By Kevin Collison
Downtown Kansas City leads the nation these days reducing its office vacancy rate, but not because it’s returning to its heyday as the region’s business center.
The drop is primarily due to the conversion of many older, obsolete office buildings into apartments and hotels as downtown has transitioned to a mixed-use, ‘live, work and play’ district in the 21st Century.
A total of 1.7 million square feet of former office space has been converted to new uses over the past three years, according to CBRE Group, a national real estate firm.
That’s more space than One Kansas City Place, downtown’s tallest skyscraper.
The 3.1 percent office vacancy drop last year ranked fourth in the nation, according to CBRE.
And the trend is continuing with Kansas City posting the biggest vacancy decline in the country during the first quarter of 2017, bucking the national average that showed a slight increase.
The downtown vacancy rate was 12.8 percent during the first quarter, according to CBRE.
“The stars have lined up having older properties still available for redevelopment,” says Brian Bacon, a vice president at CBRE.
“That, along with the great increase in people living downtown, the streetcar and the retail has made the vibe of what’s going on awesome.”
It hasn’t all been about removing old buildings from the office inventory. Downtown saw its first new office project since 1991 open this spring with the Corrigan Station redevelopment at 18th and Walnut.
Corrigan Station landed a major tenant when New York-based WeWork leased 44,000 square feet, joining Hollis + Miller architects, and Holmes Murphy.
AutoAlert, a software developer, also relocated its headquarters from California and is occupying 55,000 square feet in the former Kansas City Southern building at 114 W. 11th St.
Bacon said the reduction in inventory also has helped boost rents. CBRE said lease rates increased by 66 cents per square foot during the first quarter compared to a year ago.
The average lease for Class A space downtown is $20.36 per square foot. While improving, it still lags behind the metropolitan average of $21.47 per square foot.
As it becomes harder for tenants to find good downtown space, Bacon predicts the opportunity for significant new construction, perhaps a high-rise project, is heating up.
“If you asked me two years ago, I’d tell you we were for five years out for there to be demand for a new high-rise,” he says. “I was wrong.
“I think we’ll see negotiations for a new office building in the greater downtown area over the next 18 months.”
Jon Copaken, a principal at Copaken Brooks, which co-developed Corrigan Station, says it’s been out-of-town firms and smaller companies that have led the charge returning downtown.
“While rents are rising, they are not currently high enough to spur high-rise office on a speculative basis,” Copaken says.
“That being said, as the larger corporate user prepares for its next move, downtown will become its most viable option.”
CBRE estimates the renovation of older office buildings removed 313,000 square feet from the downtown inventory last year, and so far this year another 300,000 square feet has been converted. The downtown office market currently totals about 13 million square feet.
Among the obsolete downtown office buildings converted recently to apartments or are in the process are Commerce Tower, Traders on Grand, the Power & Light building and the Mark Twain Tower, says Gib Kerr, a director at Cushman & Wakefield.
While Kerr agrees great progress has been made reducing vacancies, he adds that two other big downtown businesses, Hallmark and State Street Bank, recently put about 600,000 square feet on the market.
“Every time we make progress, there’s a step back,” Kerr says. “But rental rates are going up and vacancies are going down. We’re making good progress taking buildings off the market.”
Sean O’Byrne of the Downtown Council, credits the Missouri historic tax credit program, a tool that helps developers finance renovation projects, and strong interest in downtown living, particularly among young adults, for the conversion trend.
“Both worked together for us to save these historic facades and give them another 100 years of life, and take them out of the office inventory,” O’Byrne says.