Johnson County Small Office Buildings Holding Value
By Jim Gates, SIOR, Office Brokerage
The talking heads would have you believe that the commercial real estate sky is falling. When the media talks about $500 billion of commercial loans coming due in the next three years and the Commercial Mortgage-Back Securities Market (CMBS) being almost non-existent, it’s a bit over whelming. While this may be true in other parts of the United States, it is not the case in Kansas City. Real estate values in Kansas City remain stable as they relate to owner/user office buildings, and I believe you will find the below statistics of interest.
Ten years ago, when I started in the commercial real estate business, the owner of a 5,000 to 40,000 square foot building could call a few friends to let them know it was time to sell. After a few phone calls, the building was under contract, sometimes even without the help of a commercial real estate professional. Alas, it is a new day. Buyers/tenants have more choices when it comes to owning a small to medium-sized office building, and landlords of multi-tenant office buildings are getting very creative when it comes to securing their existing tenants and attracting new tenants.
Next time you drive down any major thoroughfare, take note of all of the buildings for sale. Although these buildings may be on the market for a longer period of time in today’s market, the values have not dropped as low as the media would have you believe. To help prove my point, below is a brief case study of College Boulevard, a submarket of Kansas City.
According to Costar Analytics, since 2005, 31 buildings between 5,000 and 40,000 square feet have sold to users with an average sale price of $118 per square foot. In 2007, when the market was at its peak, the average sale price was $127 per square foot. The average sale price today is $135 per square foot. Although this is a small sliver of our 60 million square foot office market, it is a very interesting statistic.
If you take the entire Kansas City metropolitan area using the same criteria, 238 buildings have sold at an average price of $87 per square foot. In 2007, the average sale price was $95 per square foot, and, today the average sale price is $81 per square foot. In other words, prices for small to medium-sized office buildings are down about 7% across the metropolitan area, but in the College Boulevard submarket, the average price is up 15%.
I realize one or two building sales can skew this number in any given year or submarket, but the numbers are still eyeopening. These statistics demonstrate why buyers are not finding the deals in the marketplace they would hope to find. Every sale transaction included a willing seller and a user who was in a position financially to make the purchase. The common theme I discovered in each situation was that the timing was perfect. The buyer’s business was stable, each party had a grasp on its growth, and there happened to be a building that met the buyer’s needs.
The buyers purchasing these buildings are typically small businesses based in Kansas City that are interested in creating wealth and investing in the community. According to the US Census Bureau, Kansas City contains 51,921 businesses. Over 90% of those businesses contain 250 employees or less. The average office tenant in Kansas City occupies approximately 4,000 square feet and has approximately 15 employees.
These numbers demonstrate that the media focuses too much on large public corporations. While it is important for our public companies to grow, small businesses are the ones that will determine our success as a country and as a city. The entrepreneurs of Kansas City are going to get us through these tumultuous times, not the CMBS markets. The Kansas City business community is spread out over many different industries, and I believe this is the reason why our commercial real estate market is stable relative to other regions.
Jim assists his clients with site selection, financial analysis, and lease negotiations, and he oversees tenant finish. Jim has assisted in the sale and leasing of over 1,000,000 square feet of office space since 2001. In 2008, Jim was awarded the SIOR designation, which is a designation held by knowledgeable, experienced, and successful commercial real estate brokerage specialists.