Despite challenges — including labor shortages, broken supply chains, rising interest rates and inflation — panelists at MetroWire Media’s 2022 KC Market Forecast Summit told the audience that they are “bullish” on 2022 and project continuing growth in the Kansas City commercial real estate market.
Chris Vaeth, vice president and regional leader with McCownGordon Construction, moderated the event held last week at Johnson County Community College.
Panelists included Rob Bratcher, president of Commerce Bank, Kansas City; Donald E. Maxwell, owner, Donald E. Maxwell, LLC and co-developer of Linwood Investors; Tim McKee, CEO of Olathe Chamber of Commerce; and Leonard Popplewell, senior associate, Cushman & Wakefield.
“Like every other market across the U.S., the office market in 2021 struggled from a leasing perspective,” said Popplewell.
McKee said that some companies that have figured out how to work remotely are relinquishing large chunks of space.
“Employers who want to attract talent are looking for Class A high-end space,” Popplewell said.
Class A space was one of the bright spots in the market and the Kansas City market has several new office projects that are performing well from a leasing perspective, including Avenue 82, Edison District, the Creative Campus and 46 Penn Centre.
Popplewell predicts that 1400KC, the 260,000-SF building under construction (originally for occupancy by Waddell & Reed Financial, Inc.), will be fully leased by the end of the year as companies pursue a “flight to quality.”
“It’s not just competing against other companies for talent. You’re actually competing against home offices, the ability to walk out of your room, go to your kitchen, your backyard, the ease of that. You have to provide an office space that is an increase of what they’ve had for a year working from home,“ said Vaeth.
Popplewell said landlords who own Class B and Class C office space, older spaces and buildings with fewer amenities, are facing challenges and to compete in the market, they will need to invest in renovations.
Most office landlords are not discounting rental rates, said Popplewell. Rental rates are holding steady or increasing; however, to attract tenants he said landlords are offering more months of free rent upfront and are being more aggressive with tenant improvement allowances.
Popplewell said the owner-user market for sales of office properties is “super hot.” Companies are looking to buy their own property and control their own real estate, and they are taking advantage of low-interest rates.
“We've seen record prices for properties, particularly in the urban core and along some of our infrastructure investments —like the streetcar and where the streetcar line is being extended,” said Popplewell.
The multifamily market also continues to thrive.
“The younger population is no longer interested in the yard and picket fence. They're more inclined to be mobile, for either work purposes or lifestyle purposes. They want to be able to pick up and move at any time. They don't want to be tied to a mortgage. And so the need to have that multifamily housing has basically been tied to that generational desire to not be tied to what was formerly the American dream,” said Maxwell.
McKee said the cost of single-family housing also is driving some of the multifamily demand and he doesn’t see the demand slowing. “A lot of older folks also don’t want to deal with a home or be tied down,” he said.
With the race to deliver goods the same day, McKee does not foresee any shortage of new industrial space being built. He said Olathe has five different industrial developers currently building, including Lineage Logistics, LLC, which is building a refrigerated warehouse, the largest in the Kansas City area at approximately 400,000 SF.
In addition, De Soto (Kan.) recently announced that it is annexing the approximately 6,000-acre former Sunflower Army Ammunition Plant and the 300 acres next to it for industrial development.
“So Southwest Johnson County is just exploding with industrial and we still have land in Olathe to be developed for industrial that’s zoned that way,” McKee said.
Vaeth said the American economy is consuming at a 20 percent greater rate than pre-COVID, creating record demand; however, the supply chain is broken and many older workers (truck drivers, for example) have elected to retire early and are not rejoining the workforce. And, there are not enough new workers to replace them. This has resulted in increased costs and project delays.
Popplewell said the researchers at Cushman & Wakefield believe that supply chain issues will exist probably for another 12 to 15 months. He said the researchers also believe that adjustments will be made to improve the supply chain system to make it more flexible.
Bratcher said there is a lot of liquidity in the market right now and margins are good. But, as interest rates and costs of fuel, wages, and goods rise, those margins will shrink. Bratcher said he expects interest rates to rise four times this year.
“I think we’re going to be okay… The discussion now is really what does 2023 look like? If we have four (rate increases) this year, is there another three or four next year? I think it’s too early to start saying what’s going to happen there,” said Bratcher.
Inflation is another factor that could impact the market. Bratcher said in some ways inflation will be absorbed by a lot of companies because of record profits and liquidity. But, as rates rise, inflation’s impact will intensify.
“The biggest challenge that we have right now with the huge levels of inflation is that the number that we got going into the project is not the number that we get when it's time to sign the loan agreement or when it's time for the tax credits to issue,” said Maxwell.
“It's incredible to see in the last five years, how much more national investment there is in Kansas City than there used to be. We're seeing developers and investors from both coasts. They're looking for more growth and higher returns on their investments in office and other commercial real estate classes. So they're looking at Kansas City and they're making investments —and we are excited,” said Popplewell.
View entire event (Facebook) photo album here, courtesy of Arch Photo KC.