Mixed-Use, Build-to-Suit Office Developments Add Sizzle to Steak in KC

The truth is that the local economy is so broad-based that it is difficult to define. Kansas City’s economic growth today is driven by life sciences, architecture and engineering, information technology as well as financial services.

All of these industries feature homegrown companies and institutions that began with entrepreneurial roots such as telecommunications giant Sprint, a company that traces its roots to a small utility company west of Kansas City.

The world’s power plants and sports stadiums are designed in Kansas City, and a cure for cancer is ongoing driven by The Stowers Institute for Medical Research and the University of Kansas in conjunction with the Kansas City Area Life Sciences Institute.

Cerner, the second largest health care technology company in the world with more than 8,000 employees, announced in August that its 4.5-

million-square-foot campus will surpass Sprint’s campus in Overland Park, Kan., by 600,000 square feet.

BATS Global Markets, which is currently the third largest equities exchange operator both in the U.S. and globally, is headquartered here along with a host of other financial service companies such as American Century Investments, Waddell & Reed Financial Inc., and DST Systems Inc.

Office Winners and Losers

As the office market continues to improve, high-quality office buildings in the best locations are a few quarters away from reaching 90 percent occupancy levels, a feat not achieved since 2007. By contrast, vacancy is expected to increase in Class B office by the first quarter of 2014 as a number of large tenants move from older buildings to newly constructed build-to-suit facilities.

This shift will provide much-needed options for large tenants, but all are in secondary locations in older Class B office buildings. With Class A options dwindling for smaller to midsize tenants in search of quality office buildings, rental rates are firming and setting the stage for higher rates that ultimately will support multi-tenant speculative office construction.

With no speculative office construction for the better part of the past 10 years, large space users today must consider build- to-suit office construction. Kansas City’s largest employers have done just that, initiating more than 1.4 million square feet of new office construction in eight new office buildings. All but one commenced construction within the past 18 months and will be completed by the fourth quarter of this year.

The tenants choosing the build-to-suit option define Kansas City’s new economy. Freightquote, the largest online shipping logistics company in the United States, completed a 200,000-square-foot facility in South Kansas City. Teva Neuroscience, best known as the manufacturer and marketer of Copaxone, the leading drug treatment for multiple sclerosis, completed its new company headquarters in August, a 160,000-square-foot office building in Overland Park Kansas.

Office buildings that lag behind the rest of the market in vacancy may never participate in the current recovery due to their obsolescence, location or merely the fact that the ownership is unable or unwilling to update their assets to current standards, so overall vacancy rates don’t tell the entire story.

The Mixed-Use Advantage

There has been a clear indication that smaller to midsize companies are willing to pay considerably more rent for location over quality, a change in the mindset of many employers. Office buildings located in a mixed-use environment versus locations void of immediate adjacency to retail and entertainment venues are experiencing up to 30 percent higher lease rates and 15 percent lower vacancy rates.

Doing more in less space and redirecting those savings toward a better-located and more efficient facility is a growing trend that will transform the next phase of speculative construction. Projects under construction, such as Merrill Cos.’ Prairiefire at 135th Street between Nall and Lamar avenues in Overland Park, are tapping into that trend.

Anchored by the American Museum of Natural History, Prairiefire’s first two phases are underway with retail and restaurant tenants and 285,000 square feet of office space. It’s not enough just to be able to drive a few minutes down the street. People want to walk across the street to their favorite restaurant, and they are willing to pay more for that luxury.

Downtown Dilemma

Contrary to most large CBD office markets, Kansas City’s downtown office market continues to languish, a negative trend that is 30 years in the making. While downtown has become the preferred place to live (there are currently 22,000 permanent residences and 2,649 proposed new multifamily units planned for 2014-2015), it has lost significant daytime population. Many companies have chosen to move out of downtown.

There is no clear strategy to reverse that trend, even in light of the dramatic success that downtown has experienced as the preferred place to live and be entertained. Kansas City’s downtown has become the cultural center of the city at a grass-roots level with more than 70 art galleries, as well as at an intuitional level with the completion of the $450 million dollar Kauffman Center for the Performing Arts. A few blocks away, the new Sprint Center is the fourth busiest arena in the country.

Downtown has become one huge mixed-used project, but despite the benefits of this type of environment it has not been able to attract new employers. Modern and efficiently designed office buildings in the right locations, a more streamlined entitlement process and land not tied to a specific developer will reverse this trend as employers seek a young, educated workforce that is increasingly choosing downtown as a place to live.

Construction has begun on the first leg of the city’s streetcar system that will link the Riverfront to Crown Center and eventually the Country Club Plaza. The national trend of putting more people in less space puts suburban office product at a serious disadvantage because surface parking at suburban office buildings typically features a ratio of four parking spaces for every 1,000 square feet of space.

A more favorable parking ratio may ultimately be downtown’s greatest advantage, and one of many reasons to keep a close eye on Kansas City’s CBD if a strategy is put in place to attract companies that are considering build-to-suit as an option.

Here’s a final word to our friends in the East: The next time you are attending a Jets game at the Meadowlands and drinking a Boulevard Beer, know that the venue and the beer were designed and brewed in the place where you can get a great steak.

— Tim Schaffer, executive vice president, Red Brokerage LLC