That’s the good news. The bad news is that construction and labor costs, soft job growth, and increasing competition for venture capital may prevent the area from experiencing the metro-wide “boom” that many have been hoping for. The good news about the bad news is that, while certain sectors of the market may be leveling out, other sectors are positioned for serious growth.

Retail Market 

The retail sector has been the hottest sector, by far, of the commercial real estate market in Kansas City over the past decade, but may be reaching a point of critical mass, according to Kevin Nunnink, chairman of Integra Realty Resources, a commercial real estate valuation and counseling firm.

“The retail market has been kind of the darling for the past ten years or so, but it’s approaching what we call hypersupply, where you have more supply than demand,” Nunnink says. “When you have that, you will either stagnate or, if you continue to build, you will run it into a recessionary stage.”

Ken Block, principal of Block & Company, Inc., the Plaza-based commercial real estate brokerage, development and management company, agrees, adding that while the overall retail market may slow down, there are still areas where retail growth will continue.

“Retail is still hot in certain submarkets in the metro area,” Block says. “The reason for that is because Kansas City has the second most land area of any city in the country. Because of that, you have continuous growth further and further out. Retail follows that growth and we continue to see pockets of retail constantly expanding.”

This expansion, however, leaves behind other pockets and properties that have gone past their prime and must either be re-developed or re-purposed or razed to the ground.

“That’s why you see a lot of the development in these shopping centers and malls being re-done, because they’ve outlived their economic viability,” says Block. “They’re having to be repositioned. The ones that have a great location get repositioned into more retail; while others, like the Mission Mall, for example, get repositioned for a variety of uses.”

Office Market 

A welcomed rally in the office sector that began in 2005, continued into 2006, and the outlook for 2007 is one of cautious optimism. Even with an influx of new office construction, vacancy rates have not increased dramatically, yet quoted rates have gone up slightly. That’s pretty good news for both landlords and developers.

“We’re definitely in an office recovery, but there are some things that could slow it down,” according to Nunnink. “The main problem is construction costs, which have gone up dramatically over the past few years.”

A lot of the problem has to do with a scarcity of resources, as other nations, such as China and India, are using a lot more steel, concrete and other resources than in the past. Construction labor costs are another contributing factor, particularly in Kansas City, where construction labor is among the most expensive in the country.

“These are just a couple of factors that have led to a nearly 50 percent increase in construction costs in the metro area over the past five years,” Block says. “Land prices haven’t moved much, but when you take the hard construction costs, which account for usually about 70 percent of the entire project cost, and construction costs go up 50 percent, it’s going to add 35-40 percent to total cost. What that’s done is made new space substantially more expensive. It’s just simple math,” says Block.

In order to compete with other cities, Nunnink noted, Kansas City is going to have to see some mediation in escalating costs, particularly when it comes to union labor.

“If you look at Denver, for example, they have appreciating rents and a vibrant economy, more so than Kansas City, yet their construction prices are significantly cheaper. It’s unbelievable,” Nunnink says.