Kansas City 2022 Office Investment Forecast Report

South Johnson County Powers Local Office Gains; Investors Respond to Suburban Leasing Trends

Absorption outside the CBD reflects growing demand for higher-end space. Kansas City’s office sector entered 2022 following a recent stint of encouraging performance. Across suburban submarkets, traditional office-using firms absorbed 1.2 million square feet during the third quarter of last year, for the strongest three-month total since 2007. Rising demand was preceded by the number of office-using positions surpassing the pre-pandemic peak. While the job count retreated in subsequent months, another round of gains is anticipated, led by growth in South Johnson County. Here, tech-related expansions and relocations are fueling demand for newer or renovated space. Last year, TreviPay and Industrial Accessories each inked midsize leases in Overland Park, with Optiv subleasing nearly 50,000 square feet in adjacent Leawood. Heightened demand for space in South Johnson County has the potential to spur a wave of project starts this year, as nearly 3 million square feet of space is proposed here. As the metro’s largest submarket by inventory, the area will significantly impact metrowide fundamentals with its positive performance this year, allowing overall absorption to exceed delivery volume.

Mid-tier trading dictates deal flow. Investors that focused on Midwest markets with proportionally high numbers of traditional office-using positions are pursuing listings in Kansas City. The metro’s ability to attract tech firms is expanding the local buyer pool, which largely consists of private investors that target sub-$5 million transactions. Smaller Class B properties in South Johnson and East Jackson counties account for the largest percentage of deal flow, with these buildings trading at high-4 to mid-5 percent minimum returns. In both locales, pricing below $200 per square foot is available for 1960s-to-1990s-vintage assets. Home to one of the lowest vacancy rates among major submarkets, Midtown also attracts investors seeking Class B assets. Future Kansas City Streetcar stops in the area have the potential to bolster the attractiveness of nearby offices.

2022 Market Forecast

Credit/Original Report: https://www.marcusmillichap.com/research/market-report/kansas-city/kansas-city-1q22-office-market-report

Kansas City Multifamily Market Report 2Q/22

Affordable Submarkets with Short Commutes to Reopening Downtown Offices at the Forefront

CBD revival and growing suburbs foster metro-wide gains. Kansas City ended last year with all 11 major submarkets reporting positive net absorption and vacancies below 5.0 percent, coinciding with the second-fastest year of rent gains since at least 2000. Rents in the CBD grew by 8.9 percent last year, after falling 1.8 percent amid the pandemic shock in 2020, evidence that the recovery is underway. The area registered a five-year vacancy low in the first quarter, falling 340 basis points year-over-year to 4.8 percent, marking a rapid but still-progressing resurgence. At the same time, suburban rents grew by 11.3 percent in 2021, as renter preferences for larger units and more spacious communities helped drop vacancy in the suburbs to 3.2 percent entering this year.

Downtown-adjacent submarkets gain traction. Most completions are expected to come online this year in the suburban areas. Even amid inventory growth, South Kansas-Grandview will see vacancy shrink below 3.0 percent and Independence will also retain low availability. Both submarkets have easy access to downtown, offering renters the space and reduced cost of suburban living, with a manageable commute to urban offices as companies return to in-person work. Additionally, this proximity is appealing to the age 20-34 cohort, which comprises approximately 20 percent of the metro’s population, as millennials move away from the core but continue to utilize its amenities.

Multifamily 2022 Outlook

1Q 2022 – 12-Month Period

• CONSTRUCTION: 4089 units completed
  • Completions during the past year ended in March grew stock by 2.4 percent, with over 800 units coming online in the first quarter.
  • Throughout 2021, over 1,000 units were delivered in Central Kansas City, increasing the metro’s urban inventory by nearly 4.0 percent following an 8.9 percent rise in 2020.

• VACANCY: 230 basis point decrease in vacancy Y-O-Y
  • Renters absorbed nearly 8,000 units over the past 12 months, shrinking vacancy to 2.9 percent. Over half of the metro’s submarkets recorded drops of more than 200 basis points since April 2021.
  • Despite construction above the pre-pandemic benchmark, Class A vacancy continued to compress to 2.9 percent in 2021’s fourth quarter.

• RENT: 13.5% increase in the average effective rent Y-O-Y
  • Tight vacancy helped lift the average effective rent to $1,152 per month as positive rent growth was recorded in each of the last five quarters.
  • Rent growth was the strongest in South Overland Park, with an annual gain of 17.1 percent pushing the monthly payment up to $1,339 — the second-highest submarket outside of Central Kansas City.

Investment Highlights

• The past year featured an elevated number of trades in Outlying Johnson County, over half of which consisted of Class A and B properties. The submarket’s suburban location has attracted renters and enabled locales, such as Olathe-Gardner and South Overland Park, to see sharp drops in vacancy on the Kansas side of the metro.
• Kansas City’s sub-3 percent availability will contribute to rent gains as net absorption remains elevated. Consequently, deal flow may accelerate in the near term, as buyers rush to lock in financing ahead of anticipated increases in interest rates. Higher borrowing costs may soften price gains longer term, even with above-normal rent growth.
• Despite a nearly 8 percent increase last year, an average sale price lower than many other major metros was sustained. While cap rates dipped 20 basis points to the mid-6-percent range, they remain meaningfully higher than the national average as well. Lower pricing enables a larger pool of potential buyers to be active, while high cap rates attract capital from metros with smaller yields, drawing out-of-market investors to Kansas City.

Original Report by Marcus and Millichap: https://www.marcusmillichap.com/research/market-report/kansas-city/kansas-city-2q22-multifamily-market-report

Return to Office Outlook – April 2022

Big Tech Doubles Down on Space; Return to Office Approaching

Omicron a minor setback, but attitudes are shifting. Before the omicron wave, office leasing activity had reached its highest levels since the onset of the pandemic. The space available for sublease also declined, most importantly in central business districts. Omicron interrupted this positive trend, raising vacancy in CBDs by an estimated 30 basis points in the first quarter of 2022, while suburban rates remained stable. The subsequent slowdown in cases is welcome news for office owners. If the U.S. does not face a new, serious pandemic wave, it is likely performance could reinitiate pre-omicron trends. Changes to gathering rules in prominent office markets, such as New York, Bay Area, Los Angeles and Seattle, also suggest more employees will return to offices, at least part time, soon, providing another tailwind for office demand.
Tech firms signal imminent return to workplace. The country’s largest technology companies have upped the sizes of their office campuses, suggesting physical spaces will be a key component of corporate strategy going forward. Since October, Meta, Facebook’s parent company, has added nearly 1.8 million square feet of space to its national inventory. Apple and Amazon each committed to over 1 million square feet over the course of 2021 as well. Google purchased St. John’s Terminal in Manhattan, with intentions to move in during 2023. March and April employee return dates have been signaled, with varying flexibility. Smaller firms will likely follow, resulting in heightened demand for office space.

Flight to quality underway. Leasing activity has been strongest for high-end office properties, even in metros most impacted by the pandemic, highlighting a tenant shift to quality assets within the market. Key factors driving the trend include employee health, energy cost reduction, and as a means of enticing workers back into offices. Firms have sought advanced air purification systems, green energy certifications and high levels of amenities to address these concerns. Class B/C office owners are remaining competitive through concessions and tenant-specific upgrades.

Labor Market Trends Aid Office Assets

Traditional office-using jobs gaining most quickly. Non-farm payrolls were approximately 1 percent below the pre-pandemic peak at the start of April, but office-using employment has grown. Job counts in the financial activities sector crossed the previous high in January 2022, joining the professional and business services sector, which currently sits more than 3 percent above its pre-2020 record. As a result, overall office-using employment is up roughly 2 percent nationally, compared to before the health crisis.

Sizable cohort of workers eager to resume in-person activities. According to the Pew Research Center, the number of workers without access to physical offices who report a willingness to return is rising, up to 49 percent in 2022, compared to the 36 percent registered in 2020. This suggests a large pool of employees will come back upon policy changes at the company level. At the same time, there’s a meaningful segment of employees that prefer to remain remote, as 61 percent of at-home workers indicate they choose to work outside the office when given the option.

* Estimate
Sources: Marcus & Millichap Research Services; The Pew Research Center; CoStar Group, Inc.

https://www.marcusmillichap.com/research/research-brief/2022/04/research-brief-april-return-to-office

Ongoing Robust Job Creation a Positive Signal

For the Economy, Multifamily Sector

Employment growth continues at rapid clip. Employers created 678,000 jobs in February, exceeding the 2021 monthly average of 560,000 positions. The strong opening salvo in hiring for 2022 has lowered the unemployment rate to 3.8 percent. Down from the pandemic peak of 14.7 percent in April 2020, the measure is just 30 basis points above the pre-health crisis benchmark, which in itself was also a historically tight rate. There are nevertheless 1.4 percent fewer people working last month than in February 2020. Given the current trajectory of onboarding, that marker is set to be met and even surpassed this year.

Broad-based hiring fostering prodigious housing demand. Growing headcounts across multiple sectors are fostering widespread and vigorous household formations. Given a limited number of more costly single-family homes for sale, much of this new housing demand is going toward multifamily options. A record number of apartments were leased in 2021, with roughly triple the typical level of net absorption occurring last year. Vacancy dropped to a historic low of 2.6 percent as a result, pushing effective rents up by more than 15 percent on average. These tight conditions necessitate the record number of apartment deliveries anticipated this year. About 400,000 units are projected to open in 2022, yet vacancy will stay compressed under 3 percent, bolstering the outlook for rents.

Job creation could hit headwind later in the year. The unemployed population was 6.3 million last month, 600,000 personnel above the February 2020 count of 5.7 million. The number of people who want a job but have stopped looking is also up about 1.5 million relative to the pre-pandemic tally. Taken together, this figure about matches the 2.1 million jobs that still have to be added to return to the pre-health crisis headcount. As unemployment drops closer to the 5.7 million mark, filling the remaining open positions will require prompting some individuals to return to the labor force, which may take longer. Despite this, a rapid drop in COVID-19 case counts following the omicron wave should help, with the pace of infections falling to a six-month low.

Additional Trends

Markets improving at varied paces. The national jobs landscape is making tremendous gains, but not every metro is on the same point in the recovery timeline. As of the start of this year, multiple tertiary markets in the midwest and mountain states, as well as Atlanta, were reporting unemployment rates below their February 2020 levels. By contrast, several large gateway metros, such as New York, Los Angeles and Miami, were trailing their pre-pandemic benchmarks by more than 300 basis points. However, recently rescinded mask mandates in many of these densely packed settings could accelerate hiring in retail and hospitality fields.

Upward wage pressure persisting. Lagging labor force participation prompted increases to pay last year. The employment cost index at the end of 2021 was up 4.4 percent year-over-year, well above the 2.2 percent average for the decade preceding the health crisis. The need for workers in the fields of hospitality and transportation is driving out-sized compensation growth, but the comparatively lower dollar values of those wages could affect topline averages.

Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.

https://www.marcusmillichap.com/research/research-brief/2022/03/research-brief-march-employment