Kansas City Reflects Economic Uncertainty

The Q1 slowdown possibly is "a reflection of the current turmoil in the US economy," according to a report by Colliers International. Other commercial real estate firms following the market are in agreement that Kansas City's office market has either slowed already because of changing economic conditions or is at best going to undergo a series of ups and downs this year as it adjusts to changing conditions.

Colliers points out direct effects from changes in the financial markets included downsizing by NovaStar Financial and closings of some offices of Calabasas, CA-based Countrywide Home Loan while indirect effects included a reduction in consumer spending. Colliers also cites "several positive factors for the metro area," which has suffered less from the housing market slump than many other areas. In addition, Colliers observes "strong growth in farm income has benefited every area of the Midwest."

Colliers tracks 45.5 million sf of office space in the Kansas City metro with 11 million of that in the Downtown. CBRE follows 53.5 million sf, of which 15 million is Downtown and Grubb & Ellis Co. pegs the market at 49 million sf, with 14 million sf of CBD space. As CBRE notes, the market is divided between two states, Kansas and Missouri, with more than 900 office buildings.

CBRE's report remarks about the eye-catching amount of construction under way in the market. "Downtown Kansas City, MO looks to be nothing more than an ongoing construction site, but as the dust clears over the next few years an amazing new image will become visible," researchers conclude. CBRE says that the new image, a revitalized Downtown, will be the result of public and private redevelopment efforts that will bode well for Kansas City's entire metropolitan area.

In the meantime, however, Colliers says that "the slow pace of activity in the first quarter was a clear indication that 2008 will not be a robust year for leasing activity in Kansas City's office market." First-quarter net absorption was positive, but totaled just 69,000 sf, according to Colliers.

Net absorption was down from 205,000 sf for the previous quarter and an average of 360,000 sf per quarter during 2007. At the same time, some 277,000 sf of new construction has been completed to date in 2008, helping to push up the vacancy rate by nearly half a percentage point to 16.2%. CBRE tracks the vacancy at just under 16%, while Grubb & Ellis Co. tallies it at 17.2%.

Because of differences in the ways that different brokerages track and account for leasing activity, Grubb & Ellis reports nearly 169,000 sf of negative net absorption during the first quarter. CBRE and Colliers both counted positive absorption in the quarter.

Lease rates climbed slightly in the first quarter, but are expected to level off, according to Colliers, which reports the average asking rates were $21.89 per sf per year for class A space and $17.26 for class B product. Grubb & Ellis says the average is $20.95 per sf for class A and $16.97 per sf for class B space.

The market reports share an outlook for Kansas City that might be called cautious optimism. Colliers, for example, expects net absorption will continue to be neutral to slightly positive in 2008, but vacancy may rise because construction is likely to exceed net absorption. "In the near term the metro-area office market is likely to have offsetting gains and losses. Beyond 2008 the growth should resume," its report says.

The brokerage houses report no blockbuster leases during the first quarter, but point out there was at least one significant sale. Hines Interests acquired the 515,000-sf Crown Center in Kansas City, MO for $155.8 million from a subsidiary of Hallmark Cards. The property, at 2555 Grand Ave., was designed by architect Mies van der Rohe and was developed in 1975 by Hallmark.