Office Occupiers in Kansas City Face the Short-Term Cost Versus Long-Term Benefit Dilemma
With Kansas City unemployment hovering at cyclical lows around 3.5 percent and the war for talent at an all-time high, companies must leverage their real estate to attract and retain top talent.
At the height of the corporate office boom in the late 1990s and early 2000s, the average space per employee ranged from approximately 275 to more than 325 square feet. Today, that number has shrunk to 175 square feet per employee and some predictions see that number moving even closer to 100 square feet.
These changes are driven by a recognition that companies are adopting better workplace strategies. These newer, more efficient spaces deliver a more engaging experience for employees and provide a stronger return on real estate costs for companies.
There is no denying that these new spaces cost more on a per-square-foot basis. Cushman & Wakefield research reported that the weighted average asking rate for Class A space in the Kansas City market was $25.04 per square foot on a full-service basis in the third quarter of 2019. Yet the net asking rates for the buildings with this new class of product range anywhere from the high $20s to the high $30s. Occupancy costs for new office space in downtown may reach $40 per square foot.
Companies that are committing to these new buildings in Kansas City are making a strategic choice to pay the higher rents in exchange for what comes with them.
Wellsky, a healthcare software provider, has been a local success story and its growth necessitated a new headquarters. The company went from a basic facility to leasing the entire 120,000-square-foot, newly constructed building at CityPlace. Wellsky made the move because it was the best way to invest in its people.
One of the most prominent signs of the demand for what an office looks and feels like is the rise of coworking spaces. A November report released by Cushman & Wakefield’s national research team indicated that large corporate occupiers expect the amount of their workforce that uses coworking space in some form to grow from just 5 percent in 2018 to as much as 25 percent by 2023.
Modern coworking facilities are the height of efficient, flexible workplaces, but they may not be a good long-term solution for all office users. Many have the perception that the more buzzworthy buildouts of coworking space are what drives the substantially higher per-square-foot costs associated with them, but that is not entirely true. The real factor behind coworking premiums is the flexible terms of tenant commitment, with even the major enterprise users signing leases that on average are only 18 months.
Some tenants will not continue to pay the premiums associated with a short-term lease for space they plan to remain in for the long term. Instead, they can invest in the high-quality product and make better use of less space.
Modern buildings will give employees a better work experience while also improving their productivity. Additionally, these new buildings are designed to evolve and embrace the innovations that haven’t arrived yet, meaning they will offer employees the tools to be successful now and in the future.
Predicting what the future will look like is impossible, but we recognize how an office functions in 2025 will look a lot different than it looks today. The era of big data is just getting started, and in the not-too-distant future, sensors, cameras, electrical devices, GPS trackers and biometric readers will be commonplace. This data will help security systems, increase efficiency in all types of traffic, improve building maintenance and offer numerous other benefits to both tenants and landlords.
Ground-up construction projects are moving forward throughout the market. Work on a second building at CityPlace is underway, while creative office space is part of mixed-use developments at the Edison District in downtown Overland Park and City Center in Lenexa. Construction is scheduled to begin in early 2020 on the Strata tower in the central business district.
Commercial real estate has always been priced on a per-square-foot basis, but a better way to evaluate the actual cost of an office might be to look at how many dollars are spent per employee and what kind of experience that investment delivers.
The benefits being realized in these new spaces are above and beyond the previous generations of office product, and that return is likely to improve as the world continues to evolve.
— By Miles McCune, Senior Director, Cushman & Wakefield. This article originally appeared in the January 2020 issue of Heartland Real Estate Business magazine.