As 2016 winds down, CREW Kansas City had some of its top leading industry experts shed some light on current market conditions and speculate as to what to expect over the next year. The panel of distinguished real estate gurus included Debora Field of Newmark Grubb Zimmer, Susan Smith of Newmark Grubb Zimmer, Julia Taylor of VanTrust Real Estate, and Catherine Singleton of Nueterra Properties Group.
Julia Taylor: We have quite a few industrial projects and believe the market is very strong right now. We’ve seen 15 quarters of consecutive positive net absorption; We expect that trend to continue. Our brokerage community that we stay in constant contact with expects it to continue at least in the near term. Every week, we’re seeing at least one – if not more than one – large new spec building announcement, and we’ve been part of that. They’re going up all over the Kansas City metro. We’re seeing sizes increase, and institutional investment quality buildings with 36-foot clear heights and lots of loading docks. There are still new things to come, and the absorption seems to be there to handle it – at least in the relatively foreseeable future. It’s the longer-term future we’ve yet to see, but at this point we don’t see things slowing down.
Newmark Grubb Zimmer recently announced the kickoff of this new 496,150-square-foot Class A industrial building in Olathe, Kan.
Susan Smith: Kansas City has absorbed 2.5 million square feet of office space since 2013. That’s amazing to think about. We rank second in major markets across the country in that statistic, based upon a percentage of our inventory. Our office market is very strong: The vacancy rate is going down. It’s right at 10.6 percent and goes down a half percent every quarter. If you think it’s a buyer’s market, it’s not. It has changed so rapidly that tenants are looking for deals and they’re not there. The days of six months of free rent are gone. Options that are few and far between, especially if you’re looking for a small space.
If you look at it, there’s a lot of vacancy, but in Johnson County for over 20,000 square feet of vacant space, there are only 28 buildings – most of which are large single-tenant buildings. When you take all those buildings out of the equation, there’s not a lot of vacant space. We’re running out of space to lease, and all the brokers are asking what we’re going to do next year.
It’s good to be a landlord now, because they’re seeing rates starting to climb. Kansas City has not seen rental increases in probably 10 years. That’s encouraging because landlords are making money on their investments. Now, is the time to sell some of those buildings. You’re going to see the buildings that are over 90 percent leased – like the Country Club Plaza and Corporate Woods – go on the market. So that turns us from a landlord rep to an investment broker, because we want to get in on those transactions a well.
Most of these investors come from outside Kansas City and that’s good – people are looking at Kansas City in a positive way. It’s a steady market and they love the positive absorption we’ve seen since 2013. We’re seeing a lot of REITs come into Kansas City – not really pension funds but large REITs. That will probably be the buyers of the Plaza and Corporate Woods.
We’ll continue to see investment sales. So many people with money want to invest in Kansas City and it’s gotten very competitive. We’ll continue to see more owner-users in the market and at some point, we’ll start seeing some spec come out of the ground.
Julia Taylor: We’re in a very strong economy right now and all market types are doing well, but [Class A] multifamily looks like it is beginning to soften. We’re not seeing yet as a company with any of our projects, and we haven’t seen it on any official reports but there are rumblings that it’s softening.
Catherine Singleton: The Affordable Care Act was seen negatively at first, but now we’re seeing that there are a lot of positives for our industry. The trend we’re seeing is people are taking their cases out of hospitals and putting them into outpatient surgery centers where patients can recover for 23 hours or less. Hospitals are extremely dangerous places; 90,000 people a year are killed by hospital-acquired infections. You don’t want to be in a hospital unless you absolutely have to be. There are many procedures now that can be done in an outpatient center. Most elective procedures are getting out of hospitals; that’s a good thing for a variety of reasons. It’s a safer environment and much less costly of an environment. Hospital systems all over the country are building these surgery centers as well because it costs everyone less: patients, providers, insurance companies. That’s a huge trend. There are always things that will need to be done in hospitals, but all of those things that do not have to be done in a hospital are moving out into the community and into less expensive real estate.
Another part of the Affordable Care Act has been high deductibles. We’re seeing patients becoming educated consumers who want the best care in the nicest environment with the best outcomes at a low cost.
Julia Taylor: We’re seeing a lot of interest in the market by outside investors and I think overall it’s a good thing. Investment on the back end is a very good thing for us. Park Place, for example, was an outside investor who had not previously purchased in this market. Often times, these new investors become repeat purchasers. When you see new money coming in, it’s a bigger pool or purchasers for developers on the back end, and that’s good for us.
Susan Smith: I have a different perspective because most of my clients are local owners who get pushed aside because they can’t pay what a pension fund out of California will pay. The pension fund is looking for a 5 or 6 percent return; My local owner has put his heart, sweat and soul into this building and he wants to see it succeed and he wants to buy it because he wants to develop wealth. And he can’t do it. So that’s the negative of it. But I do think it’s good for companies to come in. I’m sure an outside investor will buy Corporate Woods and come in and do some new development, because there’s some vacant ground there and that takes big time money that a single high net worth individual can’t pull off by himself.