Signs of stabilization continue to emerge throughout the national and local office markets as employees continue to return to the office.
Rising occupancy levels and flattening vacancy rates are positive indicators pointing toward an office market recovery. Sublease space remains a cost-competitive, short-term option for firms awaiting clarity on the economy.
• Tenants are showing a strong preference for Class A space with well-placed amenities
• Occupiers will continue to embrace some hybrid models based on company, culture, and business sector needs
• Asking rents remain relatively steady at $20.63/SF
Kansas City Highlights
At the national level, quarterly absorption totals are beginning to turn positive for several markets, employees continue to return to the office, with rising occupancy levels and vacancy rates are beginning to flatten. Currently, the vacancy rate in the Kansas City metro stands at 10.5%, a 10-basis-point increase relative to last quarter and a 70-basis-point increase from this time one year ago. Throughout Q2 2022 the Kansas City metro experienced 109,352 SF of negative absorption bringing the year-to-date total to a negative 312,739 SF. Sublease space remains a key contributor to the increase in vacancy.
Overall asking rents within the Kansas City metro remain relatively steady at $20.63/SF across all product classes. As firms continue to evaluate their post-COVID-19 real estate needs, sublease space will remain a cost-competitive, short-term option until there is greater clarity on business and economic direction. Additionally, as more active requirements emerge, pressure on rents could increase in the coming months as landlords compete to capture tenants in the market.
Workplace and the Return to the Office
Some degree of remote working is here to stay, but many office users are still awaiting clarity on the adoption of hybrid models and how many days per week people will be required to be in the office. Many office occupiers will continue to embrace hybrid working to some extent but policies will vary greatly based on company, culture, and business sector needs. It will take time for firms to recast their property strategies, decide how much space they need, and where new offices should be located. Many businesses continue to reassess their space requirements, exploring new work models and space use configurations.
A trend has emerged as tenants continue to show a clear preference for the best quality space available. This is evident by several recently executed leases and touring activity focusing on quality space options. Firms are seeking quality space to help bring employees back to the office as well as attract talent with Class A offices and enhanced amenities. A flight to quality space will continue for office occupiers as more Class A space options become available at competitive rental rates.
Moves and Growth Around the Metro
Several sizeable deals were executed in the second quarter, including many lease renewals. In the downtown submarket, Bank Midwest renewed 57,000 SF at Town Pavilion while Armstrong Teasdale renewed 30,000 SF at 2345 Grand. State Street will relocate its existing operation from 801 Penn into 20,000 SF at Lightwell. Stueve Siegel Hanson renewed 15,000 SF within the Cordoba Building on the Country Club Plaza. In the suburban submarkets Apria Healthcare renewed 22,500 SF at Aspiria, IAC will expand at Summit52, and Hantover leased 17,500 SF at College Oaks A.
Office construction activity continues to increase around the KC Metro. Supply-side risks are minimal as a result of limited speculative construction within the metro. Groundwork began on CityPlace Centre IV, a $51 million, six-story 190,000 SF office building in South Johnson County that will be primarily occupied by Wellsky. Construction on Hallbrook III, a 120,000 SF office building, continues to make progress. KBP Investments will anchor the new building located at the southwest corner of College Boulevard and State Line Road. The building is attracting additional tenants during pre-leasing. In May, construction began on the new FBI field office building in the Northland. The 136,910 SF office is located near KCI airport.
From an investment standpoint, Price Brothers acquired the Lighton Plaza portfolio from BentallGreenOak for nearly $61,800,000. The three-building portfolio located near I-435 and Metcalf totals nearly 476,000 SF and includes Lighton Plaza I, Lighton Plaza II, and Lighton Tower.