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LANE4’s Annual Comprehensive Look at The KC Retail Market

Stability, despite a significant shift toward e-commerce and technology, evolving consumer habits, and retailers allocating significant capital to reposition themselves, has emerged as an encouraging, though unexpected, theme in 2019. Voices echoing the impending ‘retail apocalypse’ are fading and being replaced with the realization that the retail market is slowly working toward an equilibrium. The changing market conditions spurred by e-commerce are creating opportunities where there will inevitably be winners and losers, but ultimately the industry outlook is positive.

Nationally, the retail market is showing a significant lack of new ground up product. Kansas City is no exception, it is far more common to see renovations of existing properties, particularly in the central region and historically strong suburbs, or retail as part of a larger mixed-use development. New retail construction is expected to remain sluggish for the imminent future, especially as construction prices are driven higher due to an abundance of projects in other commercial asset classes like industrial, multifamily, and healthcare.

Occupancy rates in the KC Metro remained unchanged 94.6% from 2018 into 2019, and it is expected that vacancy will stay low in 2020. Aggregate lease rates for the Metro also went stagnant at an average of $13.27 PSF in 2018, and $13.26 PSF in 2019. Bankruptcies and store closings are a typical part of the business cycle, luckily those are offset by openings as new concepts emerge.

The most active tenants in 2019 were restaurants, fitness, medical, and entertainment, as opposed to soft goods and big box stores who have significantly tempered their growth. Retailers who are expanding are generally trending toward fewer physical locations, but the locations they do open are strategically located and integrated with their e-commerce tactics. Many online retailers are seeing targeted physical locations as a compliment to their e-commerce strategy, including Amazon.

A side effect of e-commerce integration and service-focused tenants taking up retail space, local municipalities may start to see declining income from sales tax. Taxable sales for the entire KC Metro dropped slightly in the first six months of 2019 compared to the first six months of 2018 despite a strong economy. Local municipalities have to account for this as even more service-based tenants move into retail centers that don’t generate sales tax, particularly medically oriented users.

Aside from the settling impact of e-commerce, the bifurcation of corporate retailers versus smaller local tenants seems to be hitting a comfortable equilibrium as well; both are succeeding in their own right. Local, or “mom and pop,” tenants are generally better suited when it comes to customer service and personal attention, while corporate retailers tend to have the edge when it comes to value-oriented products and concepts. That doesn’t mean the corporate retailers are giving up on trying to improve customer service. Interaction with customers is vital to any brand, especially those trying to differentiate themselves within the retail market, and a big reason to expect new concepts embracing brick-and-mortar positions.