Double Barreled BOOM in Kansas City

In a challenging economy with residential real estate in the doldrums and commercial sectors under pressure, Kansas City has bucked the trend and enjoyed a resounding property boom in two geographic centers.

The city's undernourished and drab downtown has been reinvigorated by The Cordish Cos. based in Baltimore, which turned a nine-block area marked by parking lots and dilapidated buildings into a flourishing, mixed-use entertainment center, the $850 million Kansas City Power & Light District. The district sits at the core of a massive urban revival area that has drawn at least $2 billion in development in the past three years, with a total of $4 billion in projects planned.

“Downtown was not as vibrant as the community wanted and the idea of a major revitalization project was talked about for a long time,” says Blake Cordish, vice president of The Cordish Cos.

Meanwhile, in the suburbs of Kansas City, divided by state lines into the Missouri and Kansas sections, the industrial property market is also thriving, and stands to rev up even more as two of the nation's largest railroads prepare major projects that are expected to expand the city's role as a transport and distribution hub for goods traveling across the country. Developers are building a new generation of industrial buildings that dwarf those of the previous era.

“Our sweet spot used to be local distribution buildings of between 50,000 sq. ft. and 150,000 sq. ft.,” says Ed Elder, a managing director and principal with Grubb & Ellis/The Winbury Group in Kansas City. “For the past 24 to 36 months, we have seen a consistent pattern of deals north of 200,000, 400,000, 700,000 sq. ft.”

In the past two years, Medford, Ore.-based Musician's Friend Inc. has snapped up more than 700,000 sq. ft. Pacific Sunwear of California, based in Anaheim, took more than 400,000 sq. ft. And during the same period, Irving, Texas-based Kimberly-Clark Corp. gobbled up 450,000 sq. ft. while Broomfield, Colo.-based Corporate Express US Inc., took 250,000 sq. ft., says Kevin Wilkerson, president of NAI Capital Realty in Kansas City, a real estate services firm.

“It used to be you could count the number of transactions over 100,000 sq. ft. on two hands in a given year, but those deals have increased significantly in recent years,” says Wilkerson.

Lighting a once-drab district


Kansas City's urban core hasn't had much to brag about since native son and jazz legend Charlie Parker played there in the 1940s. It picked up the beat with the Kansas City Power & Light District, which fittingly includes the new Kauffman Center for the Performing Arts.

The Cordish master plan anchored the development with entertainment projects such as the Kauffman Center, which includes a symphony hall; the 18,000-seat Sprint Center, a sports and entertainment venue; and the convention center.

“We were fortunate in that the vast majority of the multi-block district consisted of parking lots and old buildings that were not of architectural significance and we could pull down,” says Cordish. “There were two important theaters from the early 20th century that we revitalized.” One is a 3,000-seat, live-performance venue and the other will become the flagship theater for AMC Entertainment Holdings of Kansas City.

Although there is an eight-year build-out for the district, the first phase will be completed by late 2008, but many major projects are already open. They include the Sprint Center, a 200-room Hilton, half the 550,000 sq. ft. of retail and entertainment, and 1 million sq. ft. of office, including the new 17-story, 550,000 sq. ft. headquarters for H&R Block Inc., which relocated to support the downtown revival.

“We have blown through our initial expectations,” says Cordish. “We had proposed in Phase I about 325,000 sq. ft. of retail, but we increased it — a pretty strong statement as to how the market received the project.” It is 90% leased.

Kansas City-based contractor JE Dunn Construction Group broke ground this year on a 203,000 sq. ft. headquarters, and in downtown's Crown Center section, the Federal Reserve and Internal Revenue Service built huge new quarters: 620,000 sq. ft. for the Fed opened in 2008 and 1.1 million sq. ft. for IRS in 2006.

While downtown is getting what it wished for, a huge influx of workers, these numbers are not reflected in downtown office market data because companies like JE Dunn and the government institutions built their own buildings. Officially, downtown boasts 12.5 million sq. ft. of office space, now the second largest office concentration behind South Johnson County, and a lot of it stands vacant.

The area office market is so soft its absorption has turned negative, reports Bryan Johnson, president of Grubb & Ellis/The Winbury Group in Kansas City. His numbers show a 16.4% vacancy rate for all classes of office space during the fourth quarter of 2007, which increased to 17.2% by the first quarter of 2008.

Research by Kansas City real estate services firm Colliers Turley Martin Tucker shows downtown vacancies across classes pushing 25%. A great deal of Class-B space can be found in older office buildings with smaller floor plates and inadequate parking. “The most aggressive lease rates will be found downtown, averaging $15.29 for Class-B space to $20.89 for Class-A space,” says Michael Mayer, a principal with the firm in Kansas City.

Downtown has recently lost big tenants like Transamerica Occidental Life Insurance, which vacated 150,000 sq. ft. to move to Cedar Rapids, Iowa.

Ship it by truck or rail


Kansas City is centrally located in the nation's heartland, at the confluence of three interstate highways, chiefly Interstate 35, called the NAFTA highway because it travels to Mexico in the south and Canada in the north. Four major rail lines run through the city.

The Class 1 railroads include BNSF, the east-west line, Kansas City Southern, which runs north from Mexico, and Union Pacific and Norfolk Southern lines.

“We are the second largest rail center in the country after Chicago in terms of the number of rail cars, but we are the largest rail center in terms of tonnage,” notes Chris Gutierrez, president of nonprofit Kansas City SmartPort Inc.

Several cities that are considered part of the Kansas City metro area lie along the Kansas and Missouri state lines. In Kansas, Johnson County has been a hotbed of retail and office development for years. The metro area has a population of about 2 million.

As the region grew in importance as a logistics hub, the nonprofit Kansas City SmartPort was incorporated in 2000 to market the region's industrial and transport assets. The group's efforts helped Kansas City attract large new corporate distribution centers.

Kansas City's industrial market suffered through the recession years at the turn of the millennium and didn't start to recover until 2004, recalls Mark Sonnenberg, director of industrial sales and leasing with Colliers Turley Martin Tucker in Kansas City. “Before 2004, this market was a local, sometimes regional distribution market. Now, we seem to be a local, regional and sometimes national distribution market.”

In the last four years, the market has recorded three or four big distribution deals annually, Sonnenberg confirms. He is putting together two deals, one for 1 million sq. ft., and the other, 400,000 sq. ft. “We've been on a pretty good run for the last couple of years,” says Sonnenberg.

Net absorption for Kansas City's industrial market in 2007 totaled 4.8 million sq. ft., the largest single-year volume since Colliers began tracking the market in 1995. Vacancy fell by 1.3% in 2007, ending the year at 7.1%, reports Colliers Turley Martin Tucker. The vacancy rate for modern distribution space was 3.7%.

At the end of the first quarter, industrial vacancy held at 7.1%, but rates strengthened to $4.31 per sq. ft., up from $4.22 the year before.

Kansas City's 180 million sq. ft. industrial market produced a positive net absorption of 342,000 sq. ft. of space in the first quarter of 2008, the lowest total in the last six quarters, reports Colliers Turley Martin Tucker.

Railroads develop new outposts


The Kansas City area has six intermodal — mixed-transport — facilities, but they are old and have little room for growth, says Gutierrez, so BNSF Railway and Kansas City Southern agreed to an intermodal joint venture in the suburbs.

In Gardner, Kan., about 25 miles south of Kansas City, BNSF joined with San Diego-based The Allen Group to develop an $850 million, 1,000-acre logistics park. At buildout, Logistics Park Kansas City will total 7 million sq. ft. of vertical development. The groundbreaking is expected next year, says Gutierrez.

Meanwhile, at the shuttered Richards-Gebaur Air Force Base about 20 miles south of Kansas City in Belton, Mo., Kansas City Southern Railway is joining with CenterPoint Properties of Oak Brook, Ill., to build the $300 million, 1,340-acre CenterPoint-KCS Intermodal Center, featuring a 370-acre mixed transport facility run by the railroad and CenterPoint's 970-acre industrial park.

“These intermodals won't mean an Oklahoma land rush, but an orderly progression of activity,” says Elder of Grubb & Ellis. “We won't see new buildings being constructed overnight at either of these intermodal parks, but they do put Kansas City into the mix for the next five to 15 years on larger deals.”

Corralling the office market


The biggest area office submarket is in south Johnson County, south of the city, with more than 14 million sq. ft. “Of the 1.5 million sq. ft. of absorption in the Kansas City metro office market last year, just over 450,000 sq. ft., or about one third, was in south Johnson County,” notes Mayer. For the period from 2003 to 2007, the county captured 2.1 million sq. ft. of net absorption.

Class-A rent in the submarket at the end of the first quarter averaged $23.75, up from $22.90 for the same period a year before, Mayer adds.

Colliers estimates 389,000 sq. ft. was added to the south Johnson County office market in 2007 and another 650,000 sq. ft. will be added this year. Larger projects include Opus Corp.'s Corporate Ridge II and III with 120,000 sq. ft. and 102,000 sq. ft., respectively. The buildings are 90% leased, says Mayer, leading Opus to start construction on the 90,000 sq. ft. Corporate Ridge I.

Also leasing well is the Pinnacle Corporate Center in Leawood, Kan., being developed by local Block & Co. Realtors.

The Center has four phases. Pinnacle I at 75,000 sq. ft. is already completed as is the 131,000 sq. ft. Pinnacle II. Tenants include Mariner Wealth Advisors and CBIZ Inc. Pinnacle III at 106,000 sq. ft. and Pinnacle IV at 60,000 sq. ft., are slated for completion this year.

Absorption won't take up all the new space planned in south Johnson, which explains why vacancy rates rose to 13% in the first quarter of 2008 from 11.7% in the first quarter of 2007, reports Colliers.

“You won't see nearly the absorption this year as last year,” Mayer cautions. “A lot of companies are just battening down [the hatches], waiting to see what the economy is going to do.”