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Despite Pandemic, Wichita Market Experiences Significant Urban Development

Almost 400,000 square feet of office space is under construction or in the planning stages within the Wichita market, including Fidelity Bank’s $51 million corporate office project.

By Tom Johnson, NAI Martens

The overall Wichita economy is not out of the woods yet, but numerous factors point to a continuation of the recovery from both the Great Recession and the impact of the pandemic. Since the significant employment downturn during the second quarter of 2020, the Wichita metro area has markedly recovered but remains well below 2019 non-farm employment.

The seesaw unemployment rate has now declined to just over 5 percent. All employment sectors are expected to increase from 3 to 6 percent in 2021 with retail, leisure and hospitality leading the way as restaurants and travel return to pre-pandemic levels.

Tom Johnson, NAI Martens

In the background of all the pandemic noise have been significant gains in urban development with over $1 billion of public and private sector investment since the recession.

● Residential has grown exponentially with 21 new and renovated properties representing 1,228 units with some of the highest rental rates in the city.

● With over 100 restaurants and local shops, retail has increased significantly, adding almost 500,000 square feet, a 39 percent  increase with more to come.

● Starting with the Ambassador Hotel renovation, the hospitality sector has added 375 rooms with another 95 rooms in the recently opened Home2Suites in Delano.

● In the last two years, several significant office projects representing over 500,000 square feet have been completed. Almost 400,000 square feet is under construction or in the planning stages, including Fidelity Bank’s $51 million corporate office project.

Complementing and supporting the commercial development has been significant additions to the community’s quality of life, including the $200 million Intrust Bank Arena, the $38 million Advanced Learning Library and the opening of the 10,000-seat, $75 million Riverfront Stadium, home of the Minnesota Twins Double A affiliate, the Wind Surge.

On the drawing board is the Riverfront Legacy Master Plan, the $1 billion performing arts, convention center and green space plan; and Riverfront Village, a $127 million mixed-use venture adjacent to the ballpark. Both were put on hold during the pandemic. The $75 million Kansas Health Science Center, home to the College of Osteopathic Medicine, is under construction with a completion date in 2022.

Changing office environment

Led by Cargill’s $70 million Protein Division headquarters, IMA’s move as the 430 Douglas building’s anchor tenant and Meritrust’s renovation of the 110,000-square-foot former Cargill building, core area office space migration has been significant. Users continue to evaluate remote work alternatives, flexible space utilization and employee retention and recruitment amenities.

The downside of office relocation, without an increase in net absorption, has been increasingly large blocks of space coming available in traditional central business district buildings and some suburban properties. The fate of these older, less competitive office environments will have a significant impact of the future of the market.

There has been limited office development in the suburban market apart from Wichita State University’s Innovation Campus, which has seen phenomenal partnership growth. Most recently, Fortune 500 company NetApp broke ground on its new 168,000-square-foot Wichita headquarters. Additionally, the 60,000-square-foot Partnership Building 7, home to Deloitte’s The Smart Factory @ Wichita, is under construction.

The overall occupancy rate ranges from 80 to 85 percent for Class A properties, including available first-generation space. Properties with ownership and management focused on quality maintenance and expanding amenities will outperform the market. Most Class B properties will continue to be marginalized by lower demand.

There is a unique spread in asking rents for Class A space in the urban core and the primary suburban markets. The top end of the market previously ranged from $16 to 18 per square foot on a full-service basis for most second-generation space. New space, with rents quoted from $19 to $20 per square foot on a triple net basis, has pushed the full-service lease rate to about $30 per square foot for the first time.

On road to retail recovery

With consumer spending surging and the economy regaining its footing, the retail market is making a comeback. Despite a few setbacks, occupancy rates and rents have generally held steady.

Wichita was aggressive with its reopening strategy, beginning last summer for hard goods and continuing into 2021 for restaurants and entertainment. The market, not unlike others around the country, experienced national chains who filed bankruptcy and or closed stores such as Stein Mart, Gordmans and Pier 1, with small businesses heavily impacted.

Most local restaurants and retailers have reopened to varying degrees of success under local mandates on wearing masks and social distancing. The Core Area submarkets of Delano, Old Town and the Douglas Design District are primary infill destinations for restaurants and local shops. Government stimulus programs such as the PPP and the new Restaurant Revitalization Fund have been a godsend for small and midsize businesses.

While new significant development has essentially come to a standstill, developments such as Greenwich Place along K-96 in northeast Wichita have seen substantial activity with national retailers such as REI, Under Armour, Old Navy, Marshalls, Skechers and others opening new outlets.

Power centers New Market Square and One Kellogg Place remain competitive apart from a couple of big box vacancies. Towne East is faring better than the typical suburban mall despite losing Sears a couple of years ago, while Towne West remains challenged by changing demographics.

Entertainment is coming back as theaters and concert venues are reopening. Regal Cinemas has opened its primary locations as has AMC. Major concerts and events are returning to Intrust Bank Arena. Online shopping and brick-and-mortar stores are here to stay, and all retail categories  have adapted or are adapting to the “new normal” with carryout, curbside and drive-thru concepts continuing to evolve.

Strong demand for industrial

E-commerce is having a significant effect on Wichita’s historically manufacturing-driven industrial market. Demand has been strong for quality-user properties, but supply has traditionally been limited. A significant shift is the emergence of large speculative development supported by the City of Wichita’s incentive program.

Over the recent past, several 100,000-square-foot buildings with asking rents around $5.50 per square foot triple net have been built and leased. This rental rate is well above the historical industrial gross rent of $4.50 per square foot.

Amazon has entered the market leasing 130,000 square feet and building a 1 million-square-foot distribution center. Pratt Industries, a major corrugated packing supplier to Amazon, is building a new 900,000-square-foot facility. A 114,000-square-foot sister building to the Amazon-leased property is under construction and another 100,000-square-foot spec building is available in the Ironhorse Industrial Park.

The primary demand corridors are 1) along I-135 extending from Robelli’s Air Capital Industrial Park at 85th Street south to RRM Properties’ 120-acre redevelopment site at 21st Street that will include 30 acres of warehouse space, a travel plaza and 630,000 square feet of industrial or office uses, and 2) in the Comotara industrial area north to the Bel Air Industrial Park.

While the overall vacancy rate pushes 10 percent, most available space is characterized by older, less-competitive manufacturing-oriented property. For those properties meeting today’s requirements, leasing and sales activity has been brisk.

As the aerospace/aviation environment improves, suppliers and vendors, who have found ways to sustain themselves over the last few years, should push overall demand. Given continued requirements and a shortage of available property, land sales have increased significantly. Over the last two years, there have been over 60 transactions representing over 650 acres.

Tom Johnson is president of NAI Martens. This article originally appeared in the May 2021 issue of Heartland Real Estate Business magazine.

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