The good news in commercial real estate—whether for retail, industrial or warehousing and distribution—is that the prime properties in the Kansas City region have re-established the concept of a competitive market. We have demand. We have rising prices.

We have not returned to the heady days of 2006–7, realty professionals say, but things indeed are looking up.

Retail/Office

In the retail sector, said Lane4 Property Group president Owen Buckley, “cap rates are very low, which means prices are quite high. Of course, the prices make more sense to buyers because they are able to procure very attractive financing at very low interest rates.” Meanwhile, he said, sellers love the high pricing, and that dynamic is leading to what he called “a decent number of transactions.”

Smaller tenants, Buckley said, are having a difficult time finding “A” type locations, and because of that, “we believe this will stoke the fires to begin new developments for junior box tenants and smaller tenants. We do not see that larger tenants (100,000-square-foot and above) such as grocery stores and large discounters picking up in a significant way any time soon.”

In part, that’s because the bigfoot retail operations need new rooftops, he said.

“Infill retail sites remain strong because they are not dependent upon new housing, new subdivisions,” he said. But many suburban green sites remain stagnant because home new construction, while up in recent months in the region, hasn’t reached critical mass. “However, they should pick up as home developers and new homebuyers return to the marketplace, which is happening on the West Coast and East Coast and is projected to again pick up in the Midwest,” Buckley said. “Retail follows rooftops.”

As the economy lagged in recent years, tenants took advantage of conditions to secure more favorable lease terms, in some cases for longer durations. But Buckley said that for the prime properties, that was no longer the case.

“The A-properties have already returned to this business-as-usual level,” he said. “We believe certain B-properties and certainly C-and-D-properties may never return to this level.” Those harder cases, he said, would either lead to demolition or refitting for new uses.

Pat McGannon, president of Kessinger/Hunter & Co., saw things much the same way. “On the office side, the first half of 2013 has had little in the way of growth. In our business, we need people to hire people, especially in the office. When you hire, it plays down to retail, it plays down to needing goods to serve. If you’re not hiring, not using more office space.”

Companies are still figuring out ways to further tighten their belts and be more efficient, and to the extend there is movement, much seems to be the State Line-hopping spawned by business incentives—not net new growth. “We are hearing more and more talk about the state income tax (reductions) in Kansas, but hopefully, we’ll start to see some big ones come in from out of state, out of the region,” McGannon said.

North of the Missouri River is still a pretty thin market he said, and even in Johnson County, there’s not much activity, particularly north of College Boulevard. In contrast to Buckley, he said grocery activity was up with his firm, and new restaurants were surprisingly strong.

After a respectable year in 2012, the first half of 2013 has been more disappointing, he said, possibly because of the federal spending issues with sequestration and business concerns about health-care reforms kicking in next year. “There are still a lot of companies making money,” he said, “but some areas are struggling, and we’re in the fifth year of this thing. We’re just not used to seeing something like this.”

Distribution/Industrial

Happy days are hear again. Well, comparatively speaking, anyway. Ed Elder, president of Colliers International, saw signs of optimism in his focus area. “I think everybody feels better lately about where things are, the decision-makers,” he said, and most would agree that “the balance of the year will continue to have a much better rhythm than compared to a couple of years ago. There are a lot of exiting things happening for new construction, spec buildings—and that’s a sign of renewed confidence from the development community and financing courses willing to take that risk again.”

Overall, he said, he was seeing low vacancies, particulary for Class A large blocks with a minimum of 100,000 square feet. “If you’re looking for space over 100K,” Elder said, “there’s not a lot to look at.”

The emergence of the BNSF intermodal facility near Edgerton in Johnson County, he said, was a magnet for big distribution center construction. “BNSF is the gold standard—a Tier 1 rail line out of Long Beach and Southern California’s ports.” When it comes to the region’s newfound claim as a national center for shipping and distribution, it’s all about the numbers of containers moving, and the BNSF line is without peer for that.

Overall, he said, the market has seen a healthy decline in vacancies, so “it’s more of a landlord’s market today. There just are not as many options today, and landlords are picking up on this. We’re starting to see more firmness in renewal rates, fewer concessions for companies to stay put.”

Until more six-figure properties go up, he said, the sweet spot for most activity would remain in the 30,000–75,000 square-foot range based on the numbers of lease transactions. “Over the last five to seven years, we’ve seen an increase in larger deals,” Elder said, “for 100–200K, and in some cases, greater. There just haven’t been that many new ones built to accommodate that.”

“Industrially, we’re seeing a construction boom of new, large bulk facilities,” said McGannon. His firm built the 800,000-square-foot warehouse for SunLife at the I-35 Logistics Park near Edgerton, he said, and he cited NorthPoint’s plans for a 500,000-square-foot building, as well as Van Trust’s announcement of a 375,000 square-foot facility in Edwardsville.

“There’s a lot of demand by corporate America to get to get these 32-foot-clear, high-end, high-cube facilities,” McGannon said. “Corporate America seems to be the one with the money to spend.” That’s not the case elsewhere, he said. “Smaller tenants are kind of wringing their hands about the future and what’s around the corner, how they’re going to function in the world. They don’t seem to be nearly as bullish. We see a lot of smaller companies renewing for shorter periods of time and figuring out how to make money.”

Return to Ingram's June 2013