A Rebirth of Kansas City’s Downtown Multifamily, Office Market

It’s a trend that’s happening across the country. Millennials are fleeing the suburbs of their childhood and choosing to work and live in the urban areas of every major American city. But there’s a unique twist to this story in Kansas City. While Millennials are moving downtown in droves, many have a reverse commute.

Most Fortune 500 companies have remained in the suburbs after their flight from downtown beginning in the 1970s. In addition, several large companies have jumped the state line due to favorable tax incentives.

In the second quarter, the downtown office vacancy rate stood at an unhealthy 29.9 percent. Only one office submarket posted a higher vacancy rate. Meanwhile, the leading submarket, South Johnson County, recorded a 12.8 percent vacancy rate.

It’s been difficult for older office buildings with smaller floor plates of 10,000 to 15,000 square feet to compete as companies look for larger floor plates of 25,000 to 30,000 square feet. Companies are also finding that surface parking in the suburbs is more economical.

Building Conversion Wave

The good news is that a slow reversal in both the multifamily and office markets is occurring as older and historic office buildings are adapting to the demands of Millennials. According to the Kansas City Downtown Council, Millennials (defined as persons age 18-37) make up 59 percent of Kansas City’s downtown population.

Over the last 10 years, roughly 4 million square feet of office space has been converted to multifamily housing in downtown Kansas City. In 2014 alone, 715 units will be added, and another 1,266 units are expected in 2015.

This continued trend of multifamily development will eventually reduce the office vacancy rate as repurposed office buildings are removed from the inventory and new multifamily projects bring more residents, followed by the expectation of job growth.

Developed by the Cordish Cos., the Power & Light District’s entertainment, shopping and dining options are part of the appeal to living downtown. The Crossroads Arts District, an organic, local dining and entertainment venue, is another draw for Millennials. The renovation of Crown Center, an interior retail mall, also has helped with the transformation.

Nearly 1,500 multifamily units will be added to the market when seven historic building conversions are expected to be completed in 2015. Of note is the prominent Commerce Tower, which will be converted into a $70 million, mixed-use property with 160,000 square feet of office space and approximately 350 Class A apartment units.

Another new project involves the Power & Light Building, which is being converted into 270 multifamily units by NorthPoint Development. One of the best examples of art deco architecture in the country, the Power & Light Building is a recognizable part of the city’s skyline that has been dark for years. The residents of Kansas City are greatly anticipating the iconic building lighting up the skyline once again next year when the project is delivered.

Running out of options for historic renovations in Kansas City, developers from across the nation are looking at cultivating new projects. In 2013, 19,100 residents were living downtown. By 2030, another 20,000 projected new residents will result in a need for an average of nearly 800 new units per year during the next 15 years.

Berkley Riverfront is an example of a new development by Indianapolis-based Flaherty & Collins Properties. The 396-unit multifamily project will be located on the riverfront site that is owned and master-planned by the Port Authority.

The upscale One Light, a 311-unit, high-rise multifamily development, along with the 275-unit Crossroads West and 156-unit Summit on Quality Hill, are just a few of the new projects in the pipeline scheduled for delivery in 2016 for a total of 1,413 units.

Dynamic Office Market

The impact of Millennials is demonstrated by downtown’s transformation into a creative employment hub. Information technology companies, advertising agencies and architectural firms all are moving in and vying for young talent. Creative tenants are interested in the downtown office market because it suits their office space needs and helps attract and retain highly sought after employees.

In addition, a $100 million, 2.2-mile streetcar route will be completed by the end of 2015, which will spur land sales and new construction projects along the route. Intended as a starter line, the possibility of more routes remains to be seen.

While many of the traditional office tenants have fled downtown in recent decades, growth from creative employers will continue as more and more Millennials choose to make their home in Kansas City’s urban core.

By Gib Kerr, CCIM, vice president, Cassidy Turley. This article originally appeared in the September 2014 issue of Heartland Real Estate Business.

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