Money
“Our biggest challenge,” said Tom Turner, “is that there is an enormous amount of money available to be loaned or distributed into what we call the capital stack.” The difficulty, as he saw it, is trying to educate would-be end users on the various layers and types of money that can go into a project.
Olen Monsees questioned whether the availability of money was an issue if the underwriting statements were still holding up. “It was a big problem in the ‘80s and early ‘90s,” he added, “but it seems like underwriting sales [are] pretty reasonable.”
Turner agreed that they were.
“Is the underwriting reasonable,” asked Bob Johnson, “or is it the fact that the rates haven’t moved?” In the ‘80s, he observed, there had been much more volatility in the rates. “Look at the last three or four years,” he added. “Money continues to be, historically, very, very cheap.”
Turner explained that what has driven overbuilding in the past has been the participation of large banks with a short term focus that “need business immediately.” That has not been a problem in Kansas City, he believes, because the banks here “have not been at the height of aggressiveness over the years.” Still, he sees banks here as getting more aggressive.
As Carl LaSala with LaSala Sonnenberg noted, the tax laws aggravated the problems of the 1980s. “We were incentivized to build buildings that didn’t necessarily make sense financially,” he said. Then when the tax laws were changed, “they changed the way we figured the score and of course that brought everything down.”
Turner asked those who were active around the country whether they had seen any areas that were particularly overbuilt. Ken Jaggers with Integra Realty Resources did not see overbuilding as the problem per se. Rather, he identified a lessening of demand for the existing supply that has caused a certain “dis-equilibrium.”
“There may be an abundance of space in certain markets,” said Kevin Jones of Jones Development Company, “but it’s the wrong type of space.”
Office
Tom Turner wondered out loud how well the regional office market was faring.
Kansas City has typically lagged behind the national absorption rates, commented Estel Hipp. He also noted that throughout the metropolitan area, institutional owners—with “deeper pockets than even in years gone by”—now own a good portion of the projects. These they typically hold for a seven-to-ten year period. As a result, they are able to offer cheaper rents in order to get some absorption.
Speaking for South Johnson County, Kathy Woodward with DDI Commercial observed that “things have picked up dramatically” since the first of the year. Apparently, there are many prospects in the market, but most are small, and few have needs of 10,000 square feet or above. “Everybody is fighting for the mighty dollar,” she noted. “Landlords are having to give up a lot.”
Woodward conceded that the Plaza is “by far the healthiest” of the office markets with little inventory and strong demand. “The Plaza is the only area in the city where you get real rental rate increases,” agreed Jon Copaken.
As to downtown, Woodward was less sanguine. “If you don’t have a couple big users come take big chunks off the market,” she said, “It’s going to take years.”
Buzz Willard sees a turn around coming as a result of downtown development. “We have attracted tenants in the last 24 months that never would have dreamed of being downtown,” he noted.
(...continued)