Employers sent their employees home in 2020, triggering a permanent paradigm shift in the office market.
“Old office was really a place for people to have to go and perform their work, a place where we kept all of our stuff... The pandemic drastically changed likely forever how we think of office spaces and where our employees want to work and want to be and how they want to work,” said Susan Schaefer, VP of construction with JE Dunn Construction, a panel member at MetroWire Media’s 2023 KC Office Summit.
MWM Office Summit panelists from L to R included: Jason Carter-Solomon, Trisha Allenbrand (moderator), Hunter Johnson, Marty Gilchrist and Susan Schaefer. Photo credit: Arch Photo KC.
Jason Carter-Solomon, senior VP of commercial banking and real estate for Landmark National Bank; Marty Gilchrist, CCIM, senior associate with Cushman & Wakefield; and Hunter Johnson, senior VP of sales and leasing with Occidental Management, joined Schaefer to discuss the current state of the office market and outlook for the future. Trisha Allenbrand, CEO of Spaces, Inc., moderated.
According to a second-quarter report prepared by Cushman & Wakefield, Kansas City has just over 53 million SF of office space and an overall vacancy rate of 21.7 percent, with 17.7 percent of that space being available on a direct basis. The average asking rate in the Kansas City metro area is $22.15/SF. In contrast, the national vacancy rate is 19.2 percent, with an average asking rate of $37.34/SF.
“Traditionally, our vacancy factor is indeed higher, but this is not unexpected. The $15/SF differential on the asking rate, however, is very interesting to me because it provides context to the affordability of our market. In review of the national stats, the news that you hear that offices are doom and gloom does not apply to us, in my opinion. We just have different market dynamics,” said Gilchrist.
She said that with the rising costs of construction, tenants are agreeing to longer terms and to higher rates.
Gilchrist said the Kansas City market is not overbuilt, but Carter-Solomon said that certain submarkets are, including northern Johnson County, Kansas, which has existing product that is obsolete and needs a reposition to quality or purpose.
“In the competition landscape of where people want to office, frankly, people are looking for convenience, good geographical location with amenities, and we are blessed and a little bit cursed that our landscape has a lot of competing options for that given the spread of our municipalities throughout the region,” Carter-Solomon said.
The panelists agreed that the days of tenants occupying 40,000 to 50,000 SF or whole floors of office buildings will no longer be the norm because of the new hybrid work environment.
“You can downplay the effects of COVID all you want, but the truth is that when businesses are looking at their bottom line, they’re going to think about if I can have people flex and hotel, that is a better proposition for the bottom line with this one fixed expense line item,” said Carter-Solomon.
“It’s all about flexibility now... The new office space is flexible, having those hotel stations. Folks learned that they like working from home, and certain industries can lend to that better than others. Coming up with some sort of hybrid or work-from-home option -- that’s what a lot of people are wanting to do. As employers, we have to listen to that and pivot,” Schaefer said.
Gilchrist said employers are doing everything they can to encourage employees to come back to the office.
“The workforce right now is very tight, and there are very warranted fears of losing people if they drop a hardline mandate,” said Gilchrist.
To encourage people back to the office, employers are offering enhanced amenities such as outdoor spaces, rooftop decks, wellness rooms, free food and pet daycare.
According to Johnson, employers are enticing employees back to the office by making it an experience.
“You hear a lot about flight to quality. Well, it’s also a flight to experience. People have been home for a couple of years. They don’t want to come back to their same office that they were in before they went home,” Johnson said.
Carter-Solomon said companies seeking to relocate are looking at assets with good geographic co-location.
‘What we see are folks flocking to corridors that have all of those amenities already embedded in,” he said.
Carter-Solomon said the downtown areas of Mission, Shawnee and Overland Park are building good ecosystems with reciprocal opportunities for small businesses and office tenants.
Technology is also important in the office environment.
“We know everyone needs great internet now. But we also know that in three years, five years, 10 years, we’re going to need even more of it. So I think making sure that you’re positioned in a property that is flexible and can change with the way things change over time and have a landlord or be a landlord that is willing to make changes [is important],” Gilchrist said.
Schaefer said that audio-visual capability is in huge demand now.
Office rents are starting to increase in Kansas City, especially for class-A properties, which are in short supply.
“The flight to quality that we just keep hearing over and over, it is so real, and what we have found so interesting are the rates that people are willing to pay. They continue to just keep going up and up and up. But the way that works is that companies are downsizing and they’re utilizing the same or maybe even a little bigger budget and they can afford it. That’s why we have very, very little class-A plus space right now,” said Gilchrist.
Cushman & Wakefield predicts an excess of 330 million SF of office space nationally by the end of the decade, and Gilchrist said Kansas City will feel the pinch, although not as drastically as some other major cities.
“A good portion of our vacancy is buildings that are becoming functionally obsolete, and they are just due to be repurposed, and new life needs to be brought to them,” she said.
“The story of the office being dead I think is a little bit premature. It is not dead. It’s just changing and evolving, as it always has,” said Carter-Solomon.
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FEATURE PHOTO: ARCH PHOTO KC