Downtowns across the Midwest continue to struggle with the aftermath of the COVID-19 pandemic, as many employees continue to work from home. This has left many urban cores with high office vacancy rates and downtown retailers who are struggling to find customers now that the lunch-time rush barely exists.
But this doesn’t mean that there isn’t hope for the Midwest’s downtowns. Just ask Leah FitzGerald, managing director with the Kansas City office of CBRE. This industry veteran sees a brighter future for commercial real estate in Kansas City’s urban core. And it all starts with employers incentivizing their workers to return to the office and the city continuing to invest in downtown through transportation and infrastructure.
Midwest Real Estate News recently spoke to FitzGerald about the commercial real estate market in Kansas City, both downtown and suburban, as 2023 begins. Here is some of what she had to say.
Leah Fitzgerald, Managing Director, CBRE, Kansas City
Let’s start with last year. How busy was 2022 for Kansas City’s commercial real estate market?
Leah FitzGerald: We had a very positive year. It was our best year on record locally, by quite a big margin. Now, most of those gains were made in the first part of the year. We kind of limped into 2023 when you look at the activity we had in the fourth quarter. Having said that, overall we had a really strong year despite all the headwinds we are facing.
And as in most markets, were multifamily and industrial the strongest performers in the Kansas City market last year?
FitzGerald: By far. Industrial and multifamily were the stars last year. We have very strong multifamily and industrial teams here. That certainly helped. But our retail team also did very well. I say that they are small but mighty. Our office team had a lot of big wins, too. Everybody had a pretty solid year, all the way around and I’m pretty pleased.
We often overlook retail, but it sounds like retailers had a pretty strong 2022 overall.
FitzGerald: Retailers are starting to get very creative with their footprints and product offerings. They are getting better at marrying e-commerce with brick-and-mortar. They know that customers might purchase something online and if they decide to return it, they’ll go in person to the store. Once they’re in the store, they might do more shopping while they return their item. Retailers today understand how important it is to focus on both online and in-person shopping.
That doesn’t mean that retail doesn’t have challenges. Retail is still highly impacted by location, density and traffic. Parking is a big driver for retail. Retailers have certain parking ratios that they expect to see, especially in the urban core where parking is at a premium and is more difficult to come by. Developers and city leaders want to minimize parking, but retailers want to maximize it.
How are retailers and developers handling parking in the urban core?
FitzGerald: That is kind of a pain point when it comes to retail, especially with the national credit clients. They are looking at a larger-scale geographic footprint when figuring out where they want to expand. If they see one site that doesn’t quite meet the parking ratio and one that does, they’ll go with the one that does.
I recently co-chaired a study on shared parking through the Urban Land Institute. I was a little surprised that there is not a big appetite on the part of the city to invest in park-and-ride facilities. Their preference is to spread the parking out. In their minds, this encourages more walkability. We found with shared parking, you can park a mile away at a restaurant and then hop on the streetcar and go downtown for the day. When we studied what other cities were doing, the solution was often a park-and-ride garage that allows people to park and then take public transportation into the city. I am optimistic we will find the right solution that works for Kansas City.
Another solution is to increase density, to encourage more people to live in downtown Kansas City. If people live downtown, they are out walking, not driving through the urban core.
Speaking of people living downtown, is there enough multifamily supply in Kansas City’s downtown core?
Fitzgerald: The challenges developers face with bringing in more multifamily is the cost of debt and the higher construction costs. Parking is a factor, too. Developers will often seek incentives to make their deals pencil. The city wants to encourage affordable housing, but those deals are difficult at this point to pencil without a strong partnership with local jurisdictions. Developers have historically focused on one subset of this industry, meaning they were either focused on building affordable projects or market-rate deals. This is beginning to change and some market-rate developers are starting to explore affordable deals, which is encouraging.
What about the office sector? This sector has been struggling in all the markets we cover.
FitzGerald: We are seeing by far the most office activity in South Johnson County, our suburban area. That’s where you have a higher per-capita income and where the schools are strong. The office product there is newer or recently renovated, and you have owners who are paying attention to amenities and keeping up their facilities. The office market in South Johnson County is really strong.
An example is Park Place in Leawood, Kansas. That’s a mixed-use project with office, retail and multifamily. We manage and lease the office and retail portion. We just celebrated 100% occupancy of the office portion of Park Place. The owner is a dream client and is very astute when it comes to making sure the amenities are top-notch. They make sure to keep their building facilities in excellent condition and we operate as a partner with their team. As a result, we can leverage our CBRE platform to really perform on behalf of our client.
That said, I am a big believer in the strength and resilience of downtown Kansas City. I am optimistic that we will see demand return, and we are already seeing that.
Our downtown has historically had lower rents and higher vacancies than our suburbs. That hasn’t always been the case nationally, but for the first time in a long time, the national trend is mirroring what we’ve grown accustomed to here. We’ve been trying to solve this for a while and that’s in part why there is a call for increasing the density of downtown. The more people we get living in downtown, the better it is for our urban core. Certainly, there is a lot to get excited about in downtown KC, in terms of new hotels, KC Current Stadium and the streetcar. I am optimistic we will figure out downtown baseball. It’s a complex problem so the solution isn’t easy but I’m confident that all these projects coupled with our new airport will spur growth and development.
Is there anything that sets Kansas City apart and makes it a special place to do business?
FitzGerald: I am proud of how Kansas City loves Kansas City. We know that this is not typical in other markets. I’ve heard people from other cities remark about how everywhere they go they see people wearing something that says ‘Kansas City’ on it. That is exciting. It is fun to live in a place where people care about their city and about what is going on. That exuberance really has an impact on people. We’ve heard it before about companies that come here with low expectations only to fall in love and go home with a Charlie Hustle T-shirt.