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|KCBCentral.com: Office landscape|
Story by Julius Karash
The Great Recession was an awful time for many Kansas City-area businesses, but it was a darn good time to go on a hunt for office space.
With companies scaling back their space requirements and Sprint Nextel opening up a big chunk of its Overland Park campus for lease, good deals on office spaces were about as plentiful as College Boulevard banks.
Of course, the boon for tenants proved a bane for office building owners and developers.
“The depths of despair occurred early in 2009, and we’ve been slowly creeping out since then,” says Kenneth Jaggers, managing director of Integra Realty Resources in Westwood. “It’s been a tenant’s market for four years.”
But experts say the Kansas City-area office market is beginning to turn around, albeit slowly. A bit of statistical analysis can help put the situation in perspective. For example, the Colliers International Kansas City Metro Area Market Report quotes an average area office vacancy rate of 13.4 percent in the fourth quarter of 2011, compared with 13.7 percent in the fourth quarter of 2010.
At the same time, the average asking rent per square foot of office space declined from $18.30 in the fourth quarter of 2010 to $17.31 in the fourth quarter of 2011.
Yet the decline in asking rates could signal an uptick in deals, says Bryan Johnson, the Kansas City-based co-CEO of Colliers International. “I think the reason that may have happened is probably landlords adjusted their rates down,” Johnson says. “By the time the dust settled and negotiations were completed, those rates were lower. They were probably just bringing their asking rates down closer to where deals were being made.”
What’s more significant, Johnson says, is the Colliers report’s notation of 517,493 square feet of office space absorption for all of 2011, versus a negative absorption tally of 333,869 square feet in 2010. Those figures represent a turning point.
Rick Chamberlain, vice president and sales and leasing principal with Zimmer Real Estate Services in Kansas City, says: “The market has hit the bottom and we’re coming up very slowly. In the office business, one of the key factors is employment rate. The more employees you have, the more office space you need.”
However, Chamberlain noted that some hiring will serve only to fill up work stations that have been vacant for a few years. Furthermore, employees generally need less office space to work in than they used to, due to advances in technology and greater efficiencies. And a significant number of employees nowadays work from home.
“Companies that have expanded with people haven’t necessarily needed to take more space,” Chamberlain says.
Experts agree that south Johnson County continues to reign as the most vibrant office market in the Kansas City area and that Sprint Nextel appears to have reached the satiation point on leasing out office space at its sprawling Overland Park campus.
“The Sprint phenomenon has started to go away,” Johnson says. “Assuming that they don’t give additional space back, that’s going to be less impactful to the market now because they pretty much said they’re not going to do large blocks of space. [But] those guys keep losing money, and who knows what’s going to happen there. They’re probably still a wild card, but for right now they are not impacting the market.”
The availability of space largely depends on how much you need. For example, Johnson says, 100,000 square feet or more of available office space is a fairly limited commodity in any Kansas City-area office submarket right now. “Where you may have had multiple choices for larger blocks of space in south Johnson County or downtown or some of the other submarkets, those are starting to go away because they’ve been absorbed,” he says.
Tim Schaffer, executive vice president with RED Brokerage in Kansas City, says tenants seeking 2,000 to 10,000 square feet of office space are finding “a very, very competitive market because there are multiple options. Even as vacancy rates decline, I think we’ll continue to see that side of the market be extremely competitive.”
So what could these trends mean for businesses looking for office space?
“From a tenant’s perspective, it’s still a tenant’s market,” Johnson says. “Today, a tenant can get a great deal because there are still enough options to look at, especially if you’re not a monster tenant. But as the market continues to turn, eventually lease rates will increase, and it will become more of a landlord’s market.”
ADVICE FOR TENANTS AND LANDLORDS
“If you know that your needs are going to be relatively stable for the next 10 years and/or you’ve got flexibility to expand, you should be locking in a deal further out, to take advantage of the rates [available] today,” Johnson advises. “Because two years from now, I would venture to say that the market will have significantly turned in the landlord’s favor. If you’re trying to lock in a deal at that point, you’re going to be paying a lot higher rates, potentially.”
Chamberlain says tenants have a chance to take advantage of market conditions by obtaining a longer term lease in exchange for a lower rental rate. Another tactic is to extend a lease for a longer period but for a smaller amount of space, which also should result in lower rent.
Chamberlain says landlords as well as tenants can propose such deals. “If you’ve got a lot of space and tenants with the ability to move easily, it probably makes sense to offer them a special deal to renew their lease for a longer period,” he says. “You would do this with good credit tenants.”
On the other hand, Chamberlain says, tenants negotiating a special deal with a landlord have to feel comfortable that landlords will follow through on what they say they’ll do, such as with improvements to the tenant’s space. “You may think you’ve negotiated a great deal on tenant improvements, but if the landlord can’t perform you don’t have much of a deal. If you’re a good credit tenant, it is not unreasonable for you to ask for the credit worthiness of the landlord.”
Johnson says if you’re a landlord, “It’s a positive that vacancies are starting to trend down. Rates are probably going to start to firm up, although they have not yet. There’s some new construction occurring, and I think the driver for new construction is that we’re starting to run out of larger blocks of space.”
The bottom line is this: Landlords and tenants need to be proactive, and brokers should be advising them to be proactive, Chamberlain says.
MOVERS AND SHAKERS
“Kansas City was at a point where we were growing, but the role of the developer who built speculative space [without pre-committed tenants] so companies could expand didn’t exist,” Schaffer recalls. “Today, building a spec building is next to impossible for 90 percent of developers. Financing that’s out there requires a tenant with good credit for the developer to be able to finance a new office building.”
Schaffer says Kansas City-area office developments now are primarily driven by buildings being developed for specific occupants. A prime example in the Kansas City area is Cerner Corp.’s development of an office campus to accommodate its expansion in western Wyandotte County.
In another example of office development driven by an occupant, Teva Neuroscience announced in April that it is moving its headquarters and 400 employees from Kansas City to a new office building that will be constructed at the corner of Nall Avenue and College Boulevard in Overland Park. The new headquarters will be the first Class A office building to emerge in the prestigious College Boulevard corridor in two decades.
Certainly one of the most distinguished success stories from the Kansas City-area office market in recent years has been Park Place, located near 116th Street and Nall Avenue in Leawood. The mixed-use development landed a local giant last year when AMC Entertainment announced that it was relocating there from its prior headquarters downtown.
“Office-wise we’re doing extremely well and have been doing well really through the entire economic downturn,” says Park Place co-developer Jeff Alpert. “Our office leasing has been consistent, and I’d say it’s been surprising, in terms of how we have fared over the last three years.”
Park Place opened in May 2008, just as the economy was falling into the worst downturn since the Great Depression. “Yeah, our timing was perfect in that regard,” Alpert says jokingly.
On a more serious note, Alpert explains that the tough part about landing office tenants is, “Most tenants, unless you’re doing a build-to-suit, make their decision probably four to six months in advance of when they need the space. And because we had to commit to construction 12 to 19 months before the space was delivered, we didn’t have preleasing for our office space like many projects do or are required to do.”
To date, Park Place’s office occupancy rate exceeds 90 percent and is pulling in some of the highest office rents in the Kansas City area, Alpert says. “We’re getting around $30 a square foot. The Country Club Plaza, to my knowledge, is the only other submarket that is getting rents in the $30 range.”
Park Place also has drawn bigger tenants than it originally anticipated, such as the Ericsson mobile telecommunications company and IBM.
What’s the recipe for success at Park Place? Alpert says the development benefits from a hot location near the Sprint Nextel campus, a Country Club Plaza-type urban layout and deep-pocket financial backing from equity partner Cecil Van Tuyl, an auto dealership tycoon.
But Alpert says the Park Place recipe would be difficult for most developers to duplicate. The project includes office space, retail shops, restaurants and a hotel. “I think there are very high barriers to entry to creating something like what we’ve created,” he says. “It requires a very unique location. It requires a lot of patient capital. It requires a city that’s willing to work with a developer in terms of unique zoning categories. All these things enter into the mix.”
Joining the mix at the burgeoning Two Hallbrook Place office development in Leawood is Ascend Learning, a leading provider of technology-based educational solutions for health care and a variety of vocational industries.
“This move will bring together employees who currently work in three different locations in the Kansas City area,” says Bill Aliber, Ascend Learning’s chief financial officer.
Aliber also says that Two Hallbrook Place has space enough to support the 300 employees who are in the area, and it can accommodate future growth.
“Additionally, this space enables us to build out the campus to our specifications,” Aliber says, and adds that Ascend Learning “thoroughly evaluated” other options across the metro area, ultimately deciding that Two Hallbrook Place best met its specifications.
While the office market turns around, there are other indications that high-end office development is expanding into new submarkets. For example, there are plans afoot to develop a 300-acre high-end office park in Lee’s Summit.
The development is slated for a site that is largely between Interstate 470 and Colbern Road, and from Missouri 350 east to just shy of Douglas Road. The city of Lee’s Summit, which recently annexed the area from Unity Village, is upgrading infrastructure in the vicinity of the development site.
The property is owned by the Unity School of Christianity, and the developer that is in charge of creating the office plan is Zimmer Real Estate Services. The first phase of the development will be able to accommodate 675,000 square feet of office space consisting of 14 one- to four-story buildings, says Mike VanBuskirk, who is a principal with Zimmer.
VanBuskirk says construction of office buildings will begin “as soon as we have the first prospect,” which he says should occur by 2013.
“We could do land sales to a user or another developer,” VanBuskirk says. “We would also entertain doing build-to-suits. We don’t see any spec buildings starting right now.”
VanBuskirk says the office development will be the first of its size and scope in eastern Jackson County. He says Lee’s Summit currently suffers from a dearth of build-ready sites for office buildings, and that makes it difficult to land businesses seeking office space in a master-planned office park.
“One of the challenges the city [Lee’s Summit] has is when those deals come along, they really don’t have any place to put those people,” he says. “We’re trying to take development to a new level here.”
VanBuskirk says that the Lee’s Summit office development plan represents yet another signal that new life is stirring in the Kansas City-area office market, with a growing demand particularly for such high-end office space. But he also points out that Jackson County needs to catch up to Johnson County.
As an example, VanBuskirk points to Teva’s coming move to College Boulevard. “They needed a large block of space and wanted a building that would give them their own identity,” he says. “Those are the types of deals we want to go after for Lee’s Summit, and right now we’re not even on the radar screen.”
“I live in Lee’s Summit and I work downtown,” VanBuskirk adds. “Every day I see the traffic going along I-470. People who live in Lee’s Summit and eastern Jackson County are either driving to downtown Kansas City or over to Kansas to go to work. We’re trying to reverse that trend.”
NETSMART LANDS THE RIGHT SPOT
In this case, one of the city’s ugly ducklings was a 1970s-era building at 4950 College Boulevard. Earlier this year, Netsmart Technologies, a provider of services and software for health and human services organizations, announced that it was moving its headquarters from New York to the lackluster building in Overland Park.
“We took the ugly duckling and we’re now turning it into a ‘Solutionarium,’” says Netsmart CEO Mike Valentine. “We’re ripping off the front of the building and replacing it with glass. We’re going to build out an area to help demonstrate our capabilities for our clients.”
Netsmart’s move serves as evidence of a quickening pulse in the area office market, which fell into a funk during the Great Recession.
“The overall office market had a downturn with the rest of the economy going back to 2008,” says Bryan Johnson, co-CEO of Colliers International in Kansas City. “Companies stopped hiring. They stopped growing. There was sublease space that came on the market because companies had excess space. When the economy got into the bottom of the trough, the office market was right along with that. It bottomed out over 2009 and 2010.”
As a result, the Kansas City area has been “a tenant’s market for four years,” says Kenneth Jaggers, managing director of the Kansas City-area office of Integra Realty Resources. “It’s starting to approach a balanced position. It hinges on job growth. When that happens, you’ll get a more balanced market.”
Netsmart is doing its part in the job growth department. The Solutionarium will initially employ approximately 120 “solutionaires,” and that number is expected to grow to more than 500 over the next five years.
“Netsmart needed to accommodate a young and rapidly growing workforce, which meant that expansion was really important,” says Bucky Brooks, a principal with the Copaken Brooks real estate firm in Kansas City. Brooks, who represented Netsmart in its leasing effort, says, “While there were large blocks of space that could accommodate their initial requirement, it became more difficult in some cases and easier in others to see how they could have a pathway to grow their space.”
Valentine, a former chief operating officer of North Kansas City-based Cerner, says a combination of factors drew him to the ugly duckling on College Boulevard.
“We have offices in eight cities, four of which are major offices,” he says. “If you look at what we pay for those offices and what we get for that rate per square foot, we have a much better situation here,” or about a third less than what Netsmart pays for office space in Chicago; Columbus, Ohio; and on Long Island, N.Y.
Valentine says Kansas City’s proximity to a handful of major universities and the resulting pool of qualified job candidates drew Netsmart’s attention.
In addition, Valentine says, the deal with building owner Executive Hills includes the potential for construction of another building into which Netsmart could expand. “It fits us almost like a glove relative to how we expect to grow in the marketplace,” he says.
Netsmart is receiving $23 million in tax incentives from Kansas, but Valentine firmly contests that the company did not play Kansas against Missouri in the much ballyhooed “border war” over economic development. “Instead of doing the traditional state line thing, we thought it was much more important to have something that represented us well,” he says. “When it came down to it, the offers [incentives] from either side of the state line were pretty comparable.”
The road to College Boulevard began in August-September 2011, when Netsmart did some brainstorming about what it would take to grow its business. The company provides information systems to clients such as mental health and substance abuse treatment agencies, mental health practices, psychiatric hospitals, managed care organizations and public health departments.
“The conclusion was we could do more for our clients,” Valentine says. “We wanted to create centers of excellence that our clients could tap into so they would get more for the money they’re spending today. We determined that that was a growth opportunity for us as a business.”
Second, Valentine continues, “We looked at the markets we were in and where we thought we could scale the company with the right kind of talent, and we concluded that Kansas City was a viable alternative. That was the genesis for, ‘Let’s go look at Kansas City and see what the real estate options are.’”
Valentine says Netsmart took time to explore all options within the Kansas City-area office market. “Bucky [Brooks] and his team did a really good job of keeping a blank slate and introducing us to the pros and cons of each of the areas, and introducing us to the people who would help drive the incentives for us to come to Kansas City.”
As the search for office space got under way, Netsmart looked into buildings where it would have been one of many tenants. But the trajectory of the search changed when Larry Bridges, longtime Kansas City-area real estate mogul and president of Executive Hills, surfaced with a more innovative approach.
“Larry called us up and proposed an option of, ‘How about if you take a look at one of my properties? We’ll build a situation where you can have your own identity,’” Valentine recalls.
It was an innovative proposal. “I think Bucky and his team described it as the ugly duckling,” Valentine says. “But once we got of the mindset that we wanted to have our own personality, our own footprint, we started looking at that facility differently: How would we renovate it to fit who we are and who we want to be when we grow up?”
Valentine says the new headquarters will be a good fit for Netsmart and its health care industry clients. “Health care is being more and more scrutinized around value for the dollar spent,” he says. “Health reform is challenging them to do more with less. This is a great instantiation of that. We’re not going to build a new building. We didn’t want a new structure to be the representation of us in the marketplace. Our taking an older building and retrofitting it to represent the new, I think, is a great correlation to what our industry is being asked to do.”
Tom Herzog, Netsmart’s executive vice president, likens the ugly duckling to a hidden oasis. “Many people have driven by it and haven’t considered it,” he says. “But with a bit of rethinking and visioning, it led to an associate/client-centric design, letting form and function marry in such a way that creates a Solutionarium-type experience. We wanted to be really good stewards of our resources, and this building allows us to do that.”
The renovation of the four-story ugly duckling building, a project that is being undertaken by Executive Hills, began in March and is expected to be completed later this summer.
The renovation will include the addition of a stainless steel-covered walkway to the front of the building. “A lot of this is to bring much more of a high-tech feel to it,” Valentine says. “All of the floors are basically being gutted and redesigned to be very open and collaborative work spaces. We have an area in the back that we’re building that will be a covered awning across an open space, similar to what is downtown at the Power & Light District. That will be another outdoor work space complete with fire pit.”
Herzog says that once the renovation is complete, those entering the building will walk into a very spacious environment. “Immediately to the left you’ll see our network operations center,” he says. “That’s where we are managing our clients’ infrastructure. Then you journey downstairs and enter a corridor that tells our story. As you walk through, you will be able to view different points before ending in what we refer to as a 360 vision around what a client’s going to be experiencing.”
Valentine says clients and prospective clients from all over the world will come to the Solutionarium. “Think of this as a series of demonstrating solutions in the context of health care,” he says. “In the middle, we’re creating an architectural piece that is a hanging digital tapestry of health care that describes our history and where we’re going as a company. When you get to the end, it will have the same feel as a personalized IMAX Theater. We’ll take groups of 10 to 15 people and we’ll tell the story.”
The architect for the Solutionarium is Christian Arnold, a principal at design firm Clockwork Architecture + Design. “Clockwork has developed an expertise at rebranding existing buildings,” Arnold says. “We have seen this practice, once confined to historical structures, has now extended to buildings originally built in the ’50s, ’60s and ’70s because of the old adage, ‘location, location, location.’ Add in the financial feasibility of renovation, if it’s done correctly, and it’s a win-win for companies.”
Arnold says if a building has good planning depths and a good mechanical system, it’s often a candidate for a “transplant surgery,” whereby key elements are removed and replaced with new ones to give the building a vibrant new life while still maintaining the appeal and character of the original structure.
“Our vision for this project is to create a physical extension of the Netsmart brand,” Arnold says. “We commonly refer to this as workplace branding, and the process involves identifying the company’s core attributes and then using these attributes as inspiration during the design process.”
For instance, Arnold says, after they viewed a video called “Everyday Matters,” which was created by Netsmart, Clockwork designers incorporated the message and imagery from the video into a custom wall graphic that wraps the elevators.
Arnold says Netsmart places a great value on sustainable practices, so recycling an entire building was an appealing notion. “We extended these concepts to the interior environment,” he says. “Reclaimed wood timbers become interesting conversation points at key areas throughout the space.”
A new glass entry and a canopy also will rebrand the building, Arnold says. A new curving stair will provide a visual connection to all four floors.
Arnold says the first level of the building will become what he calls an “immersive customer experience,” with a variety of facilities for brainstorming, workshops and training. The second floor will house the 24/7 Network Operations Center, where clients’ critical data will be monitored. The third and fourth floors are the collaborative workspace.
In addition to the “recycling” of the building, high-efficiency lighting and eco-friendly interior finishes will be used throughout.
“Research indicates that top-performing companies place an equal emphasis on focus space, learning space, collaboration space, socialize space,” Arnold says. “Netsmart has embraced these workplace planning principles to create a high-performance work environment.”
As the renovation gets close to completion, Valentine’s excitement is building. “All our predictions are coming true, both about the business and about the opportunity here in Kansas City.”
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