Kansas City Office

Zimmer

Submitted by David Zimmer, SIOR, president with the Kansas City, Mo., office of ONCOR International.  Posted 7-08-08.

What area is your expertise?
Office market in the Kansas City metropolitan area.

What trends do you see presently in office development in your area?
Little new development.  Some mixed-use projects in the works.

Who are the active office developers in your area?
Local developers.

Please name one or two significant office developments in your area.  What impact will these projects have on the market?
Park Place – Mixed-use suburban office project including retail, residential, office and hotels.  Located in suburban Kansas City (Leawood, Kan.) 
Plaza West – mixed-use office, retail, hotel project on Country Club Plaza.  Will be corporate headquarters for local advertising firm Bernstein Rein. 

Where is the majority of development taking place? Why is this area doing well?
Suburban Kansas City

What area do you expect to be the next big development market? Why?
Suburban Kansas City

What areas are doing well in terms of office leasing? Which areas are struggling with office leasing?
Suburban Kansas City and Country Club Plaza do well.  Downtown Kansas City has struggled but with a new entertainment district along with opening of Sprint Center, it is poised to take off.

Please give a measure of office vacancy rates.  Please give a measure of available sublease space. 
Overall vacancy rates metro-wide are in the 11 percent range.

What impact do current interest rates have on the office market? What predictions do you have for interest rates and their effect on the office market in the next year?
Very little new projects being announced.  Very high construction costs will curtail new projects until economy turns around.

What is the status of job growth/(un)employment rates and what bearing will it have on the office market?
Some job growth is occurring in the life sciences area, which should boost office market. 

Is there any type of office tenant absorbing a majority of space? What industries do you expect to expand in the next year to absorb a great deal of office space? What areas will be affected?
Life sciences seem to be the driver.

 

Kansas City Industrial

St. Louis Industrial

Buffington

Trey Buffington, advisor with the St. Louis office of Sperry Van Ness/ Infinity Commercial Group. Posted 06/13/07.

What area is your expertise?
• St. Louis metro area (all industrial submarkets including the Illinois metro-market).

What trends do you see presently in industrial development in your area?
• The construction of larger industrial facilities with a focus on higher ceilings, larger truck courts and more efficient column spacing. There has also been a recent push for green building development, particularly in the renovation of older industrial buildings.

What type of industrial product is doing well in your area?
• In general, all industrial sectors are doing well. The larger bulk buildings in the St. Louis and Illinois metro area are doing quite well. Bulk buildings generally contain more than 100,000 square feet with less than 10 percent office finish and 24-foot-plus ceiling heights. This segment of the market surged in the late 1990s and has continued on a steady growth path in both the St. Louis and Illinois metro markets.

Who are the active industrial developers in your area?
• Panattoni Development, Duke Realty, Maune Development, First Industrial Realty Trust Inc., Tristar Business Communities, McEagle Development and Welsh Development Company.

Please name one or two significant industrial developments in your area. What impact will these projects have on the market?
• One of the larger projects slated for the St. Louis metro area is known as NorthPark, which is a 600-acre mixed-use development. The project is being co-developed with local developers McEagle Development, TriStar Business Communities and Clayco Construction. The development project is estimated to total between $380 and $400 million and will consist of 5.5 million square feet of office, manufacturing and distribution space with additional retail and hospitality developments. The site is located near the eastern perimeter of Lambert-St. Louis International Airport and is close to Interstates 70 and 170. The impact of this project from a new employment standpoint is immense, as St. Louis County Government officials anticipate as many as 12,000 new jobs. In addition to the job creation component, the developers have contributed several million dollars toward infrastructure and community improvements, including a new MetroLink Station and new civic centers for the surrounding communities.

Where is the majority of development taking place? Why is this area doing well?
• During the last few years, the Illinois metro market has posted healthy numbers both in absorption and construction of bulk space, indicating a strong demand for this product type, especially with companies that want to take advantage of St. Louis’s centralized Midwest location. As the price of fuel increases, transportation costs will become a major factor in a company’s decision to warehouse and transport product. These companies utilize the excellent interstate highway systems that converge and service the middle states. An example of this is Gateway Commerce Center that is located on 2,300 acres at I-255 and I-270. According to reports there is nearly 9 million square feet of space built or under development. Neighboring the Gateway Commerce Center is Lakeview Commerce Center with 600 acres and an estimated 6.5 million square feet of industrial product to be completed within the next decade. The St. Louis metro market has definitely found a niche in the bulk industrial market, and 2007 is continuing that trend as it competes with Indianapolis, Memphis and Kansas City.

What area do you expect to be the next big industrial development market? Why?
• I think there has been an interesting surge of industrial activity in the urban submarket of St. Louis. For decades this submarket was hindered by outmoded industrial/manufacturing facilities that were unable to accommodate changing industrial/manufacturing processes. These buildings were generally multi-story with lower ceiling heights, short truck courts and inefficient floor plates. Many of these buildings were utilized for dead storage or renovated into residential housing. These inefficiencies eventually lead to outer ring suburban industrial developments, leaving the city submarket to languish for decades without new investment or building product. There are two new construction industrial projects slated for the City of St. Louis that I find very interesting due to the speculative nature of the developments.

• The first is North Broadway Distribution Center, a major development planned by Balke Brown for the north side of the city at 6500 Prescott Ave. The cost to develop the 420,000-square-foot multi-tenant distribution building is estimated at $19.8 million. International Food Products Corp. has pre-leased 120,000 square feet of space as of first quarter 2007.

• The second interesting city project is Carondelet Coke site. Summit Development Group is converting the 40-acre Carondelet Coke Corp. site on the city’s south side. This project reclaims 40 acres of underutilized and environmentally challenged ground for the development of 600,000 to 700,000 square feet of speculative warehouse space in five or six buildings. The first 80,000-square-foot speculative building is slated for completion by the end of 2007.

These projects indicate there is a value in the urban core, evidenced by two developers’ willingness to invest in speculative industrial product. Both of these sites will take advantage of the close proximity to highway access and the attractive land pricing, which tends to be lower in the urban core areas. These sites exemplify some of the first real investment dollars being re-captured in this St. Louis submarket.

Please describe the industrial leasing activity in your area.
• Leasing overall activity is good with some submarkets experiencing higher vacancy levels. According to Costar’s first quarter 2007 total industrial market statistics, one of the hardest hit submarkets was the North County industrial market with an overall 2007 first quarter vacancy of 11 percent. These numbers are higher compared to the South County industrial and St. Charles County submarkets with vacancy rates of 6.2 percent and 5.5 percent, respectively.

Please describe the industrial sales activity in your area.
• If 2006 was an accurate gauge, then St. Louis industrial sales activity would be best described as competitive. This was evidenced by the record prices for industrial product paid by both local and national investors. According to SIOR, nearly 60 percent of the industrial buildings in St. Louis are owned as investment properties. These include warehouse/manufacturing buildings, service centers and flex buildings.

Please give a measure of industrial vacancy rates and a measure of available sublease.
• According to Costar, the St. Louis industrial market vacancy rate for first quarter 2007 was 7.9 percent, which represents an increase from 7.6 percent in fourth quarter 2006. Vacant sublease space, however, decreased in first quarter 2007 to 649,839 square feet from 711,000 square feet in fourth quarter 2006.

What impact do current interest rates have on the industrial market? What predictions do you have for interest rates and their effect on the industrial market in the next year?
• The current interest rate levels appear to keeping the industrial market moving forward. When long term interest rates begin to creep up in the next year or so, I think things will slow and possibly have a chilling effect on the industrial market.

What industries do you expect to expand in the next year to absorb a great deal of industrial space? What areas will be affected?
• The central county submarkets will be affected due to the current products’ lower ceiling heights, inadequate truck courts and poor dock access/loading. Additionally, the Interstate 40 Highway reconstruction project, which will continue into 2009, will have a major impact on the central county submarket due to its transportation reliance on the I-40 corridor and the connecting I-170 interbelt.These buildings, however, are also poised for adaptive re-use as retail, flex and office users gravitate to less expensive and atypical product. These buildings become attractive to smaller firms that are looking for creative/ non-traditional office space.

Kansas City Multifamily

Powell

Submitted by William Powell, associate partner with Hendricks & Partners in Kansas City, Mo. Posted on 01-18-08.

What area is your expertise?
• I am an associate partner with Hendricks & Partners and a veteran real estate advisor in the Kansas City and Midwest region. After completing my graduate degree in urban planning and working as a city planner, I joined the multifamily housing industry in brokerage. Over the last twenty years, I have connected the buyers and sellers of some of Kansas City’s highest profile apartment communities and condo conversions. The Kansas City metropolitan area straddles the border between Missouri and Kansas encompassing a 15-county Metropolitan Statistical Area, anchored by Kansas City, Missouri and Overland Park (Johnson County) Kansas. It is the 27th largest metropolitan area in the United States with an estimated population of 2.1 million.

What trends do you see presently in multifamily development in your area?

Sprint Arena and the Power & Light District (click image for larger picture)

• The Kansas City apartment market begins 2008 in relative market equilibrium with sound market economic fundamentals and supply in check. The downtown urban living trend gained significant momentum in 2007 with the opening of the Sprint Arena and the Power & Light District, a dynamic nine-city block mixed-use retail, entertainment, office, and loft district. In 2007, downtown had an estimated population of 17,000 people, which is up by approximately 3,900 from just four years earlier according to the Downtown Council. Following his 2008 “State of the City” address, the mayor added his desire to see that number grow to 35,000 over the next decade. Current growth is fueled by new jobs, including those stemming from the opening of H&R Block Headquarters and the IRS Regional Headquarters in the downtown core. Recently, GSA announced interest in moving its headquarters to downtown or the riverfront, potentially bringing 2,000 more employees to the area. The Downtown Council estimates job growth of 7 percent in 2007 bringing the number of jobs in the central core to 107,000.

The Ravello at Briarcliff (click image for larger picture)

Kansas City’s condominium market is characterized as demand driven, not speculative so there is no looming collapse or “shadow market” impact on the apartment sector. Condos and lofts have played an important role in downtown’s resurgence but still remains a relatively small market segment accounting for only 2 to 3 percent of annual home sales in the metro. In 2007, lofts and condos also became part of the multifamily development mix in the suburbs. Overland Park and neighboring Leawood, Kansas now have upscale ($500,000+) condos for sale in the Meridian, Mission Farms and Parkway 133 communities while Missouri’s northland offers new urban lofts and condos at The Ravello in Briarcliff Village and the Zona Rosa Lofts.  

Who are the active multifamily developers in your area?
• In 2008, New York developer GailoydEnterprisesCorp. will begin construction of the Power and Light Condos. This project is located next to a downtown skyline landmark art-deco office building on the west edge of the Sprint/Power and Light entertainment district. The new project will offer 100 luxury condos with street level retail and a 700 space public-private garage. Gailoyd joins fellow New Yorkers, Time Equities, and area developers DST, Embassy Properties, McGowan-Walsh, Matt Abbott, Nate Accardo, George Birt, Tom Trabon, and Gary Hassenflu, among others, that have supplied the market with trendy lofts. Cordish, the developer of the Power and Light district, has a ready site for a new 100-unit high-rise, while Texas-based The Morgan Group has approvals for a 300-unit, urban density “branded” community in the City Market overlooking the Missouri River. Minnesota-based Sherman Development, Massachusetts-based Antheus Capital and Maine-based Eagle Point LLC all are undertaking ambitious residential redevelopments in the urban core. AMLI, Embry and Price Brothers have garden-style projects approved in the suburbs. Georgia-based Davis Development has acquired a site in south Johnson County for its third apartment community in as many years. Developer Walt Clements recently told a gathering of commercial real estate professionals that he was thinking about adding high-rise condominiums to his Deer Creek Woods office and retail project in Overland Park, Kansas.

Please name one or two significant multifamily developments in your area. What impact will these projects have on the market?

Cold Storage Lofts

• The Cold Storage Lofts, located in the downtown City Market, had its grand opening in 2007. This unique 450,000-square-foot building started out in life as the Muelbach Brewery and later housed 38 million cubic feet of cold food storage space. It now boasts 224 apartment lofts, including some affordable housing units (90 percent affordable living/10 percent market rate). The lofts range from 700 to 1,300 square feet, with rents running from $575 to $1,300 per month. The local developer, Gary Hassenflu, teamed up with the Lenexa, Kansas-based Miller-Stauch to undertake this $20 million design-build project. Funding for the project includes: LIHTC funds, Missouri environmental clean up funds, Missouri Historic Preservation tax credits and city property tax abatement.

     The Meridian at Park Place, now under construction, offers 52 luxurious condominiums ranging from 1,300 to 4,000 square feet priced at $500,000 to $2 million+. This 30-acre, pedestrian friendly cosmopolitan project is located in Overland Park, Kansas, across from Sprint-Nextel Corporate offices at 135th and Nall avenues. It is part of a 750,000-square-foot mixed-use project that will include a luxury hotel, office and retail space and 700-car parking facility. The 750,000-square-foot Town Center Plaza Shopping Center is also within walking distance to the south. Developers and builders include The Alpert Company, Presidian Development (Hotel) and J.E. Dunn Construction.

Where is the majority of development taking place? Why is this area doing well?

Downtown Kansas City, Missouri — The acceptance of urban living in Kansas City has exceeded all expectations as evidenced by rental absorption, rising rents and increasing condominium prices. This development has occurred largely due to major commitments from corporate citizens like Sprint (arena) and H&R Block (HQ) to invest downtown. The government sector contributed a new Federal Courthouse and FAA facility. The Federal Reserve also built its new facility in the urban core. The IRS opened in 2006 adding 5,000 jobs in the urban core after consolidating divisions near Hallmark Cards Corporate Headquarters. GSA is also site shopping downtown. All this has been accomplished without light rail, which the voters have approved but is not yet finalized.   

Johnson County, Kansas — The southwest suburbs continue to grow at near double digits fueled by steady job growth in Overland Park, Kansas, home of Sprint Nextel and a host of Fortune 500 firm offices. This high income, high-growth area offers great schools, transportation network, executive housing and access to land and utilities for expansion. Other growth hot spots in Johnson County include south Olathe and western Lenexa and Shawnee. Apartment developers are also eyeing western Wyandotte County, Kansas, to add new affordable housing near NASCAR and the new Legends shopping and entertainment district.

Northland (Kansas City, Missouri North) — When you land at KCI airport in Kansas City north and get directions from your Kansas City made Garmin, you may be heading to one of many new developments like the Zona Rosa center at Interstate 29 and Barry Road that has combined upscale retail, entertainment and lofts in a 500,000-square-foot urban center. The Steiner Company selected the “northland” in 2001 because of its fast growth rate and high-income housing boom.

What area do you expect to be the next big development market? Why?
• Many local observers feel Kansas City’s Northland is the next big development market as years of public investment in infrastructure between Downtown and the Kansas City International Airport begin to pay dividends. There are new highways and plenty of land for residential growth. The Northland consists of Platte and Clay counties that have a combined population of nearly 286,600 and a growth rate of about 2.1 percent per year over the last three years. Though smaller, these counties now have a growth rate that rivals that of Johnson County, Kansas, where the population recently surpassed 500,000. Johnson County’s annual average growth rate was 2.4 percent from 2003 to 2006.

What areas are doing well in terms of apartment leasing? Which areas are struggling with leasing?

Downtown — continued strong occupancy.
The third quarter vacancy rate for Downtown was 6.9 percent, down from 8.6 percent a year prior. This figure was the lowest recorded for this submarket in more than three years, indicative of the increasing allure of the downtown area. The average rent growth for Downtown was 2.3 percent for the year ended September of 2007, compared to 2.7 percent for the metro area as a whole over this period.

South Overland Park — highest rents, effective rent increases.
This area had an average rent of $901 in the third quarter of 2007, the highest of any submarket in the Kansas City area. This figure was 32 percent higher than the overall average market rent of $682 and was up 3.3 percent from the year prior, ranking this submarket fifth overall in terms of rent growth.

Northland — fast growing inventory, construction lease up?
Combined, Clay and Platte counties have approximately 170 apartment units under construction, but some other areas are experiencing higher levels of new development. Downtown, for example, has 768 units in development (though 600 of these are contained in a single project, the East Village development). In addition, more than 200 units each are in the works for Independence and Lenexa.

Other strong submarkets — The Overland Park North submarket had an average vacancy rate of 5.2 percent in the third quarter of 2007, one of the lowest rates in the metro area and down from 6.2 percent a year prior. Moreover, the average vacancy rate for this submarket has steadily declined each quarter from the beginning of 2006. The average rent in Overland Park North rose 4.9 percent over the year ended September of 2007, reaching $755. This was the highest rent growth rate of any submarket for this period.

In terms of completed construction, the city of Lee’s Summit, Missouri, has been the most active area, with more than 500 units entering lease-up in 2006 and 2007. Olathe saw more than 300 new units over this period, while Overland Park South received 288. Downtown saw the completion of the 228-unit Founders at Union Hill project in addition to the Cold Storage Lofts.

Also performing well is Wyandotte County, which had an average vacancy rate of 5.0 percent in the third quarter, the lowest of any submarket (this figure was down from 7.3 percent a year prior). Like Overland Park North, this submarket has experienced steady declines in vacancies since the beginning of 2006 and the opening of the NASCAR / Legends. Rent growth measured 3.1 percent in the third quarter, putting the average rent at $565.

Struggling — Closed Regional Mall in South Kansas City
The South Kansas City, Missouri, submarket’s average vacancy rate of 8.5 percent was the highest in the metro area in 3Q07, unchanged from a year earlier. Rent growth in this area was a minimal 0.6 percent. The average vacancy rate for the Grandview/Raymore (far south) submarket was 7.0 percent in the third quarter, also virtually unchanged from a year ago, in contrast to improving vacancy rates across much of the rest of the region. Rent growth, however, measured 2.5 percent for this period. The good news is the Lane-4 Development has plans for a new soccer stadium and business park to open by 2009 on the former Bannister Mall site.

Please give a measure of apartment vacancy rates.
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• In third quarter 2007, the average vacancy rate for the Kansas City region was 6.5 percent, its lowest point in five years. This improvement trend will continue into 2008, with the average vacancy rate declining to about 6.2 percent. Factors aiding in this improvement include a reduction in new construction, strong job growth, and a slowdown in home sales. New apartment construction is expected to decline from just over 1,200 units in 2007 to only about 600 units in 2008.

Please give a measure of condo sales activity in the area.
• After a steady run up, metropolitan area condo sales in 2006 peaked at just over 1300 units before falling to just over 1000 units in 2007 according to local agents. By comparison, sales of single-family homes declined only about 6 percent from 36,000 to 33,000. Interestingly, the average condo price continued to rise in 2007 increasing from $140,000 five years ago to $200,000 driven, in part, by more luxury sales at Kirkwood Circle ($300-$400 per square foot) in the high-end Country Club Plaza district in Missouri and new luxury offerings in the Johnson County, Kansas, suburbs.

According to the Kansas City Business Journal, sales of downtown condos totaled 191 units through November of 2007, putting that sub-market on pace to reach 219 sales for the year. This annual total would mark a 36.3 percent decrease from 2006. (Annual totals were 332 units in 2005 and 127 units in 2004). Overall metro area condo sales were off by about 17 percent.

Multifamily permits in the metro area were issued for 1,207 multifamily units (including apartment and condominium units) through November of 2007, down 62.5 percent from the 2006 annual total of 3,214 units. However, it should be noted that the 2006 figure was the highest annual total recorded since 2001.

Approximately 213 condominium and townhome units reached completion in 2007 and another 319 will be delivered in 2008. 

What impact do current interest rates have on the apartment and condo markets? What predictions do you have for interest rates and their effect on the multifamily market in the next year?
• According to Nick Ingle, Director of Capital Markets, Hendricks & Partners, “the 10-year treasury yield is likely to remain stable throughout 2008 as funds seek quality investments and become more risk adverse. Particularly, some money market accounts and savings accounts will witness fund outflows as banking-sector distress causes those with account balances in excess of the FDIC-insured $100,000 limit to place money in treasury bills. Thus, multifamily lending rates should remain stable and attractive throughout 2008. As the slowing economy takes its toll on the lagging office and retail investment sectors, expect to see renewed demand for multifamily product as the sector is perceived as a natural hedge in times of economic distress.”

The slowdown in Kansas City condo sales is related to the general malaise of single-family homes sales rather than interest rates. Kansas City has been impacted less by sub-prime lending woes than high-growth cities because it has enjoyed slow but steady job growth during this period absorbing some of the oversupply. Ironically, those sub-prime home and condo buyers increase the demand for rental housing.     

What is the status of job growth/(un)employment rates and what bearing will it have on the multifamily market?
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• The Kansas City economy has entered into a strong recovery phase, with preliminary data for November of 2007 showing an over-the-year job growth rate of 1.1 percent for the area. This figure is up from annual losses recorded from 2001 to 2003. Job growth is expected to increase moderately in 2008, to about 1.6 percent, which would mark the best annual growth rate in ten years. Employment gains are expected to be even stronger in 2009. Kansas City is currently experiencing growth in sectors such as manufacturing, construction, and services. One factor contributing to the positive outlook for Kansas City is the fact that the area did not experience the dramatic boom-and-bust housing market with which high-growth areas such as Miami and Las Vegas are contending.

Would you like to make any additional observations about the multifamily market in your area?
• Kansas City rent growth for the year ended September of 2007 was 2.7 percent, the highest over-the-year gain in six years. Coupled with tightening vacancy rates, this trend bodes well for stronger rent growth in 2008.

Anecdotal evidence indicates the region may be gaining residents returning from places like San Francisco, Los Angeles and Chicago — Kansas City offers a good quality of life with less congestion and more affordability than these areas, while also providing the cultural amenities and job opportunities to which these residents are accustomed. The Power and Light District project will enhance Kansas City’s appeal in this regard, especially because many echo and baby boomers are looking for urban, mixed-use environments such as that offered by the P&L development.

St. Louis Multifamily

Ojile

Submitted by Louis Ojile, vice president with the St. Louis office of Solon Gershman, Inc./ONCOR International.

What area is your expertise?
The St. Louis Metropolitan Area

What trends do you see presently in multifamily development in your area?
Many of the St. Louis area developers are including residential components (both rentals and sales) in their developments. The desire to work, live and shop in the same area is desirable in the St. Louis region — from shopping, to office, to education, to entertainment.

Who are the active multifamily developers in your area?
Local office and retail developers are adding residential components to their developments.

Please name one or two significant multifamily developments in your area. What impact will these projects have on the market?
Clayton is seeing an increase in condominium construction as well as housing units becoming a part of retail and office developments. For example, Maryland Walk opened with 99 high-end condominiums and has added a retail component. The Crescent development includes 72 luxury condominiums and 26,000 square feet of retail. The $73 million, 390,000-square-foot project was developed by Mark S. Mehlman Realty.

Where is the majority of development taking place? Why is this area doing well?
Condo and apartment development and redevelopment are on the rise in the Central Business District as a result of revitalizing the downtown area. Over 4,500 new housing units (rentals and sales) have been added to the downtown area since 1999. Over 2,500 additional units are planned or proposed including both new construction and historic renovations.

What area do you expect to be the next big development market? Why?
The Clayton submarket will be the next big development market. With many mixed-use developments planned, we will see many of them having not only condo or apartment components included, but also hotel components.

What areas are doing well in terms of apartment leasing? Which areas are struggling with leasing?
The St. Louis urban areas (the City, Maplewood, Clayton, Richmond Heights) are very desirable to the young professionals and baby boomer retirees. The convenience of shopping, entertainment and jobs in a close proximity is desirable. With the rise of fuel, I see this trend continuing for some time. Surrounding suburban areas are not as attractive to young professionals as they once were. 

Please give a measure of apartment vacancy rates.
The apartment vacancy rates in the St. Louis region ranges from 3 to 5 percent.

Please give a measure of condo sales activity in the area.
With the spillover of the subprime fallout, condo sales have slowed slightly. The St. Louis area has experienced less housing difficulties than other regions in the U.S.

What impact do current interest rates have on the apartment and condo markets? What predictions do you have for interest rates and their effect on the multifamily market in the next year?
Low interest rates typically induce sales in the residential market. With the current market conditions, residential sales have suffered pushing up occupancy rates in multifamily as well as it has spurred some developers to add rental units in condo developments.

What is the status of job growth/(un)employment rates and what bearing will it have on the multifamily market?
The unemployment in the St. Louis Metropolitan area was 5.3 percent in April. If unemployment rates increase, less people will be able to afford housing and/or quality for multifamily rentals.