Legalized riverboat gambling and increased hotel openings keep the heartland city pumping

A normally even-keel transportation hub in the heartland, Kansas City, Mo., is experiencing some sharp peaks on its commercial real estate horizon, thanks to continued growth from new jobs, retailers and downtown hotel expansion.

The city's economy is fueled by job growth and an unemployment rate of 3.6%. Ambitious economic development efforts recently have succeeded in luring a new $82 million Harley-Davidson facility to be built on 320 acres near Kansas City International Airport and a new $77.9 million headquarters and plant for AlliedSignal Commercial Avionics to be built in Lenexa, Kan., which will add 1,100 new jobs. AlliedSignal has selected the 126-acre Renner Ridge site as its corporate campus. Kenneth G. Block, senior vice president of Kansas City-based Block & Co., represented AlliedSignal in the site selection.

Gateway 2000 is building its own $30 million facility in West Bottoms near Kemper Arena and expects to employ 3,000 over the next two years.

Kansas City's downtown convention business is getting a shot in the arm from a $73 million expansion to the Marriott downtown and the opening of a renovated 27-story, 400-room Omni Hotel. The two projects will double the number of hotel rooms within two blocks of the city's recently expanded convention facility, Bartle Hall.

A new partnership of downtown developers will build the 427-room addition to the Marriott. The project is scheduled for completion in June 1997. The Omni Kansas City Hotel will open this fall in the former Americana Hotel, which closed in December 1994.

Average room rates in Kansas City have grown from $50 in 1987 to $61 in 1995, according to research by Horwath Hospitality Consulting, Kansas City.

Over the same time period, occupancy also increased, from 61.2% to 70.3%. The Kansas City hospitality market also has been boosted in recent years by the legalization of river-boat gambling. Projects totaling more than $200 million, including an $80 million Hilton Flamingo Casino, are currently under construction.

Retail continues to be a hot real estate commodity, particularly in Johnson County, Kan., which boasts an unemployment rate of 2.7% and the highest per-capita income in Kansas.

The citywide vacancy for retail space stood at only 7.6% at year-end 1995, according to research by Cohen-Esrey Real Estate Services. But there's still room to grow in those former wheat fields in south Johnson County, where the city has rezoned more land for retail development.

"Retail is by far the most active, particularly in the Johnson County area with the development of the 119th Street retail corridor," says John Stacy, president and COO of Cohen-Esrey.

The location's popularity has inflated land prices in the past 12 to 18 months, Stacy says. "Rents have also gone up, but not as dramatically as land prices."

The areas around 119th Street in Overland Park are seeing the largest amount of commercial growth, says David Block, senior vice president of Block & Co.

Construction on the $102 million Great Mall of the Great Plains began in January in Olathe, Kan., a southwestern Kansas City suburb. The mall is scheduled to open in spring 1997. The first phase will include 1 million sq. ft. of gross leaseable space.

But, Block says, retail is active in other parts of Kansas City as well. "There's also quite a bit of development in Independence and north of the river," he says.

Retail activity has been good for a number of retailers, including grocery stores, drug stores, category killers and big boxes, says Bob Johnson, principal of Kansas City-based R.H. Johnson Co.

He thinks, however, that overbuilding is going to occur in some areas where merchandise is too similar or finances aren't as solid. "I think there will be some fallout because of that," Johnson says. "We've got a situation where population increases are moderate at best, and a lot more retailers are coming on the scene. Something's got to give."

Good news for office market

The business newcomers are good news for the office market, which posted an overall vacancy of 10.2% last year, falling to half of what it was in 1988, according to Cohen-Esrey research. Overall Class-A office space dropped to 6.4% vacancy at year-end 1995.

"The office activity in metro Kansas City is pretty widespread, and the College Boulevard (111th Street in Overland Park) submarket is perpetually active," says Chris Wally, president of Kansas City-based Wally & Co.

Major chunks of office space will soon be up for grabs downtown as large tenants plan to move. "It's kind of a big chess game," Wally says. "It's more activity from large tenants than we normally see."

Twentieth Century Investors' merging of downtown and Plaza locations into the old Marion Merrill Dow headquarters will vacate 115,000 sq. ft. in Town Pavilion downtown and 80,000 sq. ft. on the Plaza, according to Wally.

Vacancies could very well have an impact on downtown rents, which traditionally have been in the low teens, Wally says. "I suspect to re-let that space, leases will be done in the $13 to $15 range."

The Northland submarket has made the biggest dent in office vacancy, dropping from more than 15% in mid-1994 to 7.7% at the end of 1995. Class-A vacancy there is only 5.7%. The highest asking rents for Class-A office space are in South Johnson County, where they have reached as high as $24 per sq. ft. Asking rents downtown for Class-A space fluctuate between $13 per sq. ft. and about $23 per sq. ft., though the typical rate is $18 to $19. Lowest office rents are in Northland, East Kansas City and Kansas City, Kan., where most are in the $14 range.

Industrial demand increases

Buoyed by its position in the heartland, at the convergence of rivers and railways, Kansas City enjoys a consistently strong industrial market, which has continued to tighten as new companies move into the area.

The industrial market could be characterized as quite active, says Jerry Fogel, owner of J.P. Fogel & Co., industrial real estate brokers, Kansas City. "The demand in nearly all sizes is fairly strong," he says. "The greatest demand is in large warehouse and office/showroom space and, for the first time in memory, flex space is almost non-existent."

Of Kansas City's total 123 million sq. ft. of rentable industrial space, 11.6% was available at the end of 1995, a slight improvement over the 11.9% available a year earlier, according to Cohen-Esrey. The lowest availability rate is in Executive Park/Northland, which has only 4.7% of its space vacant.

Demand from new businesses moving into the area has prompted more owner-occupied and build-to-suit industrial projects, Fogel says. Industrial rents are beginning to increase, especially for newer space with modern amenities, he adds.

Investors also have been active in the industrial market. "Investors have about bought everything they can buy," Fogel says.

Kansas City's gains in job growth have been good for multifamily as well.

The city's 56,388 units showed an occupancy of 94.6% at year-end 1995 as well as rent increases. The number of permits issued has risen gradually since 1989, from 759 units to 2,377 units last year.