Kansas City’s central business district (CBD) has received a great deal of media attention over the past two years for good reason. With over 3,000 new residential units delivered, the new KC Streetcar and the national trend of Millennials moving to urban areas, there has been plenty of momentum for the area and much discussion of the “live-work-play” environment. After a long period of decline, the urban core of Kansas City is experiencing a powerful revitalization.
In all the excitement surrounding the CBD, however, another trend may be getting overlooked. Through the first three quarters of 2016, absorption in the CBD (the Downtown, Crossroads and Crown Center submarkets) was more or less flat after accounting for the conversion of office space to residential use and a unique listing in the Crown Center complex.
Gib Kerr,
Cushman & Wakefield
Meanwhile, the suburban office market posted 580,000 square feet of positive absorption during the same period. Yes, Kansas City is in the process of rediscovering and reinventing the CBD, but the performance of the suburban market remains strong.
Construction Boom
The first indicator that tenants are still attracted to key suburban submarkets is the number of recent construction projects. Earlier this year, Burns & McDonnell completed a 311,000-square-foot expansion of its headquarters at 95th Street and Wornall Road.
The only major speculative project currently underway is the 144,000-square-foot Nall Corporate Center II in the College Boulevard submarket.
In terms of build-to-suit work, Dairy Farmers of America chose western Wyandotte County as the site of its new 111,000-square-foot building, which is on track to be completed in early 2017.
Over the last several years, every office development project locally has taken place outside the CBD. The amount of inventory in the CBD office market decreased in 2016 for the third consecutive year.
Miles McCune,
Cushman & Wakefield
Suburbs Attract Developers
The CBD may be moving in the right direction and becoming more attractive for prospective tenants, but at least in the short term developers are making it clear that they see stronger demand for new office space in the suburbs.
The absorption statistics are a powerful indicator of the relative strength of the suburban market, but a more in-depth look at the numbers further proves the point.
Over a 12-month period ending Sept. 30, the vacancy rate for the suburbs dropped from 16.8 percent to 15.6 percent, while the CBD vacancy rate climbed from 21.6 percent to 22.1 percent.
To be fair, Crown Center Redevelopment’s decision to list approximately 300,000 square feet of space had a significant negative impact on the vacancy rate in the CBD, but the area also benefitted from the removal of large tracts of vacant space as buildings were purchased for residential conversion. Vacancy in the suburbs has been steadily dropping, while the CBD has been holding steady.
Beyond statistical evidence, the stories of individual buildings support the narrative of suburban success. The construction of Nall Corporate Center II is nearing completion, and the building has already secured its first major tenant, Mariner Wealth Management.
In late 2015, Black & Veatch chose to consolidate multiple locations into a single space and took more than 180,000 square feet at the newly remodeled OPX office building near College Boulevard and Metcalf Avenue.
One of the buildings vacated by Black & Veatch in November 2015 was the 96,000-square-foot Corporate Woods 34, which underwent substantial remodeling after the firm moved. Within one year, the renovation was complete and the building was 83 percent occupied. It most likely will be full by the end of 2016.
CBD Turns Corner
This is not to diminish the progress made in the CBD. Downtown Kansas City is making impressive strides, and there is a great deal of excitement about what the future holds.
At first glance, Cushman & Wakefield’s recent statistical reports on the CBD show disappointing absorption numbers as many buildings have been removed from inventory for residential conversion.
But a closer look shows signs of an improving market with a lower amount of vacant space, an increase in asking rates and improving amenities (more restaurants, more hotels on the way and the high number of riders on the KC Streetcar in the first several months of its opening).
The continuing strength of the residential market also is encouraging as large numbers of professionals are now choosing to live downtown, further illustrating the attraction of the urban core to workers who are sought after by office-using tenants.
Recent trends in sales tax collections, an occupancy rate over 97 percent in residential units, and an increase in people spending more time in the CBD all point to continuing growth.
Certain fundamental changes needed to occur before the CBD office market can thrive again, and the recent activity is encouraging. Work is nearing completion on the renovation of Corrigan Station, the first major speculative office development downtown in 20 years. The project is close to being 100 percent leased.
Downtown Kansas City is becoming more and more important to the metro area. Nearly a decade ago, the Sprint Center opened, initially drawing large crowds to the area for major events. Today, it’s common to see people walking to and from home, seeking entertainment, and working throughout the urban core.
The even better news is the stronger suburban markets are going to continue to thrive.
-By Gib Kerr, CCIM, Director, Cushman & Wakefield, and Miles McCune, Senior Director, Cushman & Wakefield. This article first appeared in the December 2016 issue of Heartland Real Estate Business magazine.