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Kansas City

A strong economic base plus a business-friendly environment lure companies to the heartland city.

The general economy of Greater Kansas City remains strong with a low unemployment rate of 3.8%.

New development is being spurred by established corporate users with their headquarters located in the market.

"This is a vibrant and growing community that is not rooted in one particular industry, the whole area survived very well through the 1980s," says Tom Murphy, Sprint's director of media relations.

ADT Security Services has chosen Kansas City for its new $16 million regional call center, and Sprint Personal Communications Systems (PCS) headquarters will be Kansas City-based. In July, AlliedSignal Commercial Avionics Systems broke ground on its $80 million headquarters and manufacturing facility in Cedar Creek Corporate Park. "Our presence here makes a statement that it's a good place for industry to come," says Karl Eberle, manager of the new $82 million Harley-Davidson manufacturing plant.

Office space at a premium

The overall office vacancy rate has fallen to 8% in the metro area, down from 9.7% a little over a year ago, according to the 1996-'97 Review and Outlook Office Market Report by Colliers Turley Martin.

"Virtually all types of products are in demand by institutional investors and real estate investment trusts," says Charles M. Hunter, president of Kansas City-based Kessinger/Hunter & Co. Inc.

The first speculative office buildings in several years are under construction. MC Real Estate Services has broken ground on a 250,000 sq. ft. Class-A Johnson County office project in Corporate Woods, and Zimmer Cos. is building a 62,000 sq. ft. spec technology-oriented facility in Southlake Business Park in Johnson County.

"We're seeing rent ranges as high as $23.50 per sq. ft., but Class-A office space is probably in the $17.50 to $21 range. Class-B rates are typically running from $13.50 to $16.50," says Chris Wally, president of Kansas City-based Wally & Co.

"We've never seen asking rents increase to the degree (they have) in the last year," Wally says. "The bad news is that sometimes Kansas City is able to attract a company's interest but then not satisfy their real estate needs in a short time frame. We have lost a few deals because we didn't have the space on the shelf."

The largest employer in Kansas City, the federal government, will be building a $22 million facility for the Federal Aviation Administration. A $35 million facility for the FBI will be completed by 1998, as will a $30 million facility for the EPA. A $130 million federal courthouse building is scheduled for completion by 1998.

"Kansas City's downtown area, about a decade ago, had all been given up for dead. Now, there are more tower cranes in the downtown area than anywhere else in town," says Steve W. Coon, vice president/district manager of Newport Beach, Calif.-based Koll Real Estate Services Co.

"What companies need is efficient, less expensive space, so they've purchased a lot of the Class-C buildings in the CBD and spent a lot of money renovating them," says R. Lee Harris, president and chief operating officer of Kansas City-based Cohen-Esrey Real Estate Services Inc.

In Johnson County, Sprint Corp. broke ground on its $500 million corporate campus/world headquarters in May and is targeting occupancy for July 1999 as it staggers its three- to five-year phase-out of the more than 50 leases it holds throughout the area.

"There has been a fair amount of owner-occupied development in the area and that trend looks like it's going to continue," says Wally.

REITs grab for industrial space

Available industrial investment property diminished during 1996 and remains scarce in 1997. According to Colliers Turley Martin's market report, combined vacancy for Class-A and -B space now stands at 8.1%, down from 9.7% one year ago.

In the most important flex markets, Lenexa and Overland Park, year-end availability was down from a year earlier."While many investors are desirous of acquiring industrial, it is virtually impossible to buy any blocks of multi-tenanted, high-cube industrial real estate in Kansas City," says Hunter. "When you have a heavyweight REIT like Security Capital Industrial Trust, they are building speculative industrial buildings with no pre-committed tenants whatsoever."

Just under 1 million sq. ft. of new spec bulk warehouse projects are expected for the Johnson County, Executive Park and Northland Park areas. "The trend has been to continue to absorb any new construction within a reasonable time for new and spec building construction," says Terry O'Leary, senior vice president of Colliers Turley Martin's Kansas City office.

Jerry P. Fogel of J.P. Fogel & Co., an industrial broker, says: "The lowest availability rate is in Executive Park Northland, which has only 4.7% of its space vacant. Industrial rents continue to go up, and I'm amazed. In Lenexa, they've broken the barrier of $5 a sq. ft. for warehouse space."

Growth corridors for Kansas City will continue to be along I-70 and I-35. Fogel says that there are two added growth corridors: on the I-29 corridor near the Kansas City International Airport and another southeast along US highway 50 in Lee's Summit, Mo.

Multifamily nears saturation The occupancy rate for multifamily is at 96%, the highest since 1990. Rents are up 4% to 5% per year with rates for one bedroom at $0.66 per sq. ft. and two bedroom at $0.60 per sq. ft., according to Cohen-Esrey.

"Johnson County has attracted a great deal of national attention. Developers from virtually all over the country have acquired ground and are in various stages of development of apartments," says Walt Clements of Colliers Turley Martin. "There is some sense that the Johnson County market is reaching saturation in Class-A apartments."

Absorption in the market is running at 2,000 to 3,000 units per year, says Coon."There is substantial out-of-town investor activity, primarily from pension funds and REITs," he says.

Nearly all of the units being built in Johnson County are targeted to the luxury segment of the market with rents ranging from $700 to more than $1,000.

"The concern we have is ... with everybody chasing the same objective, we're not even sure that market niche is that big," says Harris.

When the rental rate in many cases is higher than the cost of owning a home, Harris adds, then the developers of the luxury projects may feel it necessary to lower their rents.

On the seniors front, he says, "We're seeing a number of projects both on the drawing board and completed, mainly Section 42, but it's not a significant number of starts in the area."

Retail hot along I-29 The retail vacancy rate for the metro area as of December 1996 is 7.59%, according to Cohen-Esrey. "The market is absorbing literally everything that is coming on line," says Harris.

David Block of Kansas City-based Block & Co. says, "Retail is active in the 199th Street corridor and135th Street in Johnson County on the Kansas side, but the areas that are really taking off are the I-29 corridor and the Johnson County/Overland Park/Lenexa and Olathe areas."

"Retail space among the big box players is real strong now," says Bob Johnson, principal of Kansas City-based R.H. Johnson Co. "You're seeing a lot of big boxes go in that might be duplications of existing retailers and there may be some casualties."

Will hotel growth outstrip demand?

The average occupancy metrowide was 71.2% in 1996, up from 70.2% in 1995 and above the national average of 68%, says Jeff Marvel, of Horwath Hospitality in Kansas City. "At the end of last year we started seeing some months that the supply growth was greater than the demand," he says.

The average room rate in 1996 for the MSA was $66.17, an 8.1% increase from the year before. According to the Lodging Market Trend Report, a joint publication of Horwath Hospitality Consulting and Smith Travel Research, for the month of April 1997, occupancy was 69.8%, whereas for the same month in 1996 it was 72.5%, indicating a potential downward trend. "When your supply grows three times the rate of your demand, occupancy drops," says Marvel. In Johnson County, there have been several new hotels opened and twice that many under construction for limited service or extended-stay/studio type. Marvel says, "The question now is will that result in overbuilding."

Despite this,"The favorable things for firms coming here from either coast are our low rental rates, low labor rates and our work ethic is deemed to be very good compared to other areas of the country," says Wally.

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