Roaring, but fragile, economy exceeds expectations

According to Chris Kuehl, managing partner and co-founder of Armada Corporate Intelligence, economists routinely predict things to be worse than they will be.

“If you suggest you are on the edge of recession and then you don’t hit a recession, everybody is happy,” he said.

Kuehl outlined some of his observations about the economy during a virtual presentation last week hosted by CCIM Kansas City.

Kuehl said the economic forecast for 2023 and 2024 missed the mark by approximately one-half point.

“We’ve been doing consistently better than the initial predictions,” he said.

Consumer spending, which drives 76 percent of the United States’ gross domestic product (GDP), has spurred the strong economy. Stock market gains boosted consumer spending.

“We’ve seen $900 billion in new stock wealth created, which is staggering,” Kuehl said.

The stock wealth has resulted in an estimated $288 billion in additional spending, creating a $1.3 trillion economic multiplier.

Not everyone views the economy as strong. Kuehl noted that the “radically different interpretations” about how the economy is doing are because of a rare K-shaped recovery. Those in the upper one-third (households making $100,000 or more) barely notice inflation.

“They’re buying cars and houses and recreational vehicles and all that stuff, and that is the multiplier effect. They are spending money on something that supports whole industries,” he said.

The lower third of households (those making less than $50,000) is living paycheck to paycheck and finding it more difficult under the weight of inflation. The third in the middle is holding its own as long as their jobs remain secure.

“So the economy is roaring along better than thought growth, but it’s fragile because everything hinges on the middle hanging on and the upper income continuing to spend,” said Kuehl.

Kuehl said although the rate of inflation is declining, it takes a long time for it to come down once it has risen. The two factors that can drive down inflation are a full-blown depression or competitive pressure. According to Kuehl, much of the U.S. economy is not all that competitive, with much of the competition coming from outside of the United States.

The Federal Reserve forecasts that GDP growth will rise to about 2.1 percent. Kuehl noted, however, that Scott Bessent, the newly confirmed Treasury Secretary, is targeting growth at three percent.

“So if we end up with growth even just shy of three percent, that’s pretty respectable. Our average of the last 25 years has been 2.5,” Kuehl said.

The Fed also projects that unemployment will remain stable, if not fall. Kuehl said the workforce shortage has resulted in wage growth which is fueling inflation. Historically, wage growth has been 2.5 to three percent. Currently, it’s growing at closer to 3.5 to four percent. Those making higher wages are in great shape, but households in the lower third have no leverage, he said.

Kuehl said the Fed funds rate likely will remain steady---4.4 percent this year.

Kuehl said inventory to sales ratios in most sectors are close to balanced, having recovered from the supply chain issues during the pandemic.

On a national level, nonresidential construction is still growing at a rapid rate, and even shifting a little. While much of this growth was driven for a while by warehousing and logistics support, there now is increasing development in projects like data centers.

“You’re seeing a lot of development in energy just to support the expected growth of data centers. This country is going to need to add 44 terawatts of energy production in just the next four to five years. That is mammoth. If you think you’ve seen a change in energy, you’ve not seen anything yet. The idea now is that everything is up for grabs—oil, gas, coal, solar, wind. Nuclear is going to be making a huge comeback in the next two or three years. Hamsters on wheels are probably going to be out there at some point. We need energy. We’re going to need lots of it,” said Kuehl.

The United States now is “North American independent” on oil and gas. It is the world’s largest oil exporter, and it no longer buys any from the Middle East or North Africa.

“Our production is very high. We’ve never produced this much. All-time highs,” said Kuehl.

Kuehl said office buildings are making a comeback--although not as big as they once were--with the movement to return to the office. In addition, residential construction is growing.

Kuehl said corporate investment, particularly in technology, is steady.

The tariff issue also is looming. Kuehl said the problem with tariffs (which he termed as a “tax”) is that they work only if there is a competitive market. If the United States does not make the item being imposed with a tariff, it’s not going to change the price. But, tariffs can be used to strengthen the industrial sector.

“We can use a tariff to encourage consumers to buy more expensive things that are produced here,” he said.

Reshoring is real, Kuehl said. There still are many companies coming back to the United States, and 80 percent of the jobs that are being created are in the south or the Midwest. He said Kansas City is really well-positioned, but it needs to be more aggressive about competing for the industrial projects.

“The three things that are making Kansas City competitive: One is transportation. The merger of Canadian Pacific and Kansas City Southern (CPKC) is huge because that’s a north south route that really hadn’t existed before. It really unites the Mexican industrial sector with the U.S. and Canada. That’s already attracted a lot of business interests to this region. Number two is that we have a better than average workforce situation. We have more training centers. We have more community colleges. . . . We’re pretty well fixed compared to many other states. The third thing that makes this area popular is just simply distance. No matter what side of the U.S. you come in on, the middle is easier to attract, and that’s been paying off. But, we have to be better at extolling our virtues,” he said.

The prominence of the Kansas City Chiefs also has helped put Kansas City on companies’ radar.

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Above: Dr. Chris Kuehl is a Managing Partner of Armada Corporate Intelligence and top economist keynote speaker. Image courtesy of American Supply Association

Shaping Kansas City: Copaken Brooks' century of real estate innovation

In its more than 100-year history as an on-going business, Copaken Brooks has changed and enhanced the commercial real estate landscape throughout the metro area.

The company’s owners and principals, Jon Copaken, Keith Copaken, Bucky Brooks and Bill Crandall, discussed their current projects and future plans as the guest speakers at last week's monthly breakfast hosted by CCIM Kansas City.

Copaken Brooks has developed 20 million SF of properties throughout its history, but they are not just developers.

“We have five million SF currently under management. We have equity interests in most of it, not all of it. We put together partnerships. The partnerships we’re involved in own anywhere from five percent of the asset to 100 percent of the asset. . . . We serve as the developer or the manager. We arrange the financing with banks,” Keith Copaken said.

Twenty years ago, the property located at the corner of 87th Street and Renner Road in Lenexa, Kansas was merely a cornfield. The city of Lenexa acquired the land and engaged Copaken Brooks to help them master plan the development which today is Lenexa City Center.

Keith Copaken said 1.6 million SF of the property has been developed, and Copaken Brooks has been involved in the development, facilitation, brokerage and everything else related to the site. The mixed-use property is zoned for two million SF. The project has public spaces, including the Lenexa Rec Center, Lenexa City Hall, Johnson County Library – Lenexa City Center, Shawnee Mission School District Aquatic Center and Lenexa Public Market. It also boasts residential, retail and office spaces. Kiewit Corporation occupies 650,000 SF.

SmartStorage Lenexa under construction and scheduled to open before the end of the year. Photo Credit: Strickland Construction Company

Also under development from the ground up in Lenexa is SmartStorage Lenexa, a three story climate-controlled 695-unit facility, scheduled to open in December.

Hoping to replicate the success in Lenexa, the City of Independence, Missouri has engaged Copaken Brooks to redevelop its Independence Square area with mixed-use. Crandall said he anticipates the redevelopment plan, which covers approximately eight acres, to be adopted by the end of the summer. There are still several parcels to assemble.

“When we talk to municipalities, my mantra is that you’ve got to control the real estate. I tell municipalities, you’ve got to get the real estate. You’ve got to go buy land. You’ve got to go buy buildings. . . . Until you have control, you don’t have anything. . . . Nothing happens unless you start, and the city has had the will to do this thing. The city is really owning this and trying to be a cooperative partner,” Crandall said.

Copaken Brooks wants to do infill development on the site and repopulate the Square.

“There’s lots of good tenants on the Square now. . . .We want to make it a destination,” said Crandall.

Brooks said there are development opportunities at Cambridge Business Park, another Copaken Brooks property, located along the hillside where I-35 swings west into Kansas traveling from Downtown.

According to Crandall, multifamily is probably the most robust asset class that the company is chasing currently. But, the timeframe to get new projects up and running is long.

One multifamily project under development is Third and Grand, a project that has been in the works since 2018 when the Kansas City Area Transportation Authority (KCATA) issued a request for proposal. Copaken Brooks entered into a development agreement in early 2019, and after 18 amendments to that agreement, it closed on the land in February 2024.

Third and Grand has been in the works since 2018 but is expected to be completed the beginning of 2026. Image credit: Klover Architects

Copaken Brooks broke ground on the 245-unit luxury apartment building with parking in April, with completion scheduled for January 2026

“It’s on probably the best TOD [transit-oriented development] site in the city. The streetcar literally runs right in front of us on Grand Boulevard. Third Street is a major east-west bus route. We’ve got automobiles, we’ve got scooters. We’ll have EV parking inside the building as well as outside the building. . . . It’s really a spectacular location,” Crandall said.

Another planned multifamily project is 1818 Main, the land for which Copaken Brooks put under contract in 2021. It will be a 16-story structure with 147 units on 13 levels atop three levels of structured parking. Jon Copaken said they expect to begin construction in September.

“When all is said and done, it will be about a five or five and one-half year endeavor. . . but that’s about how long these things take,” he said.

Copaken Brooks is an active Downtown player. Among its holdings are 1111 Main (previously known as Town Pavilion) and 1201 Walnut. Jon Copaken said the activity on those properties is “really good” even though tenants are still trying to figure out space needs to get employees back in the office.

The company also controls the two blocks directly north of the T-Mobile Center.

“Controlling two blocks within the center of the city is kind of a rare thing,” said Jon Copaken.

Keith Copaken said Copaken Brooks as a company does placemaking.

“We make places, and we make spots that people want to go to. . . . In order to make great places, you have to have time and you have to have control,” he said.

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Header image features Lenexa City Center. Image credit: Klover Architects

Will rising interest rates, falling supply put damper on construction industry?

“Basically, we’ve had just a super rosy environment over the last three years.. From a development standpoint, it couldn’t have gotten much better.  When your biggest challenge is the happy trouble of trying to get materials, that’s a pretty good day,”  said Joe Downs, executive vice president and general manager, The Opus Group.

Downs was the featured speaker at last Friday’s monthly breakfast meeting hosted by CCIM Kansas City.

But, Downs said, the rosy environment has quickly changed with the rise of interest rates.

“It’s just a different environment, and it’s hard to reconcile because the supply and demand metrics seem so great.  The third quarter reports that the brokerage shops just issued, they’re phenomenal.  Another 2.5 million SF of warehouse absorption and record construction.  These are all deals that started before the last six months.  Things have changed really fast, really drastically,” he said.

“What we’re sensing and experiencing is that demand is still out there.  It’s hard to tell if that demand is today’s board level decisions or six or nine months ago board level decisions, but it’s still there,” said Downs.

He said that all of Opus’ properties that are unencumbered by leases are still experiencing strong prospect activity.

Downs predicts that the interest rate environment will start to put a damper on new supply.

“I think you’re going to start to see supply slowing down. . . . I think everyone is busy right now, but that pipeline for 6, 12, 18 months is a little less certain,” he said. 

Downs said it is getting harder and harder for developers to get construction loans as interest rates rise. 

“Lead times on materials are drastically different.  We just got a precast quote in Kansas City.  What was a 14 or 15 month lead time is now 6 months, 7 months so you can tell there’s early signs of [a slowdown in] the construction industry,” he said.

Downs said there is a sense that construction costs, which have risen steadily in the past three years, are starting to modulate, but it is too early to be certain.

“We’re sensing that costs are modulating.  Certainly some of the supply chain items are getting worked out.  It’s just going to take time, about 18 months, until we really know,” he said.

Values also have risen greatly in recent years.  Downs said values are approximately 150 percent of what they were just four years ago.  However, he said those values are starting to fall. 

Downs said rent is the only toggle left to pick up the slack created by rising costs and dropping values.

Downs said tenants currently are willing to pay increased rents.

“I would say in the last several months, we’re talking about 10, 15, in some places 20 percent rent growth from what we were quoting in the first quarter.  It’s just necessary to overcome what I was talking about on value and costs.  So things are still moving along, but it’s just a much more variable environment right now,” he said.

Downs said it’s a great time for the unlevered buyer.

Opus, which will celebrate its 70th year in business next year, has been active in the Kansas City market for more than 20 years.  Downs said Opus has built more than 30 buildings in the market.

He discussed some of its recent projects which include Westley on Broadway, a 256-unit mixed-use multifamily apartment building in Westport, which was delivered during COVID and is fully leased.

“It is super rare to get 1.7 acres in an urban environment.  Usually, we’re dealing on half an acre.  To be able to spread out like this and really create an asset of size and scale is significant,” Downs said.

Currently under construction is Briarcliff Apartments, another 256-unit mixed-use apartment project which Downs said will deliver in mid-2023.

Opus also currently is constructing Liberty Heartland Logistics Center, a five-building industrial project located in Liberty near I-35 and Highway 69.  Downs said Hallmark Cards, Inc. will anchor the project and take occupancy of an 850,000 SF build-to-suit distribution facility early next year. 

Downs said deals in the foreseeable future are likely to be more modest and very understandable.

“We’re very focused on understandable deals that are more simple and modest in nature and size to meet the demand and the great locations.  It’s kind of what you do when things are less clear around you,” he said.