We anticipate signs of stabilization as 2022 approaches
Key Takeaways
• More than 75% of office-using jobs lost due to the pandemic have since been recovered
• Lease commitments remain tepid, but leasing activity is beginning to gain traction
• Gap between asking and effective rents continues to widen as a result of soft market fundamentals
Kansas City Highlights
Market fundamentals related to the office sector remain soft, but positive indicators of a recovery are beginning to emerge. The current vacancy rate in the Kansas City metro stands at 10.0%, a 20 basis point increase relative to last quarter and a 70 basis point increase from this time one year ago. The overall decline in occupancy, coupled with added sublease space, continues to raise the vacancy rate. While sublease space remains a key contributor to the increase in vacancy rates, the pace at which it is entering the market has been slowing for the past three quarters. This is an encouraging sign for the office sector. Throughout Q3 2021, the Kansas City metro experienced 154,379 SF of negative absorption as additional sublease space hit the market.
Overall asking rents within the Kansas City metro remain steady at $20.33/SF across all product classes. With limited leasing activity, the gap between asking and effective rents continues to widen as a result of soft market fundamentals.
Optimism Growing for the Office Market
While the pandemic has had a prolonged weakening effect on office fundamentals, optimism is growing related to the office sector. More than 75% of office-using jobs lost due to the pandemic have since been recovered. While many employers continue to incorporate remote working, several businesses are ramping up efforts to return most employees to the office. Kastle’s Back to Work Barometer Report continues to show an increasing trajectory of employees returning to the office each week based on national data collected via keycard access swipes in workplaces. It appears a remote work environment is not one-size-fits-all, but rather exists on a spectrum depending on business objectives and individual employee needs.
As several firms transition from working from home to re-entering their workplaces, property touring activity has increased throughout the third quarter. Lease commitments remain tepid as many firms evaluate their real estate strategy, but leasing activity is beginning to gain traction. Pending further setbacks related to the Delta variant, economic and business confidence continues to improve, helping to mitigate volatility in office market fundamentals. While the office sector will continue to face some challenges throughout the remainder of 2021, signs of stabilization are anticipated as we head into 2022.
Moves and Growth Around the Metro
Several large deals were signed in the third quarter, signaling growing confidence from decision makers in their real estate needs going forward. Although firms continue to explore ways to increase lease term flexibility and future obligations, Q3 saw the completion of several long-term deals. This is a significant shift from the short-term lease renewals and extensions that have prevailed throughout the past 18 months. The GSA announced the FBI will lease ±137,000 SF at a new building at the intersection of 112th Street and I-29 near KCI airport. The FBI expects to relocate from their current downtown location to the Northland in late 2023. Recently renovated Summit52 signed their first tenant, IAC, relocating from their current location to fill 35,000± SF by the end of 2021. Aspiria, formerly the Sprint Campus, continues to attract new tenants in South Johnson County. TreviPay inked a 73,000 SF lease to relocate from their existing College Boulevard location. CreativeOne also signed a 25,000 SF lease at Aspiria during the third quarter. Spectrum will lease 80,000 SF at 8501 W. 137th Street for a new contact center operation in South Johnson County. On the Country Club Plaza, DiPasquale Moore has signed a lease for 37,000± SF at Plaza West. This new office location will nearly triple their existing footprint.
From a national perspective, buyers continue to favor suburban office assets over CBD locations. Locally, investors and users followed this national trend, inking several suburban transactions throughout the third quarter. NorthPoint Development purchased 3315 N. Oak Trafficway in the Northland for their new headquarters location. Looking to expand their footprint for future growth, the real estate development firm purchased the 260,457 SF building from Cerner. Cosentino’s, a local grocer, acquired a 30,000 SF building in Southcreek Office Park for their office and administrative needs from Bank Midwest for $4.55 million.
