Downtown has become a magnet for younger people

KANSAS CITY—The most robust real estate markets in the US are generally spread through the Southern states, the West, and coastal areas. But even cities in the nation’s center began to show signs of strength in 2013, and experts say 2014 holds even more promise.

“The Kansas City commercial real estate market probably mirrors many Midwestern cities as it continues to rebound from the lows of 2009 and 2010,” Michael Mayer, the managing principal of Cassidy Turley in Kansas City, tells The firm just published its annual market report for the metropolitan area. “Things have tightened up and there was some very solid absorption, especially in the industrial market.”

In 2013, the industrial market’s gross absorption increased to 8.8-million-square-feet, up from a low of 6.18 million in 2010, and roughly a match for the 10-year average of 8.87-million-square-feet, according to the new market report. Meanwhile, the pace at which space was vacated slowed to 5.70-million-square-feet, lower than the 10-year average of 6.62-million-square-feet. The end result was net absorption of 3.1-million-square-feet. “Offsetting move-outs will put a damper on net absorption, but for gross absorption, 2014 should be a blockbuster year.”

Vacancy in the area’s office market increased from 19.2% to 19.6% during the fourth quarter of 2013. However, the average class A lease asking rate was $20.14, breaking a stretch of five quarters in which the rate fluctuated between $19.63 to $19.79. Mayer says that class A rates should continue to climb, especially in South Johnson County, where vacancy is much lower than the metro average.

“The interesting thing in Kansas City is it’s the suburban areas, like South Johnson County, where all the office growth has been,” says Mayer. But even in this area, speculative construction was held in check from 2010 through 2013. Still, developers completed more than 1-million-square-feet of new construction in 2013. And few large contiguous spaces of class A office remain.

That leads Mayer and others to wonder whether developers may start up suburban class A speculative projects in 2014. Considering how long the recession lasted, “just the thought that there are developers even talking about putting up spec is pretty amazing.”

“The downtown,” by comparison, “always seems to take two steps forward and then one step backward.” Although local landlords have been aggressive in filling up their buildings, which should help push up rental rates, many office buildings in the CBD have smaller floor plates and few parking spaces, which drives tenants to seek space elsewhere.

“There has also historically been competition between Missouri and Kansas called ‘the border wars,’ with each trying to lure the other’s businesses,” Mayer adds, and the big city can suffer from this competition. For example, the state of Kansas recently lured the headquarters of AMC Theatres across the river to suburban Leawood with roughly $47 million in incentives. The company had been stacked up on seven downtown floors.

However, developers have taken many of the city’s obsolete office buildings off the market by transforming them into multifamily and other uses. As reported in, for example, Commerce Tower Group, LLC has decided to spend about $70 million converting downtown’s Commerce Tower, originally built in 1964 and which currently has a high vacancy rate, into a mixed-use property with 160,000-square-feet of office space, approximately 265 class A apartment units, and retail space on the first floor.

“Projects like that are attracting a great deal of interest,” Mayer says. “The rental market downtown is just on fire. A lot of young people and even empty-nesters are moving downtown.”

During 2013, “apartment properties produced a total sale value of $617 million,” the Cassidy researchers found, and “for the third consecutive year, this was greater than the sales produced by any of the other property types. Major outside investors made inroads in the Kansas City market, and that is likely to accelerate in 2014.”

“There’s plenty of dollars out there,” Mayer notes, and overall, the value of Kansas City’s commercial real estate investment sales increased by 26% in 2013, to $1.46 billion. The value of retail property sales was $499 million, up 55% over 2012.

“But in order for us to get over the hump, to have a really strong recovery, we need some labor growth from outside the city,” Mayer adds. So far, most of the employment growth in the metro area has been organic. However, even without some significant event, such as a major, national corporation starting up a new manufacturing facility or deciding to plunk down a new headquarters operation, he still expects the job market to improve in 2014, albeit somewhat modestly.