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Market fundamentals are showing signs of improvement
The Kansas City office market continues to face challenges as a result of COVID-19. However, positive signs include office occupiers returning to their workplaces and the recent increase in touring activity. Market fundamentals are showing signs of improvement as well, but currently remain weak as vacancy rates for the metro continued to rise throughout the first quarter.
Key Takeaways
- Touring activity for office occupiers has recently increased but lease commitments remain tepid
- KC office market experienced negative absorption to start the year
- Sublease space continues to make its way to market, however, velocity of space additions have decelerated
- Average asking rates continue to hold steady despite recent vacancy increases
Kansas City Highlights
Market fundamentals related to the office sector continue to decline as a continued result of the fallout from the COVID-19 pandemic. The overall vacancy rate adjusted slightly upwards to 9.5%, a 10 basis point increase from the end of 2020 and a 130 basis point increase from this time one year ago. Throughout Q1 2021, the Kansas City metro experienced 174,196 SF of negative absorption as additional sublease space continues to be added to the market. Overall asking rents within the Kansas City metro continue to hold steady at $20.03/SF across all product classes.
While leasing activity remains well below pre-pandemic levels, the spread between asking and effective rates is widening as landlords continue to offer generous concessions via free rent and tenant improvement allowances in place of dropping their starting rates. Class A rates remained stagnant at $22.98/SF, while Class B rates have increased to $18.78/SF.
Sublease space, which was a headline story in 2020 as the overall supply increased by 55% nationally last year, remains an important dynamic to the office sector fundamentals. The Kansas City market has added more than 700,000 SF of available sublease space since last March. While additional sublease space is expected to make its way to the market, the velocity at which this space is being added to the market has decelerated over the past two quarters, a positive sign.
Optimism Growing for the Office Market
Evidence of light in the once bleak pandemic tunnel is beginning to appear as the pace of vaccine inoculations began to ramp up in Q1 2021, providing hope, increased immunity, and a return to normalcy going forward. Almost 50% of the U.S. population over 18 received at least one vaccine shot, setting the economy up to rebound strongly in the second half of 2021 and into 2022.
Touring activity for office occupiers has increased recently but lease commitments remain tepid at this point. Several firms continue to transition from a work-from-home environment and are beginning to re-enter their workplaces. As a result, firms are also beginning to rethink their office needs and space requirements going forward. The true impact on the office sector metrics will not be realized for some time as many firms will reassess their real estate strategy until they are back in the office, but the velocity of office activity is beginning to gain momentum.
Moves and Growth around the Metro
Firms continue to explore ways to increase the flexibility of lease terms and obligations and some landlords are beginning to accept shorter-termed lease renewals and extensions as a way to secure tenants. The majority of completed leases throughout the Kansas City metro in recent quarters have been lease renewals or short-term extensions as companies continue to seek clarity going forward. Leasing activity throughout the first quarter continues to reinforce those trends. Aspiria, formerly known as the Sprint Campus, signed two lease renewals throughout the first quarter. Empower Retirement signed a short term renewal to occupy 94,000 SF and Parker Hannifan signed a 20,000 SF renewal at Aspiria in Q1. Optiv Security subleased an entire three-story building at 5100 W 115th Street from Tortoise Capital Advisors. In late 2019, Tortoise occupied the new 47,500 SF building in Park Place, however, they vacated the space in less than a year as a result of the COVID-19 pandemic. Additionally, in South Johnson County, Prime Capital signed a lease extension/renewal for 30,000 SF at 6201 College Boulevard.
The Downtown submarket saw two large office deals completed in Q1 2021. The law firm of Foland, Wickens, Roper, Hofer & Crawford elected to lease 20,000 SF within One Kansas City Place. They will move to the CBD from their current location in Crown Center. Deloitte elected to renew 19,500 SF at Town Pavilion.
