KC Region Should See Accelerated Growth by Third Quarter of 2006

by Rudy Beese

What an interesting time it is to be living and working in the Kansas City region. We are experiencing an unprecedented expansion in the areas of information technology, biotech, life sciences and a whole host of other business sectors. This expansion has fueled dramatic opportunities for growth in the region. The economic forecast for 2006 promises to build on the vitality of proposed construction and development in all these sectors from the suburbs to the urban core.

The expansion in Kansas City, while holding promise for the future, has yet to directly affect most construction trades, as a tightening in these sectors of the industry has yet to occur. Many of the projects now under construction or promised will likely see considerably more activity later in the second quarter of 2006, and then into the second half of the year. This suggests that 2006 will be a year of transition in the economy of the Kansas City region as construction activity increases.

In some respects, the economy of the Kansas City region is poised to enjoy an expansion in the latter half of 2006 and beyond that is not unlike the opportunity experienced by communities such as Austin in the early eighties. While real estate developers, contractors, material suppliers and all the support sectors alike will benefit from a construction boom, the investment in offices, commercial

facilities and housing will accommodate business that will provide economic dividends to the economy of our community well into this century.

The false perception from all this proposed real estate activity is that the construction trades are currently at or above capacity. While there has been a definite upward trend, the immediate benefit to the economy is still a work in progress. This means that economic impacts will likely become more apparent in the second half of this year. This new development makes one wonder whether rumors of a real estate bubble may cloud the horizon. In actuality, construction and real estate development looks to be robust in virtually all sectors in the region, suggesting that the much feared bubble will fail to materialize.

In recent months, development in the region is reportedly forecast to exceed $4 billion by some accounts. This unprecedented commitment to the area suggests that Kansas City as a region will ultimately experience a windfall in new construction activity, and that windfall will likely precipitate an absorption of existing space. Some of the existing facilities may see tenants leave for newer space or better location. Existing properties will see a demand for upgrades or redevelopment in response to competing new properties. This should create higher property values over time, and should also create stronger demand for existing real estate related products and services.

The project pipeline in the region is robust and seems to support optimistic projections throughout 2006 and well beyond. After a lag in the first half of 2006, the metro area should benefit from the infusion of capital and jobs that the development renaissance has to offer. Over the course of the coming year, prices for construction materials will likely continue to rise, and the labor market should continue to tighten. As this occurs, so too will the costs of wages and ancillary services. While a slowing economy could negatively impact new product and pipeline, it does seem that current investment and development levels will be sustained, or even enhanced in the coming year.

As regional business recruitment and retention efforts continue to leverage the success in the metro area, new business and job growth should continue to enhance the development cycle. Competitive economic development policy offers similar promise as the states of Kansas and Missouri continue to seek out and attract new opportunities into the region. Overall, modest increases in capital and investment through the first and second quarter of this year should give way to accelerated growth in the third and fourth quarter, making for an overall upward trend for 2006.

Rudy Beese ?is a partner at Sonnenschein Nath & Rosenthal LLP. He can be reached via phone

at 816.460.2450 or by email at rbeese@sonnenschein.com.