The office sector has enjoyed a renewal of leasing activity in suburban Johnson County and South Kansas City, while the remainder of the market continues to be sluggish. Large tenants — 50,000 square feet and above — have accounted for most of the activity, whereas the smaller tenants have remained stagnant.
The majority of tenants continue to renew their leases unless there is a compelling reason to relocate, such as a business expansion or downsizing. The economic uncertainty continues to be the most significant factor affecting the overall office market.
However, many large space users have chosen to jump across the state line to relocate to either Kansas or Missouri due to the attractive economic incentives either state is offering. That trend has helped boost the overall leasing activity.
In 2011, Johnson County and South Kansas City recorded net absorption of 646,000 square feet, which is remarkable considering the average for the entire Kansas City metro area since the late 1990s has been 401,000 square feet annually. This trend has continued in the first half of 2012 as tenants absorb large blocks of contiguous space.
For example, Netsmart Technologies has leased 64,000 square feet in Overland Park, Kansas. Netsmart is modernizing a 1970s-era building, which will be the home to 500 employees during the next 5 years.
In addition, Ascend Learning has leased 85,000 square feet of the 104,000 square feet at Two Hallbrook Place in Leawood, Kansas. Ascend Learning will be the anchor tenant for the newly built building, which sat vacant for nearly three years. The company is expected to employ 400 people in the next 2 years.
Net Effect
The increased activity among large tenants has helped fill a hole that was mostly created by Sprint when it unloaded 800,000 square feet of fully furnished office space on its campus in 2008.
Today, the Sprint campus has only 80,000 square feet remaining, which is enabling the remainder of the market to rebalance and create other opportunities.
With the absence of large blocks of vacant space and the low interest rate environment, the build-to-suit market is seeing some renewed activity. AMC Theatres is under construction with its 130,000-square-foot headquarters building in Leawood, Kansas, and TEVA Neuroscience recently announced that it would be relocating its headquarters to a newly constructed 154,000-square-foot, Class A office building in Overland Park, Kansas. Both buildings are scheduled for completion in mid- to late 2013.
Cerner Corp. also recently broke ground on the first building at its Continuous Campus in Kansas City, Kansas, which will bring 1,000 employees to the area by mid-2013, 80 percent of which will be new hires.
In addition, the U.S. General Services Administration announced that it will move 1,000 employees to downtown Kansas City, Missouri, by 2014. These employees will be relocated from their Bannister Federal Complex, which is located in South Kansas City.
There are nine federal agencies located in this complex, one of them being GSA’s headquarters. The move could absorb upwards of 200,000 square feet in the downtown market, which could use an economic boost.
Notable Property Sales
Although leasing activity has created most of the buzz in the Kansas City market, the sale of owner-occupied buildings has increased in the past six months with Country Club Bank purchasing a 62,000-square-foot office building on the Country Club Plaza for its new headquarters and BE Smith purchasing a 70,000-square-foot building in Lenexa City Center East, which would be the first major development in the project since 2009.
On the flip side, the investment sales market has been quieter with only a couple of significant transactions in 2012, one of which was a 58,000-square-foot multi-tenant medical building in Overland Park, Kansas. The building sold for $16.6 million at a cap rate of 7.56 percent.
Additional opportunities have cropped up. Three of the top 10 largest high-rises in downtown Kansas City are available for sale, which includes Commerce Tower at 450,000 square feet, City Center Square at 650,000 square feet, and Town Pavilion at 833,000 square feet.
A Look Ahead
The outlook for Kansas City’s office leasing market remains positive with a slight decline in the vacancy rate by the end of 2013. The current vacancy rate has remained consistent during the past year, hovering around 12.8 percent.
Given the inability of developers to secure financing for new office buildings without a major tenant, the speculative office market has been non-existent, creating an opportunity for real recovery that cannot be seen through vacancy and absorption rates alone.
For the office market to significantly rebound, however, the Kansas City area needs to continue to see a net number of new jobs resulting from local companies hiring again as well as companies relocating from other states.
The good news is that there has been positive growth in certain submarkets, and the office market is not as soft as perceived. In the not-too-distant future, the number of quality vacant spaces will diminish and rental rates will begin to creep back up.
— Adam Abrams, CCIM, is a broker in the Kansas City, Missouri office of RED Brokerage LLC.