LEVELING UP TO THE ‘FLIGHT TO QUALITY’
As one of the nation’s most diverse economies, we have always touted a wide range of real estate choices for our broad business community. Positive economic reports according to CBRE Kansas City predict “average annual job growth of 0.4% over the five years to 2027” with the office sector expected to “grow 0.6% per year over the five years to 2027.” Local real estate teams at CBRE, Colliers, Cushman Wakefield, and JLL all report that the strong employment fundamentals of Kansas City estimate positive activity levels this year in the corporate office landscape. In working collectively, we can position our current office inventory for continued absorption while supporting our local employer base with actionable strategies for organizational success.
According to industry research, our pandemic-stunted roadway of available Class A buildings is a predominant issue. As for current inventory, there is “a growing gap between existing Class A product and first-generation Class A space, with asking rates reaching the mid to high $30/SF range for newly built space,” notes Colliers. Consequently, the increasing level of activity in the Class A market could potentially amplify differences in our Class B assets in a not-so-great way. Class B assets are also increasingly up against the effects of sublease activity. And to boot, the increasing price tags on building materials due to supply chain and labor constraints can seem to be prohibitive for building renovations that move the needle.
However, a case can be made for moving forward with investing in renovations of our Class B inventory to meet the spill-over demand of the Class A market: in a survey of over 25,000 Class A buildings across the country, Cushman Wakefield’s national research team discovered that the more recent a building has been delivered (or renovated), the more likely it is to have a high occupancy rate: “Buildings completed during the five-year time frame of 2015 through to 2019 had an average vacancy rate of just 12.6%, while buildings completed between 1980 and 1984 had average vacancy of 20.6%.” Grappling with estimations is largely the responsibility of an owner’s project partners, though. Owners with strong vendor and project partners who are engaged earlier in the planning process will succeed at leading the market with competitively refreshed spaces.
On the tenant side of the equation, the industry consensus shows increasing concessions from landlords vying for occupancy, allowing tenants to achieve lease contracts with exceptional benefits – JLL notes even seeing “certain rare cases exceeding $80 p.s.f.” in tenant improvement allowances. This couldn’t come at a better time for employers, when their biggest concern is the costs associated with retaining and attracting talent. A majority of these employers, however, are feeling a strong pressure to compete for talent when it comes to offering hybrid work, and their real estate can play a big role in bringing people back with a renewed dedication to organizational mission.
Relocations to newer offices that better warrant the commutes of remote and hybrid workers are generally an effort by employers to foster company culture. Colliers predicts “the pandemic has shifted expectations regarding work patterns and acceptable commute times. This could drive an increase in demand for closer-to-home workplace options and a shift in office placement closer to workforce residences.” We are also seeing assets in the top of their classes positioning a myriad of incentivizing benefits that are hard to resist, such as shared building amenities that offload lightly-used spaces from tenant square footages, speculative pre-furnished suites, wide open floor plans for easier accommodation of new hires, greater brand visibility, ample power access for increased technology usage, and more.
Through all of this, a famous quote comes to mind: “Nothing is more expensive than a missed opportunity.”
Cushman Wakefield determines the problem in other words: “a compelling argument can be made that the biggest hindrance threatening the Kansas City office market is a lack of suitable product.”
Over the next few months we’ll be addressing key tactics that landlords of all asset classes (but especially those outside of first-generation Class A property) can use to attract and retain tenants, and how to measure the performance of those decisions to pivot with knowledge in hand. And for our occupiers, whether they are contemplating brand new moves, developing hub-and-spoke offices, or simply refreshing their spaces in the wake of returning employees, we’ll offer the change management tools needed to drive culture and inform growth planning.
Stay tuned.
Take a look at the what local market reports are showing in the KC area!
RACHEL HEWITT
Market Development | Real Estate & Development
Scott Rice Office Works