Unlike many other major U.S. hotel markets in 2008 and 2009, Kansas City did not experience devastating decreases in occupancy and average daily rate (ADR). The severe drop in revenue that stung markets such as Detroit, Cincinnati, Chicago, Phoenix, San Diego as well as Dallas did not occur in Kansas City. In some instances, these other markets experienced decreases in revenue per available room (RevPAR) of 30 to 35 percent, while Kansas City experienced a decline of 15 to18 percent.
The Kansas City hotel market recorded increases in ADR, occupancy and RevPAR throughout 2011 and the trailing 12-month period ending in March 2012. During this period, occupancy increased 3.4 percent to 57.3 percent, average daily rate increased 2.3 percent to $82.61 and RevPAR increased 5.7 percent to $47.37.
According to Smith Travel Research, the data was based on 285 reporting hotels with a total of 31,927 rooms.
The biggest improvement in real estate fundamentals occurred in the Overland Park-Lenexa market and the Country Club Plaza area.
Both areas posted overall RevPAR growth of an impressive 10 percent, while the Kansas City North Airport market experienced growth of only 3.8 percent.
Occupancies in the downtown hotel market are projected to remain relatively flat through 2012 and then increase due to booked convention business in 2013 and 2014. ADR in the downtown hotel market is expected to increase by 2.5 percent in 2012.
Kansas City has a diverse mix of hotel demand generators. Leisure demand is driven by two professional sports franchises: the Kansas City Royals and the Kansas City Chiefs. This July, Kansas City will host the Major League Baseball All-Star Game at Kauffman Stadium.
The Sprint Center, located downtown, has become a major venue for concerts and college sporting events, including the Big 12 basketball tournament. The Country Club Plaza, an upscale, outdoor shopping and entertainment district, continues to draw visitors regionally, allowing the hotels in the area to experience the highest occupancy and ADR levels in the city.
The headquarters of several Fortune 500 companies are in Kansas City, including Sprint Nextel Corp., H&R Block, YRC Worldwide Inc., and International Assets Holding Corp. Fortune 1000 corporations include Great Plains Energy, Aquila, AMC Theatres, Applebee’s, DST Systems, Garmin International, Cerner, Seaboard Corporation, and Russell Stover Candies. Hallmark Cards, which is privately held, is also located in Kansas City.
The U.S. government is the largest employer in the Kansas City metro area, with more than 146 federal agencies maintaining a presence. The Internal Revenue Service maintains a large service center in Kansas City that is nearly 1.4 million square feet and employs approximately 2,700 workers. The new Federal Reserve Bank, which employs approximately 925 people, opened in 2010. The General Services Administration has more than 800 employees in Kansas City, with most located at the Bannister Federal Complex in South Kansas City.
The Bannister Complex is also home to the Kansas City Plant, a National Nuclear Security Administration facility operated by Honeywell. Honeywell employs nearly 2,700 at the Kansas City Plant, which produces and assembles 85 percent of the non-nuclear components of the U.S. nuclear bomb arsenal. The Social Security Administration has more than 1,700 employees in the Kansas City area, with more than 1,200 located at its Mid-America Program Service Center in downtown Kansas City.
Development trends
Currently, there are seven hotels under construction in the Kansas City market, including three new Holiday Inn Express hotels: one in the Airport market, a second Holiday Inn Express in the Midtown market, which is adjacent to the University of Kansas Medical Complex, and a third in the Overland Park market.
A new 55-room luxury boutique property is taking form downtown in a renovated office building. The Briarcliff mixed-use development, just north of downtown, has a new Marriott Courtyard under construction. Lenexa has a new Hilton Garden Inn under construction at 119th Street and Interstate 35. The Drury Hotel opened a new property in 2011 in the eastern suburb of Independence.
The Country Club Plaza features the planned West Plaza boutique hotel, which is part of the stalled West Plaza mixed-use development. Construction on this project was halted in 2008 due to cost overruns. The project was sold and is now under construction with an expected opening in late 2013.
Investment Outlook
Property sales have primarily included sales in the select-service and limited-service segments with transaction activity increasing throughout 2011 and the first quarter of 2012. Most sales have taken place in the North Airport, Overland Park-Lenexa and Olathe markets.
National hotel investment groups are reportedly interested in higher-end, institutional-grade properties. Transaction activity is projected to stay active through 2012 and 2013, particularly with the corresponding growth in ADR, occupancy and RevPAR.
Although cautious in their underwriting criteria, several financial institutions began lending in the Kansas City market in 2011. Additionally, we are seeing owners of larger properties in the market refinancing with CMBS debt provided by national firms.
Overall, the Kansas City hotel market is likely to see continued improvement in real estate fundamentals and additional investment by local, regional and national investment groups.
— Herb Warmbrodt is president of Warmbrodt Hotel Investments based in Leawood, Kansas.