Revathi Greenwood, global head of data and insights for Cushman & Wakefield, discussed the office market from a national perspective and shared how Kansas City stacks up against its peer markets and other office markets across the country in her keynote address at the 5th Annual Downtown Office Summit on November 9, hosted by the Downtown Council of Kansas City.
Greenwood said despite the fact that the country is experiencing rising inflation, inflation is good for real estate and real asset values. Rent growth is driven by inflation, she said.
“So I suspect in this type of environment, real estate is going to attract more money and more capital,” said Greenwood.
Greenwood said office leasing has come back to nearly 75 percent of where it was in the first quarter of 2020 when the pandemic hit.
“And when you look at new leasing - which is what we in the office market are really interested in - new leasing, versus just renewals, that also is at a very high level at about 80 percent. And that is really an encouraging sign,” she said.
Greenwood said she expects demand for office space to start improving in the third quarter of 2022 and rent growth coming back up in 2023.
She noted that office leasing activity is picking up in Kansas City. Kansas City’s supply situation is much more matched to demand than its peer cities, thus positioning the leasing market well. New leasing is high, almost at the 90 percent mark in terms of total leasing.
Greenwood said several factors are driving Kansas City’s office demand, and those drivers are slightly different from the national drivers.
First, the financial services, industrial and logistics industries located in Kansas City are having an effect on office demand. In addition, the growing high-tech market in Kansas City is a “very powerful driver of demand” as is healthcare and life sciences, legal and government, Greenwood said.
“This is an exciting story for a lot of investors and occupiers because, remember, that is what they care about. Do you have high-growth sectors? And, do you have the talent to support that? And the answer to both of that is yes,” said Greenwood.
In addition, workers in Kansas City do not have to contend with long commutes, and this is one of Kansas City’s biggest strengths to attract labor, she said.
Historically, central business district (CBD) vacancy rates on a national basis were tighter than the suburbs, but since the pandemic, national statistics show a trend of CBD leasing decreasing and suburban leasing increasing, but not in smaller cities like Kansas City, Greenwood said.
“I think that comes back to two reasons. One, the cost between CBD and suburbs is not as significant. And, secondly, it goes back to the commute time. People want to be in a vibrant downtown,” she said.
Although statistics show that working from home has not impacted productivity substantially, innovation and creativity suffer when colleagues cannot be together in person.
“Even though you’re going to have flexible working, I think that in order to drive those benefits, companies still have to plan for surge capacity,” said Greenwood.
Greenwood said that offices that are LEED-certified or have a Fitwel or a well certification have a competitive advantage and will command a rent premium.
“If you’re going to compete and ask talent to come back into office space, you want office space that they’re not going to get sick in. And not just sick in terms of COVID, but long-term wellness,” she said.
Greenwood said there is a lot of pent-up demand for commercial real estate. Although there has been significant investment in multifamily and industrial properties, office investors also are coming back, not only into the equity markets but also lending.
Kansas City is a much higher-yielding office market compared to gateway cities and its peer cities, and investors are looking for yield. Kansas City offers the yield play which is a competitive advantage, Greenwood said.
Because of Kansas City’s favorable quality of life, low cost of doing business and affordability, Greenwood said the population growth minted by Kansas City during the pandemic will continue.
“You’ve got STEM talent [which exceeds the national average] and not just high tech talent, but STEM talent, which is again a big driver of demand and growth. And you’ve seen job recovery,” Greenwood said of Kansas City.
“COVID has redefined what are the cities that people would consider. What’s interesting is that people are not going to live in some random city. There are a new cluster of cities that are emerging, and I think it’s a real opportunity for Kansas City to be part of that conversation and that new cluster of cities because you’ve got the raw material. You’ve got the talent looking for affordable, amenity rich locations,” Greenwood said.