Like most Midwest cities, Kansas City faces its share of challenges. The COVID-19 pandemic continues to hit the office sector hard. Retailers are still fighting against COVID cases that, as of this writing, were on the rise again thanks to the Delta variant. And in early August, Kansas City’s mayor told all residents, vaccinated or not, to start wearing masks again while indoors.
But the commercial real estate pros working this market? They’re still optimistic about the future of the Kansas City CRE market.
And why not? The industrial sector here was strong before the pandemic hit and has only seen more activity during COVID. The multifamily sector has remained solid, with investors eager to sink their dollars in apartment developments across the Kansas City region. And people have returned to downtown Kansas City, shopping, eating at restaurants and visiting the area’s tourist attractions.
For Kansas City commercial brokers, then, there’s plenty of hope here, despite the anxiety that COVID-19 still produces.
“We are seeing more activity in our commercial real estate market,” said Aaron Mesmer, senior vice president with Kansas City’s Block Real Estate Services. “Just look at the industrial sector. Like we’ve seen in other cities, industrial has exceeded anyone’s expectations. We are seeing a ton of activity in industrial, from both the development and leasing side. That hasn’t slowed. It’s accelerated during the pandemic.”
Challenges and hope
Not every commercial real estate sector has fared equally well during the pandemic. Mesmer says that the Kansas City office sector was at a standstill from last March until this April or May.
But since May of this year, the sector has shown signs of life. Mesmer said that activity is starting to increase in this sector. The difference? Tenants might not want as much space as they would have before the start of the pandemic.
“A tenant that might have wanted 20,000 square feet might now want 13,000,” Mesmer said. “But we are starting to see some of these companies making decisions and pulling the trigger on new office leases.”
The multifamily sector remained solid throughout the pandemic and is showing no signs of slowing now, Mesmer said. The downtown apartment market experienced some softness in the middle of last year, Mesmer said. But the urban multifamily market has since regained its momentum. And in the suburbs? Multifamily activity never slowed, Mesmer said.
Mesmer points to a 276-unit apartment that Block Real Estate Services built in Lenexa, Kansas. In just 105 days, the apartment is now more than 50 percent occupied.
“That is really fast,” Mesmer said. “It’s something we didn’t see coming. We are a bit surprised at how strong apartment leasing remains here.”
Part of the reason for this? The prices of single-family homes continue to rise. This makes renting an apartment, especially in one of the newer developments in the Kansas City market, a more attractive option.
“Throw in the fact that you can get a gym and pool, and the trend toward renters by choice is only on the rise here,” Mesmer said. “The first-class amenities you get with today’s apartments makes that decision to rent a little easier.”
Mesmer said that Block is looking closely at the amenities offered by the hospitality industry and bringing many of them to their multifamily developments. This means that newer apartment developments might not just have a pool. They’ll have pool areas with cabanas and sound stations. They’ll have a swim-up bar.
Inside, newer apartments will feature small markets where people can buy prepared foods and a quart of milk. They’ll also have spaces for third-party vendors offering massage services, red-light therapy and
The creativity of retailers
Daniel Brocato, retail and investment specialist with Kansas City’s Block & Company, said that the pandemic forced retailers to adapt. Those that were creative have largely survived, he said. And today? Retailers in the Kansas City region are enjoying a stronger year, Brocato said.
“This year has been a very, very good year for retail in general,” Brocato said. “A lot of restaurants, believe it or not, are doing well right now.”
The reason? Creativity.
“The retailers that adapted quickly and offered pick-up and curbside services did really well,” Brocato said. “The ones that shut their doors and hung their heads didn’t make it through COVID. Pick-up and delivery services have done really well through this. Restaurateurs are now looking for more locations in our area.”
But there are some caveats. Restaurant owners today are hunting for locations that provide them with plenty of outdoor seating space. They also want drive-through lanes, often multiple ones. The indoor dining space for many fast-casual restaurants is shrinking.
The trend is similar in the banking industry, Brocato said. Banks, too, are opening branches that are smaller.
“The days of needing a 40,000-square-foot bank building are no longer,” he said. “Banks are going into smaller spaces. They are operating with smaller lobbies with three or four drive-through lanes and ATMs.”
This doesn’t mean that challenges don’t remain. Many retailers are now dealing with a labor shortage as they struggle to find the cashiers, servers and other employees to keep their businesses running.
Many workers are remaining home, collecting unemployment instead of returning to their jobs. And that is putting plenty of stress on retailers.
“Everybody is hit by this labor shortage,” Brocato said. “Every type of business owner I talk to is having a hard time hiring people. People that are suddenly making more on unemployment than they were at their previous jobs might want to switch to new fields and find something that will pay them more. Some of these people, though, might not have the skillsets to align with a higher-paying job. The labor shortage will correct itself. But, yes, there are definitely issues with finding workers today.”
Before the pandemic, experiential real estate was thriving. People flocked to high-tech bowling alleys and arcades, sprawling golf centers and eat-in movie theaters. The pandemic, of course, brought this to a halt.
But what about today? As vaccinations rise, are more people returning to experiential retail?
“It is all regional,” Brocato said. “Some places of the country never really shut down because of COVID. Everyone kept moving along. In other areas, everything did shut down. As people have continued to get vaccinated, the level of comfort people have with going out has risen quite a bit. Certain people might not feel that way as we deal with the Delta variant. But many people are saying that they are vaccinated and are ready to do what they did before COVID.”
Coming back to downtown
Another key positive sign? Mesmer says that he is seeing more people returning to downtown Kansas City. The offices might not yet be full, but people have returned to the area’s shops, bars and restaurants.
“People are ready for a return to normal,” Mesmer said. “People are ready to resume normal activities. If vaccinated, they feel justified in doing this.”
And offices in downtown and the suburbs? Mesmer says that employees are slowly starting to return, though the rise of the Delta variant might slow this slightly. Mesmer predicts that by the first quarter of next year, most companies will bring a good chunk of their workers back.
These companies might offer a hybrid model, where employees work remotely one or two days a week. But Mesmer doesn’t see a scenario where most companies never bring their workers back to the office.
“We are still too early in the process to know exactly what companies will do,” Mesmer said. “I don’t know if you can point to a long-term trend of what companies will need when it comes to office space. It will be interesting to see where it goes. It’s certainly too early, though, to make predictions with any certainty.”
Brocato said that he, too, is seeing more activity in downtown Kansas City.
“Not every company has brought people back to the office yet. It’s a company-by-company situation,” Brocato said. “But some people are back in the office full-time, and with that comes people walking around downtown. You see more people using public transit again. Restaurants are filling up. The Power & Light District in downtown Kansas City is coming back to life. I think we’re seeing downtown slowly but surely coming back to where it was prior to the pandemic.”