What you need to know about Kansas City’s booming commercial real estate industry
Kansas City’s office and industrial vacancy rates are near all-time lows, and investors continue to show interest in one of the Midwest’s fastest-growing cities. But questions abound as the commercial real estate (CRE) industry continues its dominant run. Ned Smith, senior vice president and Kansas City commercial real estate team lead at UMB Bank, discusses the trends impacting the region’s robust CRE activity.
I recently participated in a roundtable hosted by the Kansas City Business Journal to discuss some of the key questions surrounding Kansas City’s CRE activity. While you can digest the full discussion here‡, following are some key takeaways about the current state of the region’s CRE industry.
Unprecedented but moderated development in the urban core
Development and revitalization is occurring at an unprecedented rate from the River Market to the Plaza and it includes multifamily, hospitality and commercial space (primarily service/entertainment). While the market may be nearing saturation in the areas of multifamily and hospitality, we have not yet seen a rise in vacancy or significant concessions. To date, more office space has been taken offline for conversion to other uses and developers have remained disciplined. Little new speculative office space has been developed and as a result, vacancy rates have decreased to near single digits. The panel agreed that we are heading toward an imbalance between residents who want to live in the downtown area and the number of jobs in the area. There are new office buildings in the planning stages that may help draw employers to the area, but until that happens, we may continue to see an increase in “reverse commuting” from the central business district (downtown) to the suburbs.
Opportunities for growth in the coming years
The industrial sector in the metropolitan area has also seen unprecedented growth over the past 5-7 years and the panel agreed that development will continue in the area due to Kansas City’s central location and confluence of highways and rail lines. Multifamily and office development will continue in select job centers that include walkable amenitized, mixed-use entertainment districts like Lenexa City Center, CityPlace in Overland Park and the 80th and Metcalf “Old Overland Park” areas.
Changes in lifestyle affecting CRE
In addition to changes in multifamily developments, brick and mortar retail is in the midst of continued downturn due to online retailers. The panel discussed this transition and agreed that power centers and big box retail centers will need to be repositioned, neighborhood centers with needs-based retail and service retail will continue to be utilized, and grocery and other same-day delivery services will continue to change the retail landscape in Kansas City and nationally.
There is difficulty in valuing co-working spaces in office buildings but the co-working trend continues to grow. Nearly every new office development includes this growing tenant type. Additionally, continued development will need to be increasingly strategic to avoid increased vacancies and downward pressure on rental income that both developers and lenders utilize in underwriting new CRE construction. Historically, Kansas City has not had the significant peaks and valleys in the CRE market that other growth cities have seen during upward and downward cycles, but with the significant growth that we have seen during this cycle, the industry needs to maintain credit standards. UMB intends to do so to ensure that we are here for our clients to prosper during a down cycle.
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