Fundamentals Continue to Soften for Kansas City Office Market
Kansas City Office Overview
Market fundamentals related to the office sector continue to weaken as a result of COVID-19. The recession placed an even greater toll on the market than the preceding quarter. The overall vacancy rate adjusted upwards to 9.3%, a 60 basis point increase from the previous quarter.
During Q3, the Kansas City metro experienced an anomaly with the recent delivery of phases three and four within Cerner Innovations Campus, totaling 777,000 square feet. By Colliers data collection standards, the building completions were counted as positive absorption based on delivery and intent to occupy, despite Cerner employees currently working remotely as a result of the pandemic. With this consideration, the office market totaled 303,794 square feet of positive absorption throughout Q3. Year-to-date, the Kansas City metro has totaled 11,048 square feet of positive absorption, offsetting gains made at the beginning of the year and bolstered up by the Cerner deliveries. If the Cerner absorption totals were backed out of the metrics, the Kansas City office market eperienced negative 473,206 square feet of absorption in Q3, largely as a result of sizable sublease vacancies hitting the market throughout the quarter.
Overall asking rents slightly increased to $19.94 PSF across all product classes in the Kansas City metro as landlords are still unwilling to lower asking rates within their buildings. Despite holding their rates steady, owners are beginning to offer more aggressive concession package terms with free rent ant TI allowances in order to complete deals. Class A rates have risen to an average of $22.97 PSF while Class B rates have increased to $18.72 PSF. Asking rates are typically a lagging indicator and it is assumed that rents have neared their peak in the cycle and demand for space will continue to be less prevalent throughout the market. Over 800,000 square feet of new space has been added since March, creating more options and potential for rents to drop as landlords seek to compete with additional available inventory.
Continued Challenges for the Office Market
Demand has slowed considerably since the start of the year, as most tenants hesitate to sign long-term commitments or are unsure of future space needs, especially since rents have not declined significantly. Several office users continue the trend of taking a wait-and-see approach to how the reentry into the office plays out, and subsequently, the true impact on the office sector metrics will not be realized for some time.
Employees have hesitated to return to the office, as remote work continues to be implemented across many office-intensive industries until the successful development and distribution of a COVID-19 vaccine, which is projected to advance in the coming months. Firms continue to explore ways to increase the flexibility of lease terms and obligations and some landlords are beginning to accept shorter-termed lease renewals and extensions as a way to secure tenants.
Moves and Growth Around the Metro
Activity continues to remain limited relative to the past few years, however, deals continue to be completed throughout the metro. Bluescope completed a 156,000-square-foot lease renewal in the West Bottoms near downtown. Tria Health is the first tenant to announce their relocation to Grand Place, the redevelopment of the former KC Star building located at 1729 Grand Boulevard. Tria Health will move across the state line from their current Overland Park location and will occupy 17,500 square feet by late 2020. At the Country Club Plaza, Baty Otto Coronado PC will relocate from their current location at the west edge of the Plaza and will occupy 15,000 square feet at One Main Plaza. In South Johnson County, BOK Financial leased 35,000 square feet at 7101 College Boulevard. In Q3, 46 Penn was delivered, adding 220,000 square feet of Class A space to the Country Club Plaza, while the Cerner buildings were completed in South Kansas City. In South Johnson County, speculative construction on the third building of the Creative Campus is currently underway.
Several office buildings traded in the suburban markets throughout Q3. US Realty Advisors purchased the two Burns & McDonnell HQ buildings for $121 million, totaling more than 485,000 square feet. US Realty Advisors also purchased 9601 Renner Boulevard from Lexington Realty Trust for $15.9 million. Somera Road completed the acquisition of 5200 Metcalf and has recently rebranded the North Johnson County building as Summit52.