KCRAR Commercial panel forecasts a strengthening local CRE market

KCRAR Commercial brought in economist Jason Tolliver of Cushman & Wakefield to give his predictions for the local real estate market over the next six months.

Ken Block of Block Real Estate Services says the biggest trend he’s seeing in the office market is building systems communicating with one another to monitor energy usage, etc. 

What are less obvious economic indicators you use when looking at the market?

KEN BLOCK, Block Real Estate Services: “I have a very complicated way I do my market research for office space. I call up one of my bankers – pick a bank, doesn’t matter – and I invite him to Capital Grille for a nice lunch. I then proceed to tell him I’m going to build a speculative office building and I want him to give me a loan, and I wait. If he turns green, drops his jaw, and goes into a cold sweat I know I’m going to move forward. If he says ‘I’m going to do the deal!’ then I can’t do the deal. It’s a joke but it’s the reality of the market right now.

We look at vacancy and all the other factors, but when it comes down to it, we’re talking to a lot of people. I have friends who are heads of companies, I ask them if they’re hiring. Are they on an upward trend or a downward trend? Certainly we look at vacancy but a lot of time it’s about changing demographics. The office places of 15 years ago don’t work today. The things you have to provide people are certainly interesting. We’re in multifamily as well and people in our office buildings are asking for things that are in the high-end multifamily market: rooftop patios, connection to Wi-Fi over the whole place, specialty coffee shops.

lt’s an interesting change in the market that has to do with millennials and where they’re driving jobs. Millennials now represent the biggest group of people now and are actually beginning to force my group, the Baby Boomers, to make decisions differently. That part is changing how we look at our buildings. Everything we’re building now we’re building with staying power and some artistic feature. There’s a desire by the younger people to see something special. They’re changing the way we look at, do, and design deals.”

Tiffany Lyman Ruzicka (right) of RED Brokerage says she can tell when a retail center is in a strong area when it not only can support the large, national chains but also small, local retailers as well.

TIFFANY LYMAN RUZICKA, RED Brokerage: “Each retailer has things they look at. Looking at shopping centers, we can go to five of the same restaurants in five different areas and with a secret ticket receipt indicator and see how many people have been there. The kind of merchandise a department store has can be an indicator of how strong the shopping area is. A lot of times shopping centers have the same national tenants, and you can go to other markets and see similar makeups of shopping centers. So when I’m working with expanding retailers, besides just looking at overall sales per SF and national retailers, we look at who has unique, local tenants. It says two things: that those areas are strong enough not just to support the national retailers but strong enough to attract that same category with local restaurants or ice cream shops. To see those retailers thriving is a good sign for the market they’re in.”

What kind of obsolescence are you seeing in the market, and what is being done about it?

JEFF STINGLEY, CBRE: “There are structural features like flat roofs and 8-foot ceilings that turn off investors. No matter how much value you put into the units, there’s only so high you can raise rents. But to an extent I think there needs to be rental options for every price point, and obsolescence helps with that. Unit finishes continually evolve, so you could make the case that something built 5 or 10 years ago could have finishes that are obsolete today. In a market like Kansas City, it’s good to have some obsolescence because we don’t have the 10-plus percent rent growth like in primary markets.”

Ed Elder of Colliers International said he’s noticed that industrial tenants are becoming more conscious of energy efficiency in their buildings.

What new trends in the market are you seeing for the first time?

ED ELDER, Colliers International: “For the first time in years, tenants are willing to pay up for more energy efficient industrial buildings. I was a little surprised, to be candid. I wouldn’t think industrial tenants would be concerned about anything other than his rate, but we’re seeing more and more tenants ask questions about energy and how a building is designed. Developers are also paying attention to the energy benchmarking code being adopted by most of the city’s municipalities.”

JEFF STINGLEY, CBRE: “Young buyers are seeking opportunities here, especially new buyers coming from outside markets. Half of our sales this year have been to groups where this is their first deal here.”

TIFFANY LYMAN RUZICKA, RED Brokerage: “One thing I’ve seen this year are retailers that started online opening brick-and-mortar stores. An example would be Warby Parker, which started as an online sunglasses retailer and had great success and are now rolling out brick-and- mortar stores. Prior to this year there were so many questions abut the future of retail and online, and what retailers really have found successful is this omnichannel approach.”

Bob Fagan of CBRE moderated the panel discussion.

What new amenities are tenants asking for?

KEN BLOCK, Block Real Estate Services: “Wi-Fi is becoming a big factor in campus-wide desk systems. We’re doing a lot of work to have all of the systems in the building talk to each other and be hooked to our mobile devices with an app system that allows electrical, light, heat to talk to each other and the tenant can modify it through a mobile app by the tenant. Some of the common areas we’re working on right now have rooftop terraces, but what we’re doing outside is creating gathering places for employees who want to go outside and eat, hook up to mobile, and work from a computer, so the Wi-Fi out there is important. We’re using an complicated encrypted system that completely changes every hour so it allows the Wi-Fi outside to work the same as a plugged-in system inside.”

What specific deal has fascinated you the most?

TIFFANY LYMAN RUZICKA, RED Brokerage: “We were involved with a deal with Tesla, which started out as traditional auto dealership deal except they had to be on the Missouri side legally, but they wanted to capture the best demographic. They made the decision to split sales and service departments, because sales needed a high-end retail experience and their service was the opposite of that. They landed in the Pottery Barn Kids space, which as a completely different use for the Plaza, which is now branching into those types of uses. As part of that deal, they added six charging stations to the nearest parking garage so that cars could come in from the street onto the sidewalk and into the storefront. The front third of that storefront had to hold three cars at $460,000 each. It was typical for the Plaza, and they did it in three and a half weeks.”