Ingram’s 2016 Commercial Real Estate Industry Outlook Assembly

On a glorious fall day, with the Kansas City Downtown skyline as a backdrop, a score of the region’s top commercial real estate producers, brokers and developers gathered in the luxury condominiums of One Park Place on Oct. 10 for Ingram’s 2016 Commercial Real Estate Industry Outlook assembly. In a candid, fast-paced two-hour discussion led by John Stacy of Reece Commercial Real Estate and Greg Swetnam of Kessinger Hunter & Co., the sponsoring organizations, they shared observations about the current state of the office, industrial, retail and multifamily markets, with generally positive assessments of where this region is currently positioned. They also looked ahead to factors that could bring change, from a looming presidential election to the potential for interest-rate inceases, from the flow of foreign investment capital to the inevitable downturn in a long multi-family building boom. It was an important reminder that no city can build itself up and simply stand pat: It must continually be reborn, refreshed and revitalized with buildings and projects that meet the current needs of a constantly changing business world.

Assessing the Local Market

The discussion opened on a light note as John Stacy of Reece Nichols Commercial Real Estate, co-chair and co-sponsor of the event, passed around copies of some archived business
coverage showing some of the attendees in the early phases of their careers. That led to a bit of fond reminiscing, after which the group got down to business.

Joe Sweeney, publisher of Ingram’s and moderator of the event, kicked off the discussion by asking each member of the panel for an assessment of trends and conditions in the Kansas City commercial real estate market.

Dan Jensen from Kessinger Hunter & Co. noted an uptick in warehouse construction, “Obviously the trend of the day in industrial is big box. We really continue to create a lot of them and we continue to absorb a lot of them. The question is how long will it last.”

Mike VanBuskirk, from Newmark Grubb Zimmer, offered a perspective from the investment sales point of view: “What’s interesting in the last couple of years is the amount of out of town buyers we’ve seen. New players who have never looked at Kansas City in the past, all the sudden we’re on their radar screen.”

John Sweeney, of Reece Commercial Real Estate, sees some interesting signs in south Johnson County: “Rental rates have been gradually increasing, the occupancy increasing, and I think we might actually see somebody do a spec office building sometime out south.” 

R.H. Johnson Company’s Bob Johnson pointed out how difficulty on one side of a coin can spur profit on the other in the retail space: “Occupancy rates are strong. There isn’t much new construction, but vacancies will be created by retail failures. That’s good for our business, good to increase inventory, and some good redevelopment opportunities.”

Said Brent Roberts of Block Real Estate Services, “I’d say one trend purely from an office development standpoint, is that it’s all local developers. We don’t have any major out-of-town developers building office buildings.”

Kevin Wilkerson from Jones Lang LaSalle picked up on the big-box theme: “Kansas City is emerging as a big-box market; there’s 9.9 million square feet that’s going to be introduced in Kan-
sas City this year in new construction. Unprecedented.”

He also noted Kansas City’s growing prominence in the logistics and distribution sector. “If you have one or three distribution centers in the U.S., you should be in Kansas City,” he said. “It’s really cost-justified to be in Kansas City. You can reach 98 percent of the U.S. population within three days.”

Nathan Anderson, NAI LaSala Sonnenberg, shared some immediate figures he grabbed on his way out the door, “Just before I came, I checked and 80 percent of the clients I’m working with right now are manufacturing, assembly, fabrication clients.” He then noted some factors, labor primary among them, that motivate such clients.

Pat McGannon from Kessinger Hunter & Co. agreed that big-box is a big deal but, “What it’s showing is the obsolescence of the buildings that were built in the ’70s and ’80s.” But that downside, he says, doesn’t necessarily mean no activity: “What I think I see is that price still works, even on the older buildings.”

Brian Johnson of Colliers International sees some interesting dichotomies regarding space: “We’re starting to see a lack of large blocks of space in various submarkets; Johnson County is getting pretty tight. We’re also seeing a trend towards densification by various users: Traditional users are using less space.”

Debora Field of Newmark Grubb Zimmer noted a challenge to the car culture that is so much a part of life in the region: “The walkability factor is huge with regard to redevelop-
ment projects, and walkability with any kind of new development. So the attraction of the multiuse or mixed use is driving a lot of deals in a lot of locations.”

Mark Katz, who does a lot of business in the Kansas City region for HFF out of Denver, said, “One of the coolest things we’re hearing people talk about is the rebirth of Downtown, the amount of folks moving down there. If office space follows, you could see some of the relocation we’ve seen in other markets. Groups that move from the city to the suburb back to the city. It’s really fascinating to watch.”

Bucky Brooks, of Copaken Brooks, said that when doing business in Kansas City, “It’s important to be in tune with warehouse logistics, with tech, animal health, healthcare and to some degree with recreation.”

Jeff Stingley, who handles investment property deals for CBRE, says multifamily investment is a big trend: “I think the biggest trend here is just the emergence of Kansas City as a lead central U.S. market for multifamily investment.”

Owen Buckley of LANE4 Property Group gave another retail perspective: “I would say locally a trend that we’re seeing, which is probably a national trend as well, is the lack of new, large junior and big-box stores,” which he says poses difficulties for smaller tenants such as quick-casual restaurants that need to be near big traffic generators.

Audrey Navarro of Clemons Real Estate brought the conversation back to the city: “We’ve seen a huge urban renaissance. I would say the biggest two trends we’re seeing now are the influx of people moving into the city in terms of residential density, as well as out of town investors looking to invest in the urban market.”

Sharon Gartin from Kessinger Hunter  & Co. said that even though she focuses on office space, “The whole multifamily thing to me is just absolutely amazing. I think it affects me because I work Downtown. That whole convergence of loft space, industrial space and the brand new high-end residential just amazes me. It’s never been like this in the 30 years that I’ve been in the business.”

Dan Lowe, founder of Legacy Dev-elopment, wonders about technology: “A couple of challenges, I think, are how technology is going to affect business, and the onset of virtual reality and what that’s going to do to shopping. Also, the lack of liquidity in our business, back-end liquidity. You can get the money to build [shopping centers]. But on the back end with the disappearance of private REITs [Real Estate Investment Trusts] it’s been really difficult to sell our product.”

Greg Swetnam, event co-chair from Kessinger Hunter & Co., ended the first round of discussion on a very positive note: “The trend that’s been really remarkable, I think, is the amount of sales that have finally started to pick up traction in our marketplace. Up until about the last 18-24 months, we hadn’t really seen that actual arm’s-length transaction in probably 5-10 years.”

Conflicting Cycles

Next up on the agenda was where the experts felt the market is in terms of cycles, a discussion that turned quickly to focus on urban living.

Jeff Stingley started off: “It’s tough to say. I think we’re definitely in a prolonged upcycle, longer than it typically lasts. Honestly, you hear about ‘renter by choice’ but that’s a real thing and it’s changed the game, so to speak, in terms of tenant demand.” Citing favorable occupancy rates and rents among the highest Kansas City has seen, Stingley says it’s hard say to when the trend will fizzle out.

Audrey Navarro said: “Particularly in the urban market, we’re seeing the Millennial population and we’re seeing the empty-nesters and we’re starting to
see families come back to the city. Even in our office, we have two brokers with young kids who are just going into kindergarten. They each moved from the suburban market into the city and they’re sending their kids to charter schools, which is probably the first time in 30 or 40 years we’ve seen families in the urban core.”

Mark Katz noted that a return to urban living is a national trend that Kansas City is only now catching up with: “It’s awesome to watch, to walk around and see the people down there and see One Light and Two Light and all that’s going on, it’s very cool to see. And institutional capital is noticing. There are conversations we’re having that we weren’t having two, three or four years ago about Kansas City.”

Swetnam then steered the conversation toward industrial real estate and when the up-cycle there might end.

Kevin Wilkerson began his answer by telling the assembly that 32 percent of the 9.9 million new square feet he had mentioned earlier had already been leased: “So there is still quite good absorption. E-commerce continues to generate some of the demand. I was looking back at the occupancy at [Logistics Park Kansas City], 35 percent of it has been directly related to
e-commerce. I think that’s going to soften the next cycle for industrial. If you look at it, 8 percent of it is making up retail sales today and they project it’s going to grow 15 percent annually. So there should be at least some demand through the next cycle in the industrial sector.”

Pat McGannon says that sophisticated companies will pay higher rent for a better, newer industrial facility, but that “the mom-and-pop companies in Kansas City won’t.” He continued, “I see, nationally, shortages in some regional markets. We’re working on a vacancy that doesn’t come up until next July, and we’re aligned with two other groups trying to lease it.”

Bob Johnson sees opportunity for retail: “Retail is very strong right now. It has an opportunity to be repositioned because of the Internet. Retailers that can combine an Internet presence with a brick-and-mortar presence are doing very well. But there’s going to continue to be a lot of shakeout, even for old established retailers. Who would think that Macy’s is going to close 100 stores next year? Who knows what’s going to happen to Kmart next year or even still this year. There’s a lot of un-certainty there. But with those buildings, if they do come available mostly they’ll be repositioned” with other retailers splitting them up, or new uses found for them.

The Online Reality

Some of the talk about online brought a response from the table that you don’t hear much in these days of online as king. It was voiced that retailers need industrial because they don’t make enough money on Internet sales and that efforts in the industrial area that beef up distribution are going to be watched closely for their effect on Internet sales.

As for good, old brick-and-mortar business, Debora Field was struck by something she noticed on a list of Kansas City office buildings: “They’re old. There’s nothing new. The CBD [Central Business District] speaks about what the life of a city is about. And with all this stuff happening, it is the hole in the doughnut. You’ve got the River Market, Crossroads, the West Bottoms have stuff going on, but you just don’t have that financial district doing anything, except at the street level and maybe residential. If enough residential occurs, I still don’t think those people want to work in the towers. This cycle that we’re in with office is just not taking off. It’s just steady, steady, steady. The only thing that seems to be taking off are the niche markets around the redevelopment walkability locations.”

Of course, it wouldn’t be a discussion about the direction of commercial realty without exploring public policy and the possible effects of the upcoming election.

John Stacy brought up the Federal Reserve and the potential for higher interest rates: “I don’t think the Fed cares about the election; the Fed cares about when it’s the right time to start jumping 25 basis points. What effect is that going to have? In leasing, I don’t see that it has any effect. Maybe in construction or investment?”

Debora Field offered, “It affects the business person who leases the space because of their cost of borrowing funds, or their investment in buying equipment or their investment in buying real estate. So what you do, I believe, is you have to keep an eye on what the conventional wisdom is right now with regard to when those increases occur.”

John Sweeney joined in with a smile: “Everybody who answers this question, you’ll know their leanings, Democrat or Republican, but if regulations continue on small business and the tax burden on small business, that will slow things down.”

The conversation then turned to the idea of a president’s influence on such issues. In Field’s opinion: “It’s really more about who’s below the presidency. It’s not necessarily who gets elected at the top. They have less impact than the House and the Senate do, frankly. In terms of when these bills come out of committee and they get reviewed and pushed through.”

The subject of liquidity and sources of capital continued to be a source of speculation during the session. Mark Katz, who earlier said that a recent trip to Europe left him convinced that there is a lot of foreign capital poised to enter real estate, added: “Yield-chasing, private foreign investors will come to Kansas City. We’re seeing them move to secondary cities, and as a matter of fact, I can tell you right now, we were just there, some of these institutions are raising some of these smaller funds to start investing in Kansas City and places like it. And they will only invest in urban. They will not want suburban.”

Bucky Brooks pointed out the health of the office market in general: “Suburban office has not been in favor. The urban office is more in favor. But I think we have a big push ahead of us. In my career, I’ve not seen this healthy of a rent push increase. I remember two, three, four years ago, CBRE had predicted 5.7 percent annual office rent increases for several years. I’ve never seen anything like that, and I would have to say that the last couple of years it’s almost been there.”

The Role of Incentives

The issue of incentives prompted some introspection from the table, especially with how policies meant to promote business growth were defeating that very purpose with cross-border moves.

“I’m curious on the office side,” said Jeff Stingley. “You hear about people moving from Kansas to Missouri or vice versa, but how often do we talk to companies looking to come to Kansas City from another location? Because that’s where we’re going to get the job growth.”

Missouri incentives, combined with a large block of office space that’s generating low demand, are a powerful draw for companies to the west, Greg Swetnam said. “You take a company from the Kansas side and go down into that core [Downtown], get the incentives to be able to do it, and you can pretty much do whatever you want at that price,” he said. “It’s free space. That space has been sitting long enough to give it away.”

That’s part of a broader Downtown challenge that continues, despite the infusion of roughly 10,000 residents over the past decade. Economic development pros suggest that Downtown’s population—now about 20,000—needs to double to have the critical mass needed to generate a substantial bump in retail activity.

“National tenants don’t ever want to be Downtown, except for in special districts, and you don’t have the sales per foot to really induce them,” said Audrey Navarro.

For Owen Buckley, those residents aren’t coming quickly enough. “I think the pedestrian traffic isn’t high enough down there,” he said. “You can drive down there on Saturday or Sunday on a nice day, there aren’t that many people walking down the street by those storefronts.” Plus, he said, parking and convenience are factors that will compel even Downtown residents to take their retail urges into the inner-ring suburbs, easily accessed with the city’s highway system.

But suburban retail is challenged, as well, by increasing opposition to the kinds of tax abatement and incentive programs that have confounded some development efforts in Kansas City proper. That’s unfortunate, developers at the table said, because the opposition from the public is generally grounded in a lack of understanding about the uses and benefits of community improvement districts and tax-increment financing. But it’s not limited to the public.

“I think a lot of municipalities just are not understanding; definitely, the general public doesn’t,” said Dan Lowe. New development can be a magnet for further growth, adding to the tax base, he noted, so “I don’t know why any municipality would push back on that—you’re getting the redeveloped asset out of it. Without that, it’s money they’ll never get, they’ll never see, so why not do that?”

Changing the nature of the relationship between retailers and the communities they serve is a key element for driving greater public appreciation of how incentives can benefit the region, Owen Buckley suggested.

“These private-public partnerships are—you know, it’s got to be good for both sides, and the cities, these municipalities have to decide what is this, if we fix this up or we build this, what kind of snowball effect is it going to have on my community? Is it going to snowball into the neighborhoods, are people going to put additions on their homes and fix their gutters, and is it going to build up the neighborhood, and are more businesses going to move in? It’s really that simple. If the answer is no, they shouldn’t give the incentives.”

What’s happening on that front, Dan Lowe said, portends greater change ahead.

“I think if retailers don’t find a way to become a part of the social fabric that they’re in, and deliver on some form of value proposition, they’re history,” he said. “And the value isn’t just cheap pricing. Apple is the great example. You can spend three grand there and come out feeling like you got a deal because their customer service is so good. A lot of retailers just can’t figure that out.”