Panelists Chuck Connealy, CCIM, principal, Waterford Property Company, LLC; Bob Fagan, CCIM, SVP, CBRE; and Nick Suarez, CCIM, executive managing director and principal, Newmark Zimmer, joined moderator Bruce Johnson, CCIM, SVP, Lee & Associates Kansas City, to share their views of the current office market at last week's CCIM Kansas City breakfast.
On the national level, it’s not a “one-size-fits-all trend across the country,” according to Suarez. The office market is strong in some markets like Miami and Las Vegas, but struggling with high vacancies in others like San Francisco and Houston.
When an office building is constructed and its class also determines how well it’s doing, Fagan said.
“Buildings that were built past 2010 across America by and large have positive net absorption. Buildings that were built before 2010 have negative net absorption… The A and trophy markets in every market have positive net absorption and are performing well,” said Fagan.
Fagan suggested that buildings classified as A minus or B class, particularly those that have been neglected, are poised for a potential price adjustment, a trend he anticipates will become more prevalent.
“They’re going to go back to the lender and sell at such a low price that a user can come in and buy it and fix it up and it pencils. Or, if they’re well placed, they’re going to do what every other building does and convert to apartments,” said Fagan.
Suarez said financing office deals right now is very tough, and office sales, for the most part, have dried up.
“There’s just a real lack of nice office buildings trading across the country, and Kansas City is in the same state,” said Suarez.
Vacancies in the Kansas City market have risen in recent years. In 2019, Kansas City’s office vacancy rate stood at 14 percent. Connealy said that the vacancy rate currently is approximately 22 percent.
The amount of sublease space on the local market also has soared.
“In 2019, there was 396,000 SF of sublease space on the market. There are 2,176,000 SF on the market today. It’s a lot of space,” said Connealy.
Connealy said the two biggest submarkets that have been hit the hardest are Downtown and South Johnson County. North Johnson County occupancy rates have remained level, and south Kansas City is actually doing better than it did in 2019.
According to Suarez, those projects that are mixed-use, well located with “really good amenities” are experiencing a lot of success. He cited Park Place (Leawood), Aspiria (Overland Park) and Crown Center (Kansas City) as examples.
“Some of these projects that may have been somewhat overlooked pre-COVID are now getting a second look for tenants,” Suarez said.
Connealy said that the top amenity his office tenant clients are seeking is not what the building has, but what else is in the area where the building is located.
“They want it to be walkable. They want to be able to turn left or right and get a cup of coffee. Those are the main ones. And then rooftop decks. Any kind of outdoor area is really important,” he said.
“Amenities can’t just check the box anymore. If you’re going to have a fitness center or a conference facility, it needs to stand out,” said Suarez.
Fagan said natural light is moving up to one of the top amenities tenants are seeking, and they want to take advantage of the new lighting technology.
Fagan said he has seen a shift in thinking among employers about space needs. They want less space but are willing to pay more in rent.
“There’s less focus on the rent cost than there ever has been,” said Fagan.
Because construction costs have risen, making deals much more expensive, tenants are willing to pay more rent and sign longer-term leases, Suarez said.
“The people that are looking to move today are typically wanting to upgrade. If they’re going to have an office space, they want it to be a good space that their people want to go to,” said Suarez.
The panelists all agreed that one year from now overall vacancy rates will be higher.
Relying upon information from the Kansas City Area Development Council (KCADC), Fagan said between March 2020 and recently, Kansas City has had the lowest amount of inquiries and success with out-of-market office tenants than this market ever has had.
“We have had the most industrial influx and the least office,” he said.
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Feature photo from Left to Right: Chuck Connealy, Nick Suarez and Bob Fagan discuss the KC office market at last week's CCIM Kansas City breakfast. Photo credit: MWM KC | Marcia Charney