While housing and entertainment have boomed, office space in downtown KC sits empty [The Kansas City Star]

June 16--The mantra behind the multibillion dollar makeover of downtown Kansas City the past decade was to make it a better place to work, live and play.

With the addition of expensive amenities, including the Power & Light District, Sprint Center and the Kauffman Center, many more people have indeed come to live and play downtown.

But when it comes to work, businesses remain unimpressed.

U.S. Census data shows that from 2001 to 2011, the latest year available, greater downtown lost 19.6 percent of its private employees. That's 16,237 fewer private jobs.

That 10-year stretch covers the period from shortly before the downtown redevelopment boom began to just after the major redevelopment projects were completed. The greater downtown area runs from Crown Center and the Crossroads Arts District through the central business district to the River Market.

Reflecting the decline in the downtown workforce, the vacancy rate for Class A and B office space, the quality most private tenants seek, was at 26.7 percent in the first quarter of this year, according to real estate firm Cassidy Turley. That's up from 19 percent during the same quarter 10 years ago.

That's more than 2.3 million square feet of empty downtown office space, or the size of two Town Pavilions, Kansas City's second tallest tower at 38 stories.

"We're supposed to be in the middle of this resurgence and I'm having trouble finding it," said Bill Lucas, president of Crown Center Redevelopment Corp., which manages 1.4 million square feet of office space at Crown Center.

"Downtown has never been better in the 25 years I've been working here," said Gib Kerr, a broker at Cassidy Turley. "At the same time, the office market is weaker than it's been in 25 years. How do you explain that?"Bill Dietrich, president and CEO of the Downtown Council, believes it would have been game over downtown if the city had not stepped up with its huge reinvestment during the last decade. The Downtown Council is a private organization that has championed downtown's revival, most notably by establishing a community improvement district 10 years ago.

"We are trying to change attitudes that have developed over 30-plus years," Dietrich said. "... But the enhancements in downtown have saved downtown. It would have been a lost cause and we're poised to recover."

Dietrich pointed out that the office market throughout the metro has been sluggish. Downtown has also faced the double whammy of Kansas incentives luring companies to the suburbs and, within Kansas City, to its crosstown rival, the Country Club Plaza.

"If you take incentives out of the equation, we compete quite well," Dietrich said.

But the downtown exodus is not getting better anytime soon.

AMC Entertainment is moving out of 10 Main Center next month, taking 400 jobs to a new building in Leawood, and 150 lawyers and staff will be leaving Twelve Wyandotte Plaza this fall when the Polsinelli law firm consolidates in its new headquarters near the Plaza.

In addition to luring AMC, Kansas incentives cost Commerce Tower 300 jobs when KeyBank Real Estate Capital moved to the Sprint campus in 2010 and FishNet Security uprooted 175 employees from the Crossroads in 2011, relocating them to Overland Park.

As for the Plaza area, the Husch Blackwell law firm, formerly Blackwell Sanders, moved its 450 employees from Two Pershing Square near Union Station to its new headquarters near the Plaza in 2004.

The financial health of some of downtown's landmark office towers is also hurting.

The $86.7 million mortgage secured by downtown's tallest building, the 42-story One Kansas City Place, is being sold by Lehman Brothers Holdings, and the building is 40 percent vacant; the 30-story Commerce Tower is on the market, 60 percent vacant; and the 30-story City Center Square building sold last fall for $17.5 million, 40 percent less than its price in 2003.

Some office building owners have been throwing in the towel. Hundreds of thousands of square feet in other obsolete buildings have been converted to apartments and lofts in recent years.

The latest candidate is Traders on Grand, a 20-story office building at 12th Street and Grand Boulevard that opened in 1962 and once teemed with lawyers. It's 50 percent empty and its owner, VanTrust Real Estate, is negotiating with a developer who wants to convert much of it to residential.

There is some help on the way for downtown, but it's not coming from the private sector. The federal government plans to relocate 1,000 employees from the Bannister Federal Complex by late 2014 and is seeking about 170,000 square feet downtown.

One of the assumptions about the downtown revival of the last decade was that it would create an environment attractive to companies that wanted to retain and hire talented employees, particularly young adults. That was one of the reasons former H&R Block executive Mark Ernst decided to bring that company's headquarters downtown in 2003.

To some extent, that idea has worked out.

Andrews McMeel Publishing relocated its 215 employees to the historic Boley Clothing Co. building in 2008; DSI, a software company, relocated its 150 employees from Overland Park to the Town Pavilion in 2011; Larson Binkley engineering brought 40 employees from Overland Park to the Crossroads in 2012; and Sporting Innovations, a new tech firm, is renovating the historic Hanna Rubber building in the Crossroads and plans to employ 120 people.

Dietrich said the downtown employment base should continue to grow as more start-up and tech ventures move into places like the Crossroads.

"It's important to find the 50-person company and grow it to 200 people," he said.

But Lucas of Crown Center believes the revival of the Crossroads area, a district of older, mostly former industrial buildings between Crown Center and the central business district, has been overstated.

"I think the Crossroads has stalled," he said. "We haven't done anything to take it to the next level. The area was supposed to go crazy after the opening of the Kauffman Center for the Performing Arts."

Crown Center itself has done relatively well; it has a 14.3 percent vacancy rate with 200,000 square feet available. But Lucas said because the overall metropolitan economy has been sluggish, many landlords are pursuing the same local tenants, driving down rents and making it even tougher for downtown to win deals.

"At most, we're just moving businesses around," he said. "I think it's time to take a hard look at ourselves when it comes to infrastructure, taxes and how other people in the region perceive us."

The most successful office buildings in downtown Kansas City, the Town Pavilion and the 30-story 1201 Walnut building, are managed by Copaken Brooks. Town Pavilion is 90 percent occupied and 1201 Walnut is 85 percent full.

"One issue is we have Class A product," said Jon Copaken, co-director of the firm. "The Power & Light District is a very big draw and has moved the center of gravity to the core."

But the Copaken Brooks buildings have scored some of their biggest successes luring tenants from other downtown buildings.

The National Association of Insurance Commissioners relocated from Crown Center to Town Pavilion in 2010; Bank Midwest moved from City Center Square to Town Pavilion in 2006; Deloitte & Touche moved from the UMB Bank building to Town Pavilion in 2005; and Stinson Morrison Hecker consolidated its law firm in 1201 Walnut in 2003, moving out of Crown Center.

"Kansas City is characterized by a lot of people moving around," Copaken said. "There's not a lot of new business coming to town.

"Our strategy is when there's deals to be made, we'll stretch to make it work rather than wait for the next tenant."

So how does downtown make good on its multibillion dollar promise of the last decade to be a better place to work?

Ten years ago, said Tim Schaffer, executive vice president of RED Brokerage, "all the services had left. There weren't restaurants or entertainment and people were not living there.

"Now, the environment has been fixed, all the ingredients of a great neighborhood have been put in place."

Schaffer believes that despite the hefty current vacancy rate, what downtown really needs now is new, more modern office space. He points out the last wave of construction ended in 1991 with 1201 Walnut. The other big towers, One Kansas City Place, Town Pavilion and City Center Square, date to the 1980s and late 1970s.

"Companies move to buildings that work for their operations and many of these are older buildings that don't work anymore," he said.

"What's interesting is downtown has become a preferred place to live but not the preferred place to office yet."

To reach Kevin Collison, call 816-234-4289 or send email to [email protected]. Follow him on Twitter @kckansascity.

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