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LANE4’s Annual Comprehensive Look at The KC Retail Market

The Kansas City retail market was steady in 2018 and is projected to continue to remain so in 2019. The near absence of new completions combined with the redevelopment of some functionally obsolete retail properties served to limit new supply. The total inventory of retail square footage increased by less than 0.5%.

The lack of new supply is serving to counteract the ongoing headwinds facing brick and mortar retail. Despite some store closings, the key fundamentals did not deteriorate in 2018, and, in fact, most key metrics improved marginally.

Across all of the shopping center types— community, lifestyle, neighborhood, power, and strip centers—occupancy rates ended the year hardly fluctuated from Q4 2017 figures. In fact, vacancy did not increase by more than 0.1% in any one of these center type so where there were some changes in occupancy, they were generally improvements in market conditions. The same is true of rental rates, which increased in every property type except for power centers.

The dynamics of power center fundamentals are particularly interesting. These centers are primarily occupied by soft goods retailers who are are particularly vulnerable to growing competition from online sales. Since 2017, occupancy rates improved from 94.1% to 94.5% but average lease rates collapsed nearly 20%.

In 2018, power centers remained occupied and viable but decreasing rents contributed to the deterioration of their values. Power centers are right on the fault lines of the retail disruption. It appears that they are adapting and surviving, but certainly not immune to the forces reshaping the retail world.

In 2019 and beyond, we expect this dynamic to continue. Demand is high for the best retail properties, from neighborhood centers to lifestyle. Obsolete centers—those located mid-block, poorly designed, or simply located in oversaturated areas—will continue to be redeveloped (in whole or in part) for alternative uses such as multifamily, office, medical and storage.

The biggest piece of retail news in 2018 was the announcement of Nordstrom’s upcoming relocation from Oak Park Mall to the Country Club Plaza. This will simultaneously breathe new life in to the Plaza and pose a potentially existential threat to the future of Oak Park Mall. At its peak, there were eight enclosed malls in the Kansas City market. With Independence Center going in to special servicing in 2018, the last two survivors are both facing major crossroads.

As with so many things in our hyper- competitive economy, technology is forcing retail to become leaner and more efficient. The winners will continue to perform, but inefficient retailers and shopping centers will continue to struggle. The challenge for retailers, investors, developers and cities alike is sorting out which are which.