Cycle-low construction at odds with tightening retail vacancy. As unemployment reached the low-3 percent range by the end of 2018, the retail environment in Kansas City remains well positioned for future advancement. Consistent job gains and steady construction have sponsored a dramatically tighter vacancy rate; it reached a cycle low as net absorption averaged 1.5 million square feet over the past eight years. Despite the strong performance, development over the coming year will reach the lowest point in over a decade, with the pipeline skewed heavily toward net-leased projects in suburban locations. The largest slated completion will be the retail portion of the Village South mixed-use project just south of the Legends Outlets and Kansas Speedway in Edwardsville. The 27-acre development will include two hotels, a 22,000-square-foot conference center and more than 60,000 square feet of retail space. The diminished pipeline will allow for a further contraction in the metro vacancy rate, with average asking rents posting a second year of a low-single-digit gain.
Yield-oriented investors raise allocations to Kansas City metro as prices, cap rates remain highly attractive. Dwindling cap rates in larger metros have underpinned a transfer of capital from coastal markets to Kansas City, where first-year returns will begin in the low-7 percent range. Core assets in Overland Park and Eastern Jackson County draw the majority of dollar volume due to their high-quality demographics and property values, while many institutions remain focused on assets in Downtown Kansas City along the Streetcar line between Union Station and the Plaza. Rental rates in downtown and midtown suburbs have surged in recent quarters amid a rapidly expanding local population due to the increased density from new apartments. However, years of deferred maintenance in many locations will motivate additional investors to deploy capital in order to recognize internal rates of return well above the broader metro average.