Through the first three quarters of 2019, Kansas City’s Central Business District saw 366,000 sf of leasing activity in the office market and the vacancy rate dropped to 17.0%, down from 18.7% at the end of 2018*. The continued momentum throughout the CBD area has been exercising a strong influence on the overall office market, as more tenants look to locate in the urban center. But while overall metrics are encouraging, a fundamental problem has developed.
According to a Cushman & Wakefield analysis of approximately 1,100 office leases signed since the beginning of 2018 (direct leases only, excluding renewals, build-to-suit leases, and sale-leasebacks), the average office tenant in the Kansas City market is around 5,000 to 6,000 sf, although that total is likely a bit high as smaller leases tend to go unreported.
An analysis by Cushman & Wakefield indicates that the median tenant size from the data set was 2,600 sf, and the top five leases, or 0.4% of the deals completed, accounted for 8.1% of the total space leased.
Kansas City’s market is no doubt well positioned in both the suburbs and the CBD to serve companies looking for between 2,000 sf and 6,000 sf, which make up the majority of tenants looking for space in the market. But there are justifiable concerns that larger tenants—individual companies that have a measurable impact on the market and are likely to be relocations that will attract significant new jobs—are not being served.
Following the recent announcement of the USDA leasing space in the CBD, only 12 existing properties in the market are capable of offering 75,000 sf or more of contiguous space. Nine of those buildings are located in the suburbs, and four of those are low-rise, Class B buildings.
These four properties are well-suited for call and support centers or tech services, but they will likely not be attractive to tenants looking for contemporary office space. What’s more, one of the buildings is located a significant distance from the CBD. The remaining four suburban buildings are quality options, although the two located near 95th and Renner in Olathe may be viewed as too far outlying and major tenants will struggle to project an identity inside the Corporate Woods office park.
The three remaining options in the CBD with large availabilities each face a similar challenge. Two of the spaces have become available as existing tenants who had single-occupancy of large buildings have contracted to offer space as demand has increased, and the third has recently come under new ownership and will require massive renovations, which have been proposed. Simply, none of those choices qualifies as “trophy” space.
Kansas City has seen a lack of office construction over the past 15 years, so data is limited, but what we’ve seen so far indicates that not only is there demand for large spaces, but tenants are prepared to pay premium prices for premium product.
Corrigan Station delivered Class A, high-amenity space to the Crossroads when it opened in late 2016, and the first phase of the building was immediately occupied by three tenants totaling 85,000 sf and ranging from 11,000 sf to 44,000 sf each. Observers who were skeptical of Kansas City’s CBD being able to attract $30-plus rents were quickly proven wrong.
In the suburbs, the evidence has been even more convincing. Four speculative buildings 75,000 sf or larger have opened since the start of 2017. Overland One was fully leased by Creative Planning, and medical software firm WellSky has committed to occupying the entire first building at CityPlace by next summer. Nall Corporate Center II has Mariner Wealth Advisors anchoring over 75,000 sf in a building that has less than 5,000 sf of vacancy, and Overland Two is completely full, with multiple tenants having taken entire floors in excess of 25,000 sf.
As for buildings currently under construction, it is clear there is still ample demand. A second 125,000-sf building at CityPlace has already leased 45,000 sf, and the 46 Penn Centre trophy tower under construction on the Plaza is over 40.0% pre-leased. These buildings, which offer modern Class A construction and amenities, are proving that tenants will pay the prices for new construction as long as the final product delivered is of high quality.
Rising costs in the major markets have caused large employers to look for alternative locations with lower housing and employment costs. This has led to Kansas City emerging as an attractive market for larger tenants.
Charlotte started a major expansion about 20 years ago as financial firms moved positions to the city. Austin was originally a manufacturing center for IBM typewriters, and over the last decade-plus it has used its history with IBM, Texas Instruments, Motorala, and others to attract today’s major tech firms. Now, Nashville is enjoying a similar boom.
Kansas City is well-positioned to attract the same type of tenants and jobs. Major, global companies are actively looking for new markets that offer a combination of civic energy, entertainment, educated work force, and desirable living experience, and Kansas City offers all those things.
Unfortunately, those very companies that would be interested in establishing a presence here are unable to do so for the simple fact that there is no viable place for them to set up shop. This is especially true in the CBD, which is where most companies are directing their focus in an attempt to attract and retain employees.
Tenants have demonstrated they will support rents that just a few years ago many thought were too high for Kansas City. Investors who have taken risk are being rewarded and there is every indication that there is room—that there is a need—for further development. While much of the discussion has focused on how much of a cost developers and local incentive authorities are willing to take on, if there is no action to bring large blocks of modern, high-amenity, Class A office space to Kansas City, especially in the CBD, then the biggest cost of all could be missed opportunity.
*Cushman & Wakefield’s statistical inventory excludes government buildings and owner-user properties.