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 …
Market Reports
It’s been a remarkable 18-month run in the Kansas City industrial market. Developers are being rewarded for their patience and long-term land positions, and larger tenants finally have several options from which to choose among Class-A distribution facilities. In January 2013, the vacancy rate in the Kansas City industrial market was a tight 6 percent, with barely any product available for users searching for modern distribution space of 200,000 square feet or more. At that time, I made some predictions about new construction, vacancy and absorption. Let’s review what happened. Market Drivers Kansas City recorded more than 3.5 million square feet of positive absorption in 2013 alone, adding another 800,000 square feet during the first two quarters of 2014. This demand was driven in large part by the automobile suppliers, online retailers and by governmental agencies. At mid-year, the vacancy rate for Kansas City warehouse product had fallen to 5.6 percent, well below the national average of 7.3 percent. Average lease rates have moved up to pre-recession levels, as regional distributors and third-party logistics companies attempt to secure large blocks of space for their national footprints. In 2013, the market delivered 2.4 million square feet of new industrial product, with …
Momentum continues to build in the St. Louis commercial real estate investment market across all major product sectors. As private and institutional investors search for higher yields, they are drawn to secondary markets like St. Louis. Investors are seeing a yield premium of 100 to 150 basis points as measured by the initial cap rate. Office Market Grows Hotter The suburban office sector has generated the most momentum, building on a strong 2013. Suburban office investment sales activity could exceed $450 million in 2014, which would be a 90 percent increase over 2013. The largest office deal is the sale of Cityplace, an 884,000-square-foot Class A office complex in Creve Coeur that is under contract and expected to close for approximately $141 million. New Boston Fund and the Koman Group are the sellers. The buyer is undisclosed. While the search for higher yields is certainly a factor driving increased suburban office investment activity, another big part of the story is the continued occupancy growth supported by job gains. The St. Louis unemployment rate, which in May 2014 stood at 6.96 percent, is rapidly approaching the pre-recession level of 5.7 percent set in November 2007. Growth in industries such as technology, …
After years of trailing cities such as Dallas, Memphis and Indianapolis as major bulk distribution centers, Kansas City has emerged as a significant and large hub for the development of Class A industrial logistics centers whose development is backed by institutional money. The trend is transformational for our market and here to stay for three primary reasons: (1) Institutional money — namely life insurance companies — has always allocated a portion of its funds for real estate. That money has found Kansas City. (2) Local Kansas City developers, brokers and property managers are well-suited and eager to accommodate non-operating entities like life insurance companies to buy land, build projects on a speculative basis, lease up and manage the new developments, and sell them when the financial backers decide to cash in on their investments. Kansas City has traditionally been a family-owned real estate development community comprised of five or six major players. None of these families has sold its portfolios to industrial REITs. Thus, there is a niche for institutional-backed, Class A development that is financed with deep pockets and brought to market by local developers. (3) The biggest reason for large-scale Class A industrial development in Kansas City is …
The apartment market in metro Kansas City is in an expansion phase, driven in large part by strong renter demand and an improving economy. Developers are building and opportunistic sellers are bringing properties to market. Meanwhile, the core, growth and value-add investors are gobbling up assets. Lenders are competitively financing both acquisitions and new developments in all classes of properties. Renters can feel the momentum as well, with more product to choose from and higher rents. Employment Summary It all starts with jobs. The Mid-America Regional Council, which serves the nine-county Kansas City metro area, estimates that the local economy added 12,300 jobs in 2013, correlating to annual GDP growth of 2.7 percent. This figure compares favorably with U.S. GDP growth of approximately 2 percent during the same period. The 12-month period from August 2012 to August 2013 provides a window into the rebound in the local employment market. The leisure and hospitality sector created 5,800 net new jobs during that stretch, while the professional and business services sector added 5,700 new jobs. Meanwhile, the mining, logging and construction industries added a total of 2,600 jobs in the metro area (mostly construction), including 1,900 in Kansas and 700 in Missouri. …
After years of trailing cities such as Dallas, Memphis and Indianapolis as major bulk distribution centers, Kansas City has emerged as a significant and large hub for the development of Class A industrial logistics centers whose development is backed by institutional money. The trend is transformational for our market and here to stay for three primary reasons: (1) Institutional money — namely life insurance companies — has always allocated a portion of its funds for real estate. That money has found Kansas City. (2) Local Kansas City developers, brokers and property managers are well-suited and eager to accommodate non-operating entities like life insurance companies to buy land, build projects on a speculative basis, lease up and manage the new developments, and sell them when the financial backers decide to cash in on their investments. Kansas City has traditionally been a family-owned real estate development community comprised of five or six major players. None of these families has sold its portfolios to industrial REITs. Thus, there is a niche for institutional-backed, Class A development that is financed with deep pockets and brought to market by local developers. (3) The biggest reason for large-scale Class A industrial development in Kansas City is …
The famous Kansas City song — first recorded by Wilbert Harrison in 1959 — says, “I’m going to Kansas City, Kansas City here I come.” Well, in 2013, the retailers did come to Kansas City, which was beautiful music to the ears of developers and landlords throughout the area. Some of the most notable new additions to the Kansas City retail scene include IKEA, The Container Store, Academy Sports + Outdoors, Scheels Sporting Goods, REI, Fresh Market, Rock & Brews, Cinetopia, Eileen Fisher, Freebirds World Burrito, Chuy’s and Hallmark’s new store concept called “HMK.” Still other retail additions include Pinstripes, an upscale entertainment and dining venue featuring bocce and bowling, as well as Sprouts and Corner Bakery. Geographic proximity to other established markets for these retailers led to a natural migration pattern to Kansas City. However, the following factors created new inventory opportunities and supplied the key ingredients for an active retail climate in 2013 that should continue in 2014: • the metro’s declining unemployment rate to 6.3 percent from a recent high of 8.4 percent in 2010; • the buoyant housing market, with an estimated 5,960 new residential and apartment units added during 2013 versus 2,342 units in 2010; …
Downtown St. Louis has always marched to the beat of a different drummer. Despite a sluggish economy and a history of major corporations leaving for a variety of reasons, the downtown office market has experienced steady, incremental growth that has been reflected by the positive absorption since 2009. Much of this growth is due to tenants looking to expand or relocate in order to take advantage of the many options downtown, which generally are less expensive than suburban locations. Since 2012, downtown St. Louis has gained 425,000 square feet of positive absorption in the office sector. New Life for Older Buildings Recent building renovations also play a part in the growth. Creative companies are looking for open, contemporary facilities, which can be found in old buildings that have been redeveloped. These revitalized buildings now offer new infrastructure and modern space that exude a cool look and vibe. Indeed, that trend can be found in historic structures like the 450,000-square-foot Park Pacific, once the headquarters of the Missouri Pacific Railroad and now 80 percent luxury apartments and 20 percent office (tenants are CBS Radio and Creative Producers Group) and retail space. Cupples 9, a 144,000-square-foot building that was once part of …
Speculative construction in Kansas City’s industrial market has exceeded the height of the last boom for a couple of reasons. On a macro level, the economy is improving, so it’s only natural that the local market would follow suit, especially given its logistical advantages. The development of intermodal facilities, the aging stock of existing product combined with no new construction in the past four years — plus a thriving automotive sector — are pushing this new wave of development locally. During the first half of this year, the Kansas City industrial market has absorbed more than 2 million square feet of space, driving down the vacancy rate to 7.5 percent, slightly lower than the historical average of 7.6 percent and down from the peak of 8.4 percent in 2011. We’re likely to experience an increase in vacancy during the next 18 months, however, as six properties totaling slightly more than 2 million square feet deliver. In fact, 2013 will post the most speculative development of the past decade, exceeding 2008’s total of 753,000 square feet. New Logistics, New Product One of the key demand drivers for the latest boom involves the more sophisticated approach to logistics on the part of …
Consumer spending in St. Louis is up, according to the latest Federal Reserve Beige Book. Likewise, the Fed reports that residential real estate activity is increasing at a moderate to strong pace with escalating home sales and prices. All around, there is a sense of optimism that has jump-started retail activity. The vital signs are just starting to reflect this surge in activity and are expected to continue improving for the foreseeable future. Asking rates, averaged across all retail sectors, have remained near $12 per square foot triple net over the last three quarters, while vacancy rates have fallen from 9 percent to 8.5 percent during that same period. Net absorption has seen positive gains over the last three quarters with the delivery of a few new fully occupied projects. These positive changes in absorption and vacancy rates should result in higher asking rates going forward. Competitive Landscape An example of a successful project is in Chesterfield Valley, where two outlet mall developers have created more than 660,000 square feet of new retail space within a two-mile radius. The two projects, headed by Taubman Prestige Outlets and Simon Property Group, will open this month in time for back-to-school shopping. The …