Class A Attracting Majority of Market Activity
Market vacancy in Kansas City increased to 14.4%, up 50 basis points from the prior quarter. The market realized an increase in asking rental rates in the second quarter of 2022, as rents slightly increased to $21.36/SF, up $0.11/SF from the first quarter of 2022. While the overall trend in asking rental rates since the second quarter of 2020 continues to increase, tenants are often seeing more concessions in the form of free rent and tenant improvement allowances to offset the increase, as well as longer lease terms to accommodate the ever-increasing construction costs. As trailing 12-month inflation continues at 40-year record levels, real asking rental rate growth is stagnant across many metro markets in the U.S. Total market net absorption in the quarter measured negative 137,877 square feet, bringing the total for the past four quarters to negative 972,582 square feet.
Construction projects currently underway total 319,492 square feet. The former Waddell & Reed office headquarters, located at 1400 Baltimore Ave. in Downtown, delivered 260,000 square feet of Class A space to the market during the quarter. Market fundamentals for the second half of 2022 will remain contractionary as tenants continue to evaluate ever-changing space needs. New or newly renovated Class A office space in marquee submarkets which combine easy accessibility, and a prime amenities package will remain in demand, even as rental rates increase. Class B space owners with dated space will face an uphill battle attracting prospects and retaining current tenants during the next four quarters. Tenants will continue to maintain considerable leverage for the remainder of the year in most Metro submarkets.
Price Brothers Purchase Lighton Plaza, a Three-Building Office Portfolio for $61.8 Million
South Johnson County continues to lead the market in sales activity as BentallGreenOak divested a three-building portfolio to Price Brothers for $61.8 million, or $130/SF. The transaction is the largest in the market by sales price dating back to the start of the pandemic. Totaling 475,800 square feet, the Class A portfolio included the six-story, Lighton Plaza I located at 7300 College Blvd., the six-story, Lighton Plaza II at 7400 College Blvd. and the 14-story, Lighton Plaza III at 7500 College Blvd.
The portfolio was approximately 81% leased at the time of sale and includes tenants such as Wells Fargo, Foulston Siefkin LLP, Regus, Burns & Wilcox and New York Life Insurance Co.
Academy Bank Moves Corporate Headquarters from Town Pavilion to 1201 Walnut
Academy Bank announced in June it will relocate its corporate headquarters from Town Pavilion to 1201 Walnut, occupying a total of 49,790 square feet. With corporate offices located on the 10th, 11th and 12th floors, Academy Bank’s new space will feature a first-floor banking branch in the lobby, which is expected to open by the fourth quarter of 2022. The relocation will reduce the firm’s footprint by 31.3%, following a trend of recent office space downsizing. Academy Bank is a subsidiary of Dickinson Financial Corporation, a family-owned and locally headquartered financial services holding company.
Asking Rental Rates Are Expected to Range from $21.20/SF to $21.80/SF During Next Four Quarters
The Kansas City office market loosened in the second quarter of 2022 as negative 137,877 square feet were absorbed. With net absorption during the past four quarters totaling negative 971,582 square feet, average quarterly net absorption has significantly decreased, measuring negative 358,201 square feet during the past 10 quarters. Although the market has already begun to adjust to work-from-home and hybrid workplace strategies, expect a decrease in total net absorption to continue to take place during the second half of 2022. Leasing commitments during the quarter were active, especially in the Downtown/Crown Center and South Johnson County submarkets, as tenants locked in favorable terms for new direct and subleased spaces.
Expect favorable conditions and opportunities for prospective tenants to upgrade from Class B to Class A space during the next four quarters, as two submarkets in the Metro display vacancy rates for Class A space exceeding 23% and three additional submarkets display vacancy from 14.3% to 17.9%. Concessions in the form of abated rent and additional tenant improvement allowances, plus inflationary pressures offset by longer lease terms, continue to assist in driving asking rental rates upwards. Overall market vacancy should range from 14.4% to 16.1%, while asking rental rates are expected to range from $21.20/SF to $21.80/SF during the next four quarters.
Economic Conditions
The local economy continued to improve in May, with total employment growth of 1.4% and growth occurring in six out of ten industries, calculated on a 12-month percent change basis.
Payroll employment in Kansas City decreased to 1.4% in May 2022 compared to 7.2% in May 2021. The national average also decreased substantially, down from 9.0% in May 2021 to 4.5% in May 2022.
The Consumer Price Index for the U.S. increased 360 basis points compared to the prior year, registering 8.6% in May 2022, while the Midwest Urban CPI increased 320 basis points to 8.8%, both at record highs during the past four decades.
Unemployment in the U.S. decreased 20 basis points to 3.6%, while unemployment in Kansas City decreased 20 basis points to 3.3% compared to the past quarter. Unemployment in Kansas City decreased 160 basis points from a year prior.
Credit: https://nmrkzimmer.com/market-research/kansas-city-market-reports/
M R Capital Advisors LLC 