"The office market is soft... The retail market is the darling of the real estate world... Construction starts on industrial projects are way down... The multifamily market has seen an uptick in demand over the last nine months..."
These are some of the observations that Blaise Tomazic, director of market analytics, Kansas City & St. Louis for CoStar, shared during a recent commercial real estate forecast presentation hosted by KCRAR Commercial.
According to Tomazic, although there has been a large increase in job growth post-pandemic, the office market has experienced occupancy losses, which is the worst this century. Tomazic said he is not projecting an increase in office demand going forward.
Hybrid work arrangements continue to dominate the office workforce. Even though some companies, like Amazon, have announced a return to the office, many companies have shifted their office usage.
“The common trend is that if tenants are moving, they will typically shrink their footprint, and that can range from 30 percent to 60 percent,” said Tomazic.
Tomazic said that although leasing activity has recently increased, the average lease size has shrunk significantly on a national level.
“As a result, our leasing volume is down. More transactions, smaller, less leasing volume. So that’s led to kind of a demand issue here on the office front,” he said.
In Kansas City, the office market does not seem to be deteriorating as much as it was a couple of years ago.
“[W]e’re seeing that in the amount of available space in the market. We’re getting to a point where availability is starting to plateau here locally, so that’s helpful, and that has been largely due to a lot of sublease space coming off the market,” he said.
Tomazic predicts the Kansas City office market will continue to see some softness for the next 24 months or so.
Retail, however, is the polar opposite of office right now, Tomazic said.
“Retail has kind of been the darling of the commercial real estate world over the last 12 months. Consumer spending has been very resilient, even in the face of inflation and higher borrowing costs,” he said.
A lot of retail demand is being driven by smaller tenants, and there has been a significant increase in the number of quick-service restaurants expanding across the country.
“A lot of those companies have decided that they don’t want people in their restaurants anymore, so they have less indoor seating and are saving some money on their buildout. But those sites just don’t exist, and you’ve seen a lot of construction come from them,” said Tomazic.
According to Tomazic, a lack of new retail development in the last 15 years has led to very tight retail market conditions and record-low availability.
Blaise Tomazic, director of market analytics, Kansas City & St. Louis for CoStar sharing his commercial real estate forecast. Image credit: Marcia Charney
“In 2008, everyone kind of got over their skis and overdeveloped and built in the path of development. . . . and then homebuilding fell off, and a lot of those retail locations were in the path of development that didn’t come for another 10 or so years,” he said.
Rising interest rates also impacted retail development.
Tomazic said that currently approximately half of the available retail space was built pre-1980.
“So there are a lot of these older properties right now that are probably good potential for value adds. There’s a lot of opportunity there, but if you’re a newer retailer and you don’t want to go into an older center, your options are even more limited,” he said.
Kansas City’s retail market is well below historical norms, and demand has outpaced new supply for several quarters in a row, Tomazic said. In addition, the number of tenants leaving space is down significantly.
“We’ve had a decreasing amount of demand just because there’s not much to lease right now that is out there. But at the same time, that has led to really strong rent growth,” said Tomazic.
Tomazic is forecasting a slowdown in the retail market because there are signs that consumer spending could be slowing in the near term.
“And that’s leading to kind of a status quo for the retail market here through the end of 2025. Not too much volatility, but conditions will be tighter. There’s probably going to be a little less demand than we’re seeing or that we have seen over the last couple of years,” said Tomazic.
In 2021 and 2022, the industrial market exploded and experienced a development run like it had never seen before. But, the demand for industrial started to cool. Construction starts are down, and 2025 is projected to be a nine-year low for delivery of industrial product.
Leasing activity is showing some signs of recovery in the Kansas City market. And, whereas nationally, rent growth has started to slow, Kansas City is faring better than many other markets.
He predicts that in 2025, the Kansas City industrial market will not get worse, but it will not get much better.
“Just kind of normalizing where they are at through the end of 2026 as far as what we’re seeing from a supply/demand perspective,” he said.
Through the first three quarters of 2024, the multifamily market has seen absorption increase by 75 percent compared to the first three quarters of 2023.
“That’s a really big increase in demand, especially as construction is starting to slow. Most of this increase is in the middle of the market. . . . The good thing is supply side pressure is starting to slow, so vacancy rates should start to decline on a national level, which should increase rental rate growth over the next 18 to 24 months,” said Tomazic.
Construction starts on multifamily projects are lower than they have been in the last 10 years, he said.
Tomazic said Kansas City’s population growth is helping its multifamily market. Over the next 18 to 24 months, the vacancy forecast is “pretty flat”.
Because Kansas City is not too overdeveloped compared to some other markets, Tomazic said the multifamily market will see some rent growth increase in 2025.
Header image: Rendering of new layout being planned for Kansas City's Country Club Plaza. Image credit: OMNIPLAN