Throughout the first half of 2019, the U.S. economy maintained a steady rate of expansion. There are no doubts that some challenges have arisen as interest rates began to move higher after a decade of record lows, the rate of job growth showed signs of slowing, and the uncertainties surrounding international trade continued to make companies reluctant regarding large-scale investments. Yet even with these threats and potential signs of a slowdown, the overall economic health of the U.S. remained strong and the commercial real estate market continued to perform well.
Kansas City has seen plenty of progress in the commercial real estate sector and while there were some encouraging statistics in the second quarter the real signs of strength came in the form of new job announcements and the advancement of projects that will stimulate additional growth in the future. The industrial market saw continued momentum in large-scale build-to-suit projects, while all indications are speculative construction of high-end office space will soon be moving forward, a local firm confirmed another sizeable office expansion, and at least one large batch of high-paying jobs is set to relocate to the Kansas City area. Regardless of the statistics, the events of the second quarter pointed towards a strong market in the future.
The second quarter of 2019 saw the office market report negative 195,000 square feet (sf) of absorption, a sizeable setback that moved the year-to-date absorption number to negative 107,000 sf. It marked only the second time in the past 16 quarters where the office vacancy rate increased, although the 14.5% rate at midyear was still only a few basis points higher than a year earlier and noticeably below the 16.8% rate from mid-year 2017. The overall state of the Kansas City office market remains healthy and stable.
One factor that must be considered in looking at the second quarter statistics is the 151,000-sf, Class A Renner Corporate Center I was vacated by Kiewit Power. The engineering firm relocated to the 250,000-sf Class A building at 8900 Renner in 2018 and just completed their move-out this quarter. Kiewit moved less than one mile from their old location and the net impact of their expansion was 99,000 sf of positive absorption, so while the timing of the move-in and move-out created some negative statistics in the second quarter of 2019 the overall impact has been positive.
More good news came when engineering firm Burns & McDonnell confirmed it would be moving forward with an additional expansion of its headquarters located at 9400 Wornall Road. The current Burns & McDonnell facility is two buildings totaling 797,000 sf, and the new project will total 150,000 sf with work scheduled to begin later this year. Burns & McDonnell remains in the midst of an aggressive expansion. The firm completed a new 311,000-sf building in 2016 and has also leased significant space in South Kansas City near its headquarters.
The organic growth taking place at Burns & McDonnell is a massive boon to the office market, but Kansas City has also been attracting new jobs from out-of-market. Car dealership Carmax established a 300-person facility in Kansas City that will focus on customer experience and support. The company leased 39,000 sf at 17300 W 119th Street in Olathe and has already occupied the space and started making hires. Additionally, the United States Department of Agriculture (USDA) has announced plans to move more than 500 positions to the Kansas City area.
Another trend in the Kansas City office market was the progress of speculative office construction. The 194,000- sf 46 Penn and the 107,000-sf Edison District remain the only major speculative projects at this time, but the general sense in the second quarter was the Central Business District would soon see speculative development in the area. As the downtown revival in Kansas City continues to gain momentum, a significant office project would further enhance the area’s reputation while additional suburban projects are also getting closer to launch.
The rate of job growth will struggle to continue at its current pace due to the low unemployment rate.
Continued interest in speculative construction projects could be the catalyst to spark additional development.
American companies have shown resilience in the face of trade uncertainties and a shortage of labor, but there is still the potential for unanticipated, short-term shocks.
Source: “Q2 2019 Office Report” by Cushman & Wakefield