COMMERCIAL REAL ESTATE FORECAST

2019 U.S. Commercial Real Estate Forecast Report

The Kansas City retail market experienced another successful year throughout 2018 based on strong market fundamentals that fueled retail growth.

Consumer confidence remains at historically elevated levels due to a result of current unemployment rates at a 17-year low and home values that remain high. Household wage and income growth also translated into strong retail sales overall throughout 2018, not only within the online segment, but also in-store purchases, which is a noticeable shift from previous years. Several retailers have successfully adapted to shifting consumer demands by offering more compelling in-store experiences that complement their online offerings to give shoppers more reason to venture away from their screens and convenience of online shopping and back into physical stores.

Based on the solid economy and market fundamentals, vacancy rates remained low throughout the Kansas City metro in 2018. By year-end, the Kansas City vacancy rate stands at 7.2% within shopping centers, and 5.5% for total retail product. Vacancy rates within shopping centers declined 10 basis points relative to this time a year ago, while total retail vacancy rate declined by 50 basis points from one year ago.

Retailers continue to seek prominent sites within the metro, particularly within established infill suburban locations, which presents an issue with limited options available to satisfy the demand. Construction costs continue to rise, and retailer willingness to pay for new construction pricing remains limited, which will continue to keep demand levels high for quality product in desirable locations for the upcoming year. As a result of pent up demand, asking rents continue to push upward for quality retail spaces. Metrowide, shopping centers have only raised the average asking rent by $0.22/SF relative to last year, but several quality centers within prime retail locations have successfully raised their asking rents by much more than that in recent months.

Retail Growth and Activity

The majority of retail growth throughout 2018 was concentrated in performing suburban submarkets that enjoy strong demographics related to population, traffic, and income growth.

JOHNSON COUNTY

Retail in North Johnson County was very active throughout 2018. In Lenexa, Sonoma Plaza is currently under construction at the southeast corner of I-435 and 87th Street. Upon completion, Sonoma Plaza will feature 143,700 SF of retail and will be anchored by a 60,000 SF McKeever鈥檚 Market grocery store. The whole Lenexa City Center area continues to grow rapidly from a development standpoint. As a result, Gomer鈥檚 of Kansas relocated from their existing Lenexa location and opened a new 21,000 SF store located in the heart of the City Center in November.

Orchards Corner Shopping Center located near Oak Park Mall, underwent extensive renovations in 2018. T.J.Maxx and HomeGoods leased a total of 42,000 SF within the center in the former Gordmans space and held their grand openings in October. Michaels will also join the center in the spring of 2019 upon build-out of their 22,000 SF space adjacent to HomeGoods.

In Overland Park, 95Metcalf South, the former Metcalf South Shopping Center, was demolished and replaced by a 165,000 SF Lowe鈥檚 Home Improvement store that opened in August. Additional pad sites will bring future retail opportunities to the Metcalf corridor. In Downtown Overland Park, a mixed-use office/entertainment venue will begin construction in the fall of 2018. The Edison District is a $53.8 million project that calls for a 125,000 SF, five-story office building located at the southwest corner of 80th and Marty. The project will also feature a food hall, public courtyard, and a parking garage to accommodate additional parking needs in the area. The project is expected to be complete by late 2019.

In Shawnee, Westbrooke Green is an infill mixed-used development located at the northeast corner of 75th and Quivira. The project calls for up to 530 multifamily units and 186,000 SF of retail. Construction is expected to begin in 2019. In Mission, the long awaited Mission Gateway project is currently under construction. The mixed-use project will incorporate a 30,000 SF food hall curated by Top Chef鈥檚 Tom Colicchio, a 90,000 SF entertainment venue, and 50,000 SF of shop retail. The development will also feature an office component, luxury apartments, and a hotel upon full build-out. The first phase is expected to be delivered by Q4 2019.

In South Johnson County, two new retail projects are expected to break ground in 2019. Galleria 115, a $182 million mixed-use development located at the northwest corner of 115th and Nall, calls for 240,000 SF of retail, anchored by a grocery store and 548 apartments. Construction is expected to begin in early 2019 and will be completed in several phases. Mentum is a $271 million project located at the former Great Mall of the Great Plains site in Olathe. The project being developed by Woodbury Corporation, calls for the development of 250,000 SF of retail and entertainment, nearly 150,000 SF of office, up to 300 apartments, two hotels, and a 4,000-seat multipurpose arena.

NORTH KANSAS CITY

In continuing the momentum of the last couple of years, Northland retail continued to be very active in 2018. The redevelopment of Liberty Commons, which opened in late 2016, continued to add tenants and developments to the area. B&B Theaters celebrated the grand opening of their new $19.5 million luxury flagship 12-screen theater in July, while Hobby Lobby added a new 45,000 SF store in April. West of the Liberty triangle, Valley View Shoppes are under construction. The 45,000 SF retail center is located along Highway 152 just south of Shoal Creek Golf Course.

TwinCreeks Center, formerly Barry Towne, upgraded and expanded their footprint throughout 2018 to accommodate for additional retailers and growth. Ross Dress for Less opened a 25,000 SF store within, while Ulta occupied 10,000 SF at the center in October. Petco will open a new 12,000 SF store at TwinCreeks in early 2019. Lukas Wine and Spirits Superstore added their third area location with the opening of a 19,000 SF space at the Shoppes at Shoal Creek in September. PetSmart opened a 19,500 SF store at Antioch Crossing in 2018 as well.

COUNTRY CLUB PLAZA AREA

The Country Club Plaza area will continue to evolve with the announcement of Nordstrom coming to the Plaza in 2021. The Nordstrom development will require demolition of the Capital Grille building, Bank of America branch, and a few Cinemark Palace movie auditoriums to accommodate for the new structure. The Capital Grille will relocate to the former Williams-Sonoma space on the Plaza in the summer of 2019, while True Food Kitchen will open in the spring of 2019 in the former Plaza III space. Just south of the Country Club Plaza, VanTrust delivered Brookside 51, a mixed-use project adjacent to UMKC. The project added a 45,000 SF Whole Foods and 170 apartment units which opened in May 2018.

JACKSON COUNTY

Lee鈥檚 Summit is also poised for significant retail growth in the coming years. Drake Development obtained city approval in December to advance the Streets of West Pryor project. The mixed-use development is located at the southwest corner of I-470 and Pryor Rd, just west of Summit Woods. The $178 million development will be anchored by a McKeever鈥檚 Market and will also include an apartment complex, senior living facility, a 105-room hotel, and additional retail space. Summit Orchards, located at the northeast corner of Chipman Road and Ward, will add up to 117,500 SF of retail space in the near future. The development will be anchored by HomeGoods, Ross Dress for Less, and Aldi, along with several pad users.

ADDITIONAL RETAIL ACTIVITY

The Belton Gateway development, located at I-49 and Highway Y in Belton delivered the second phase of construction in 2018. The new phase added more than 86,000 SF of retail space between Marshalls, Ross Dress for Less, Petco, Ulta, Party City, and Five Below.

Additional retail activity within the Kansas City metro included the opening of a 20,000 SF HomeGoods at the Legends Outlets in Wyandotte County. Midtown added a new grocery store with the addition of a 38,000 SF Sun Fresh within the Linwood Shopping Center. In Grain Valley, a new 55,000 SF Price Chopper was also delivered. Planet Fitness opened up a 19,000 SF gym, as Best Buy decreased their footprint within their building at 9301 Quivira. Expect additional growth of fitness gyms in the coming year, as gyms look to backfill vacated space or boutique studios occupying small tenant space within centers.

THE CHANGING LANDSCAPE OF RETAIL

E-commerce-related activity will continue to add pressure on the retail sector throughout 2019 and beyond.

Online sales, coupled with the delivery speed and convenience, will continue to be the major differentiator for successful retailers going forward. Retailers continue to shift away from traditional brick and mortar setups in favor of a more robust retail location that provides unique customer-centric experiences and convenient ways to acquire goods. The reality is that while people enjoy the convenience of online shopping, consumers still enjoy being able to see and feel what they are purchasing, so retailers are constantly adapting to their buyers.

Several retailers are improving their 鈥渃lick and collect鈥 strategies, and their brick and mortar stores are beginning to play a larger role in the process related to online purchasing. As online shopping continues to grow, the number of consumers who are picking up online purchases in store is increasing rapidly. The share of consumers who say they regularly use click and collect for online orders has almost doubled over the past five years. Many retailers, like Walmart, have expanded their collect from store services, even offering customers discounts for picking up their orders instead of having orders delivered. Emerging technologies related to artificial intelligence will continue to push the envelope in the coming year. Intelligence-enabled technologies and systems continue to digest massive amounts of consumer data, capable of delivering customer-centric insights, allowing retailers to better forecast and implement new strategies related to consumers.

Youth sports is another industry that continues to alter the retail landscape. In 2018, youth sports is an estimated $17 billion industry. In an age where travel teams compete year round, money spent on new facilities continues to pour in, which also is a factor in nearby retail growth. Locally, two companies are a prime example of how youth sports is changing certain retail dynamics. Foutch Brothers鈥 $39 million redevelopments of Kemper Area, renamed Hy-Vee Arena, combines sports and retail. The former traditional arena was transformed into a multi-level sports facility that offers several retail and restaurant options contained within the facility. Olathe-based Elite Sports is currently investing more than $25 million into five Kansas City area facilities, which not only offer courts but new amenities within their buildings that cater not only to youth athletes but also to parents. The Kansas City metro has also experienced several new soccer complexes around town, which will drive future retail opportunities close to these developments as well.

REAL ESTATE INVESTMENT ACTIVITY

Investors continue to focus on high-quality assets in prime locations, however, a growing number are expanding into secondary and tertiary markets in search of higher yields. Although sales volume continues to be dominated by core markets, secondary markets gained traction, which is a positive sign for Kansas City.

Several retail centers throughout the Kansas City metro traded in 2018. Truman鈥檚 Marketplace, a 303,250 SF center that recently underwent extensive renovations in 2016, closed in late December. RRI Acquisitions purchased the center from Legacy for $31.5 million. The center, located in Grandview, is anchored by Price Chopper, Burlington, Ross, and T.J.Maxx. In Johnson County, Pinnacle Village Shopping Center, Shawnee Parkway Plaza, Home Furnishings Center, and the Shops of Shawnee Crossing all traded throughout 2018. Pebb Enterprises took ownership of Pinnacle Village located at 119th and Metcalf by acquiring a non-performing loan for $11.25 million. The center is shadow-anchored by a Super Target and Lukas Liquor Superstore. Shawnee Parkway Plaza, located at the southeast corner of Shawnee Mission Parkway and Pflumm sold for $8.63 million. Christie Development, who redeveloped the center in 2014, sold the 77,466 SF center to Shawnee Plaza LLC. The center is anchored by Savers and Nuts & Bolts True Value. The same buyer also purchased the Home Furnishings Center, a 90,122 SF retail center located in Lenexa.

Additionally, there was solid transaction volume related to smaller strip centers across the metro throughout 2018. In Kansas City, the Romanelli Center sold for $5.95 million. The 28,000 SF center, located in the Waldo area, was purchased by G. Palen Investments from Addiana A, LLC. Two Ten Center, a 15,000 SF center located near I-29 and Armour Road, was acquired for $2.8 million, along with several other strip centers that were purchased by investors in the $1.5 to $3 million range.

Several single-tenant, NNN retail investments also occurred in 2018. In the Northland, a Walmart Neighborhood Market within Antioch Crossing sold for $12.61 million. Vedres Family Investment acquired the asset from Antioch Redevelopment Partners. Academy Sports, located at Liberty Commons, also traded in 2018. Roberts and Company purchased the 63,000 SF sporting goods store from Legacy Development for nearly $6.3 million. In Lenexa, Christie Development acquired the Kohl鈥檚 located near 95th and Monrovia from Tishman International. The 109,000 SF building sold for $8 million. Dave & Buster鈥檚, located within Corbin Park, was also purchased in 2018. The 40,671 SF building that was completed last year was purchased by Agree Realty Corporation.

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