City office of Cassidy Turley.
Kansas City Industrial Market
The Kansas City industrial real estate landscape is still spotty but experiencing growth and expansion in several submarkets. A bit like re-seeding the entire lawn after the drought, there are patches that can’t seem to get enough sunlight and others that appear to be lush. There is optimism, in general, but no sense that the ground will be ready for backyard football in 2011.
Vacancy And Absorption
The Kansas City market contains just shy of 250 million square feet of industrial space, of which roughly 12 million square feet would be considered flex space. At mid-year 2011, the vacancy rate stood at 7.4 percent marketwide, holding steady with its starting point on January 1st. That rate compared favorably to the national industrial rate of 9.8 percent at mid-year, and in line with Midwest peer cities of Denver, St. Louis and Indianapolis.
Historically, Kansas City has bumped along between 6 and 8 percent vacancy over the past five years, with a low of 6.2 percent at the end of 2008. But the real story lies in the 10.9 percent availability rate, which tracks space and buildings that are on the market but not yet vacant. These companies are generally hoping to shed excess space and inventory, but simply can’t due to lease obligations and/or a lack of interested buyers and subtenants. The difference between vacancy and availability adds another 8.75 million square feet of space to the competing marketplace.
Net absorption was barely in the red through mid-year 2011, which represents a positive trend compared to the 1.7 million square feet of negative absorption seen through mid-year 2010. I would expect to end the year with positive absorption, but nowhere near the five-year average pace of 3 million square feet annually that Kansas City averaged through 2008.
Rental Rates And Sale Pricing
Quoted lease rates for warehouse space in Kansas City are off only about 10 percent from their highs in late 2008, sitting around $3.90 per square foot net across all classes and categories. The flex market has been hit hardest, facing a 16.8 percent availability rate at mid-year 2011, leading to quoted rental rates at 20- to 35-percent discounts from their highs. On a positive note, the flex category is seeing the most new deal activity, with an influx of entrepreneurs into the marketplace.
Lender-owned properties and distressed sellers have dragged the sale pricing down across all categories and submarkets with few exceptions. Tracking the average asking price versus average sale price since 2007, the flex market has fallen from a peak of $120/$105 (asking/sale price per square foot) to its current level of $68/$62. Warehouse sale pricing has held up better overall, falling from a high of $54/$48 to $42/$34.
Sale pricing is more likely to fall another 5 to 10 percent before it stabilizes. By estimation, no less than 20 percent of all industrial buildings on the market are either owned by lenders or in highly distressed situations. As these buildings sell, they will no doubt drag down the average sale pricing across all categories. With over 650 industrial buildings on the market for sale, this may take another 12 to 18 months to work itself out.
Notable Transactions YTD
Renewal transactions continue to drive the leasing market, as tenants have realized their strong positions and have taken advantage by negotiating favorable terms. Kansas City’s automotive industry has driven two of the largest new leases, including 148,800 square feet to Flex-N-Gate and another 118,215 square feet to LKQ Automotive. It is notable that these new leases are driven by modern functionality — including 30-foot clear heights and ample loading — with the tenants choosing to pay for these amenities over much cheaper options in the marketplace.
Two large industrial sales have occurred in 2011. Liquor-distributor Premier Beverage acquired a 245,00-square-foot, bank-owned distribution facility in Edwardsville, Kansas, at a price of $14.29 per square foot. In Kansas City, Missouri, U-Haul International acquired a 412,000-square-foot facility for $4.7 million, or roughly $11.41 per square foot. Both properties feature clear heights of 30 feet or greater and were acquired a discounts of 60 to 75 percent of replacement cost.
Development And New Construction
New industrial development around Kansas City has come to a near standstill, averaging less than 500,000 square feet over the past three years compared to an historical average of 2.7 million square feet annually. If not for the 1.1 million-square-foot Coleman Distribution facility completed in late 2009, the average new construction figure would be negligible.
Three notable facilities are on pace to be delivered in 2011, including 170,000 square feet for Johnson Controls in Riverside, Missouri. Earp Meat Company, a supplier to McDonald’s and Chipotle, is completing a 160,000-square-foot production and distribution facility in Edwardsville, Kansas. Finally, KCI’s Intermodal Centre is underway with a 349,440-square-foot distribution center for Blount International.
Given the lack of Class A distribution space around Kansas City, I believe we’ll see at least one groundbreaking in 2011. Massachusetts-based Sun Life Financial is likely to move forward with an 800,000-square-foot, high-cube distribution space in Olathe, Kansas, to complement the 600,000 square feet they constructed in 2008. In addition, USAA Real Estate may move forward with a similar facility in New Century, Kansas, with delivery in late 2012.
— Nathan Anderson, SIOR, CCIM, is managing principal of Lee & Associates Kansas City.
Kansas City Retail Market
As the country languishes through a recovery that is seemingly taking eons, the Kansas City metro area is enjoying the arrival of several national retailers that have been courted for years. These highly respected tenants include: American Girl, Nordstrom Rack, H&M, Trader Joe’s, Sur La Table, Kate Spade, Michael Kors, Charming Charlie’s, Saks Off Fifth and LuLulemon. This line-up reads like a shopping center’s wish list and provides a welcome “shot in the arm” for their respective developments.
This is not to say that Kansas City has been immune to the effects of the nation’s economic recession. Though the market continues to show signs of gradual improvement in the stronger retail corridors, most transactions continue to include significant landlord concessions, including free rent and high tenant improvement allowances or build-out costs.
The good news is that we have seen leasing activity increase compared to 2010. Unfortunately, the overall “correction” of the retail marketplace from 2008 is still showing very modest signs of improvement. Land values also continue to remain low across the board, as there are still many attractive opportunities offered at steep discounts.
The areas in Kansas City that continue to attract the most interest, close the most transactions and outperform the rest of the market are the Class A properties in strong-performing retail corridors. These corridors include 119th and Nall/Roe in Leawood, Kansas; Highway 152 and Interstate 35 in Liberty, Missouri; The Country Club Plaza in Kansas City, Missouri; Chipman and Highway 50 in Lee’s Summit, Missouri; and 95th and Quivira in Lenexa, Kansas. The Class B properties continue to struggle with tenant retention and declining rental rates.
For the remainder of this year, we should see the retail market continue to show signs of gradual improvement, primarily in the Class A assets. We also expect that leasing activity from the national retailers will continue to improve in an effort to take advantage of on-going corrections in the marketplace.
So, the question remains: did these national retailers storm in to Kansas City because of the slow economy — or in spite of it? I suppose we’ll never know. What we do know is they are here and the rest of Kansas City’s retailers will all benefit from it.
— Matt Vaupell is an executive vice president with Kansas City-based RED Brokerage.
Kansas City Multifamily Market
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Caymus has broken ground on Village at Mission Farms, a 212-unit apartment complex in Overland Park, Kansas.
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The Kansas City multi-family market continues to experience improving fundamentals. A lowering unemployment rate, relatively little new construction and more difficult home buying/owning conditions have contributed to the improvement.
Unemployment rate in the metropolitan service area (MSA) dropped from 9.7 percent in January 2011 to 8.5 percent in June 2011, according to the U.S. Bureau of Labor Statistics. Retail employment was up 3.74 percent from a year ago. Manufacturing, education and health, and trade, transportation and utilities also showed job growth. Many suburban areas are enjoying low unemployment. Johnson County, Kansas, for example, was at 5.7 percent in April 2011.
New construction has been modest keeping demand healthy. Since 2008, only 769 units a year were issued building permits. The best example of the demand for new apartments may be the Briarcliff City Apartments project north of Downtown in Kansas City, Missouri. The 263-unit project was 100 percent leased within one year of completion, with asking rents of approximately $1.20 per square foot.
The single-family home foreclosures and short sales have added to the renter pool. Tighter home buying lending requirements as well as negligible new home construction are causing many to choose to rent or rent longer.
According to Laurel Wallerstedt with Hendricks and Partners, overall MSA vacancy is continuing to decline. As of the first quarter 2011, general MSA vacancy was 7.5 percent. But by the end of May, it has shed an additional 20 basis points. Asking and effective rents through May 2011 are $735 and $684, up 0.5 percent and 0.6 percent, respectively, since 2010 year end.
Johnson County submarkets have the lowest vacancies. Olathe was at 3.7 percent, Overland Park North at 4.9 percent, and Overland Park South at 5.2 percent. On the Missouri side, Eastern Jackson County was at 4.6 percent and downtown/East-North Kansas City was at 6.5 percent.
Rents have increased in all submarkets but two. Annual rent increases were the highest in the Eastern Jackson County (3.6 percent), Merriam/Mission/Prairie Village (3.3 percent), Shawnee/Lenexa (2.9 percent), and downtown/East Kansas City/North Kansas City (2.8 percent). Rent growth is projected at 3 percent for the next three years.
Improving fundamentals, along with low interest rates, and the low cost of construction are enticing developers with substantial equity to bring new product online. The 228-unit Corbin-Greens by A.G. Spanos in Overland Park, Kansas, is nearing completion and just started leasing. Caymus Real Estate, LLC broke ground in April on the 212-unit Village at Mission Farms in Overland Park. Slated for construction in 2012 are the 339-unit Prairie Creek project in Lenexa developed by Price Brothers, and The Sovereign of Overland Park by Davis Development, offering 250 units in southern Johnson County.
Significant sales activity includes the current marketing of the 1,400 unit J.C. Nichols portfolio, the sale of two Class A assets in Overland Park totaling 534 units and the sale of three Class C assets in Independence, Missouri, Kansas City, Missouri, in Kansas City, Kansas totaling 977 units. Rates for the most recent transactions are 6.2 to 6.8 percent for Class A and 7 to 8 percent for Class B assets.
— John Foudray is director of development for Neighbors Construction Company, Inc.
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