Like in most major Midwest cities, Kansas City’s commercial real estate professionals continue to navigate the challenges of higher interest rates, high construction costs and economic uncertainty.
But unlike CRE professionals in other markets? Those working in the Kansas City region have an advantage: They benefit from the many positives of the Kansas City area.
Those positives include an ideal location in the center of the country, a strong highway and rail infrastructure, an educated and skilled workforce and state and local governments that actively support economic development and the commercial real estate industry.
Just ask Tina Chace, executive director with the Platte County Economic Development Council, the EDC serving Kansas City, Missouri, and its surrounding areas. She’ll tell you that while economic challenges are hitting the region, Kansas City is equipped to make it through these tough times with its characteristic resilience.
“Kansas City is centrally located in the heart of America,” Chace said. “We take great pride in the fact that we have the ability to reach 90% of U.S. markets in a couple of days’ drive. This makes Kansas City an excellent choice for companies. We also have that strong infrastructure and supply chain, another big factor for companies looking for new homes. If you are exporting or importing products, this is all a key.”
In another positive? The new terminal project at Kansas City International Airport is now complete. The new terminal modernized the local airport, another key factor for companies considering the Kansas City region.
“That new terminal couldn’t have come at a better time for the Kansas City market,” Chace said. “We were coming out of a bit of uncertainty with COVID. When we rolled out the new terminal, that gave Kansas City a lot of new looks based on the newness and the exciting add-ons that most airports don’t have.”
The new airport terminal played a key role in Eastern Airlines’ decision to move its headquarters from Wayne, Pennsylvania, to a site near the Kansas City International Airport at the end of 2023.
Chace said that when Eastern Airlines came to Kansas City, it brought about 165 employees with it. The airline cited Kansas City’s central location and strong workforce-development programs as two key reasons for its decision, Chace said.
That labor force is a key for most companies that move to Kansas City. Companies can pull workers from both the Missouri and Kansas sides of the Kansas City market, Chace said.
It helps, too, that Kansas City boasts a diverse labor pool and companies that work in a diverse array of industries, Chace said. If one business sector is struggling? Kansas City boasts companies from enough different fields to absorb the downturn in another industry.
In another big workforce move, the Platte County Economic Development Council worked with Western Governors University to bring a nursing simulation and learning laboratory to the college’s Leavitt School of Health in Kansas City.
As Chace says, the country faces a shortage of nurses. The nursing simulation can help train nurses to work for Kansas City’s healthcare providers.
“Healthcare is a very important industry for us,” Chace said. “It’s important for us to always be thinking of that workforce component. Bringing in a training facility that you wouldn’t normally see in the state let alone the region was a big step.”
Of course, Kansas City remains a strong industrial hub. Chace pointed to the KCI 29 Logistics Park by Hunt Midwest. This park spans 3,300 acres and ranks as the largest contiguous shovel-ready site in Missouri. Ace Hardware is opening a distribution center in the park.
Chace said that Ace plans to hire 250 employees by 2026. The Platte County Economic Development Council is working with Ace to help make sure that it can find the right employees for the site.
Manufacturing and data centers are key economic drivers in Kansas City, too, and Chace says that she doesn’t expect the demand for such facilities to wane.
“There has been quite a bit of reshoring across the country,” she said. “We are trying to get more manufacturing in the Kansas City region. We see great value in that. We already have a diverse set of manufacturing companies here. It helps that we have Ford and GM in the region to drive some of those other manufacturers here.”
Another big win for Kansas City? This year, CPKC Stadium opened in downtown Kansas City. This stadium is home to the Kansas City Current of the National Women’s Soccer League.
“Having a new soccer stadium is a big boon for the downtown,” Chace said. “It puts you on a different stage than you get with baseball. We are fortunate: Not only are we reaching an international market with this stadium, that it is also the only female-owned team and female-owned stadium is a one-of-a-kind situation. That has been a source of pride for us in Kansas City, that we were able to accomplish something like this.”
A resilient market
Another reason why so many businesses are moving to the Kansas City area? The region has proven resilient in the face of high interest rates and inflation.
Aaron Mesmer, executive vice president and chief information officer of Block Real Estate Services in Kansas City, said that the Kansas City region is starting to see more commercial transaction activity now that interest rates have fallen slightly.
Activity, though, is still down from the highs the region saw in 2021 and 2022. Mesmer said that the development pipeline is relatively stifled now in all sectors. That’s partly because of higher interest rates. But higher construction costs have played a key role in slowing new development, too, Mesmer said.
And while commercial leases and sales are still happening, they are not happening at nearly the same pace the region saw two years ago.
“We are seeing a lot of sellers sitting on the sidelines,” Mesmer said. “Some of the activity of the past was driven by sellers who were earning crazy profits. Unless sellers get to a certain number, their motivation to sell is lower.”
On the positive side? Mesmer said that he is seeing more transactions now that longer-term interest rates have come down slightly. The region is also seeing a bit more refinances close thanks to the same factor, he said.
On the negative side? Like most markets, Kansas City is seeing a jump in distressed office assets. The work-from-home movement and higher interest rates are hitting the office sector hard, with vacancies rising. Many companies, though they have brought their employees back to the office at least on a part-time basis, don’t need as much office space today. That has resulted in an increase in office properties, especially older ones, that are struggling to attract enough tenants.
Kenneth Block, managing principal of Block Real Estate Services, said that when looking at the entire Kansas City real estate market, it’s clear that the region is still strong. He pointed to the industrial market, which continues to thrive, and the multifamily sector, which is holding steady today.
“Office is struggling here, but it is struggling everywhere in the country,” Block said. “The people with the right-size spaces are doing better. Most of the consolidation has come with the bigger, national companies. They are shrinking down to reduce their expenses. But overall, the market is doing very well.”
Block said that he hasn’t been surprised by the slow down in new development. It’s difficult to develop property when interest rates are higher, he said. And when you add in higher construction costs? That makes new development even more of a challenge.
“It’s difficult to make the numbers work,” Block said. “The banks are not loaning as much. If they do loan, the terms are not that attractive. We see build-to-suits working. With build-to-suits you can gauge where your numbers are. There is little to no risk. But spec construction is just not happening much today.”
Is there any good news in the office sector? You have to squint to see it. But Block said that office space located in mixed-use projects is performing well. Older office buildings that lack amenities are struggling.
And building new office properties? That isn’t happening in Kansas City, just like it’s not happening across the country.
Mesmer said that the flight to quality is real. It’s why newer office properties in mixed-use developments are doing better.
“There have been a lot of good tenants moving into those locations to be in that setting,” Mesmer said. “They are willing to pay more to be in those spots. That has been a positive. For the office market overall, though? I’d estimate that we are at least 10 years away from the next speculative office building.”
Block said that the most difficult office buildings to sell are those not located in mixed-use areas, those sitting off by themselves.
“They are empty. Empty buildings like those are like the plague,” Block said. “You can’t do anything with them. It’s a scary situation if you have a location that is not in a mixed-use area. The value of that office building has gone down tremendously.”
A solid retail sector
Mesmer said that the Kansas City region is seeing strong retail fundamentals today. That hasn’t changed the misperception that some investors have of where the retail sector is, he said. Too many investors still believe that brick-and-mortar retail is struggling. What’s actually happening, though? In Kansas City, those retailers that are creative, including those that are bringing experiential retail to the market, are thriving.
Mesmer says that Block Real Estate Services’ retail developments are seeing strong leasing activity today.
“We are excited about this category type,” Mesmer said. “We will continue to invest in retail. It’s sort of flying under the radar. But if you are in the real estate business, you know that now is a great time to be buying retail. Outside the business, a lot of people have a negative impression of retail. We are working diligently to see how many deals we can land in this sector before those others figure it out.”
There is one slice of the retail sector that is facing challenges today: high-end, sit-down restaurants. Block said that the owners of these restaurants are struggling to determine how to open new locations. That’s largely because the cost of building new properties has become so expensive and rental rates have risen, too. Tenant-improvement packages also cost more.
“Every part of the deal is tougher than it was before,” Block said. “A lot of the groups in this market can’t find the right location with the right economic package. In really good times, there have been a half-dozen new sit-down restaurants that open. In times like we are in, everything has to be perfect for a new opening.”
A solid industrial sector
Scott Bluhm, senior managing director and principal with Kansas City’s Newmark Zimmer, specializes in the industrial and logistics sector. And this slice of Kansas City’s CRE market? While it’s not booming like it did in 2021 and 2022, industrial remains a steady and attractive sector in the Kansas City region, Bluhm said.
He pointed to the second quarter of the year. The industrial sector in the Kansas City region saw about 2.3 million square feet of positive net absorption during the quarter. That was a big jump from a sluggish first quarter, even if it isn’t quite as high as what the region saw during the height of COVID.
“We don’t have the dips and highs that coastal markets have,” Bluhm said. “But we still have some significant highs. The fourth quarter of 2022 set a high-water mark for our region. Then 2023 was a year of adversity. But we are recovering, and we are seeing strong demand for industrial space. Because we don’t have those big lows, we don’t have to pull ourselves out of anything too severe. We are not an overbuilt market.”
Despite high interest rates and construction costs, major industrial developments are still happening in the Kansas City region. One of the biggest is Panasonic Energy Co.’s construction of a lithium-ion battery manufacturing plant in De Soto, Kansas.
This $4 billion facility is expected to bring about 4,000 jobs to the region.
Bluhm said that the Panasonic project isn’t the only industrial construction taking place across the region. He said that developers, even if they aren’t acting yet, are considering sites for new speculative and BTS projects. They might be a year out from breaking ground, but developers are making plans again.
“Developers are optimistic enough now to start pursuing sites,” Bluhm said. “They are making a bet that by the time they are ready to break ground they will be doing so in a more friendly environment for development. Based on my conversations, we have hope that we will see more spec development kick off starting in the first quarter of next year.”
Today, though? Most new industrial developments are build-to-suits that come with far less risk than do spec projects.
Bluhm said that the second quarter’s net absorption of 2.3 million square feet ranks as a solid number for Kansas City’s industrial market.
“There was some optimism in the second quarter with what the Feds are saying about a possible interest-rate cut,” Bluhm said. “There is light at the end of the tunnel. Also, in an election year you usually see interest rates go down. People have been waiting for positive news. Tenant demand, then, was strong in the second quarter, especially after a first quarter in which we posted negative net absorption.”
Tenants looking for industrial space in the Kansas City area might struggle depending on what type of facility they are seeking, Bluhm said. He pointed to Class-B and -C industrial properties. They typically have low vacancy rates today, making it difficult for tenants looking to set up shop in these spaces.
A large portion of new Class A industrial vacancies in the Kansas City market now are in buildings of 500,000 or higher square feet, Bluhm said. Industrial buildings of under 300,000 square feet tend to have more leasing activity and tenant velocity.
Certain submarkets are seeing lower industrial vacancy rates, too, Bluhm said. He cited the Johnson County submarket as one of Kansas City’s strongest. Lee’s Summit, KCI, and Liberty in Missouri and Olathe and Lenexa in Kansas remain strong markets.
“We have always had a strong industrial market in Kansas City,” Bluhm said. “We have a great location in the center of the country. Our gross-up cost of occupancy, including taxes, insurance and rent, continues to be very competitive for major metros. Our tax abatement efforts on both sides of the state lines are strong. We also have some strong developer talent here. We have several big-name developers in the region. We continue to put a solid Class-A product in good areas.”
Investment sales activity remains down in the Kansas City region in all sectors, including industrial. That’s to be expected with higher interest rates. Bluhm said that most industrial sales so far this year have been owner/user sales.
New life in the construction business?
Sam Stahnke, principal and vice president of Riverside, Missouri-based ARCO National Construction, said that developers are still targeting the Kansas City region for new construction. That’s in large part to the region’s location in the heart of the country.
On the negative side? New developments that are slated for the Kansas City region are taking longer to come to fruition thanks to the challenges of higher interest rates and economic uncertainty.
“In years past, those projects that we would see coming to town or when developers were looking at a certain region in the Kansas City market, there’d be a sense of urgency. They’d decide that this is where they need to go and they’d hit it,” Stahnke said. “Now everything requires a lot more questions and time. That can be because of interest rates or because people just don’t know yet where things are heading. No one likes the uncertainty.”
Like others in the Kansas City region, Stahnke is excited about Panasonic’s big project. It’s not surprising to him that Panasonic decided to build here. Both GM and Ford have auto manufacturing plants in the region. It makes sense that Panasonic would want a battery plant close to these facilities.
Stahnke said that ARCO itself remains busy in the Kansas City area. That isn’t to say that higher rates haven’t brought some challenges.
“We do have the opportunity to work on some interesting projects,” Stahnke said. “We have a great client base that negotiates a lot of work for us. The interest rates are making everyone pause a bit, though. Everything is moving a little slower. Everyone is making sure that they are getting the best pricing and incentives. Everyone is dotting their ‘I’s and crossing their ‘T’s for fear of not being leased out and having larger carrier costs.”
But what if the Federal Reserve Board cuts its benchmark interest rate in September? Will that boost construction activity throughout the Kansas City market?
“If they cut the rate, it absolutely will increase activity,” Stahnke said.
In fact, Stahnke worries that a drop in interest rates might result in a flood of new construction activity. Many developers have been waiting to move forward with projects. A drop in rates might inspire them to move forward. That would be good news. But if there’s too much development activity at the same time? That could lead to longer-term problems in the region, Stahnke said.
“My fear, what keeps me up at night, is if that floodgate breaks and isn’t planned or managed well, we could get into another post-COVID resurgence where prices and labor rates go up,” he said. “No one wants that. Hopefully, there will be a measured approach to new construction even if the rates do go down.”
Fortunately, developers have not typically overbuilt in the Kansas City region, Stahnke said.
In addition to higher interest rates, developers and construction companies are dealing with higher construction costs. Stahnke, though, said that these costs are stabilizing … somewhat.
Stahnke said that the costs of materials have leveled off. Developers and construction companies can now better forecast what these materials will cost.
What is still challenging, though, are labor costs. Stahnke said that the cost of labor continues to rise.
“Labor costs really are the challenge today,” Stahnke said.
Is Stahnke seeing stronger construction activity in certain Kansas City-area submarkets? He pointed to the Panasonic project in De Soto, Kansas. That submarket typically hasn’t seen as much new development as others. Stahnke, though, said that he expects developers to more frequently target the De Soto area thanks to Panasonic’s big investment.
Stahnke said that the Lenexa and Overland Park submarkets are always strong and will remain so. He cited, too, the airport submarket as one that is seeing more activity today.
Like others working this market, Stahnke says that the renovations to Kansas City’s airport have had a positive impact on bringing new businesses and developments to the region.
“That airport is our front door for any site selection consultant flying into town,” Stahnke said. “Now we have a shiny new front door. What we had in the past was less than desirable. People flying into the airport can understand why Kansas City is such an up-and-comer, why it is a bigger force in the industrial market and the development world as a whole.
And when it comes to next year? Stahnke said that he expects construction activity to only rise.
“I’m bullish on 2025,” Stahnke said. “The Fed has to help us out a little bit. Assuming that they do, a lot of our clients are interested in ramping back up.”
