Kansas City Real Estate Trends Presented To Blue Springs Developers Training Workshop February 27, 2008 Integra Realty Resources
The Kansas City Real Estate Market Benefitted from national trends Performance exceeding historical expectations 10+ years Abundance of Capital Low Interest Rates
Abundance of Capital (All mortgages including securitization) 3000 1000 2500 2000 Commercial Mortgages 900 800 700 600 $ Billions 1500 500 $ Billions 400 1000 500 REITs 300 200 100 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Q3 0
Extraordinarily Low & Resilient Interest Rates 10 10 YR Treasury 8 % 6 4 2 0 Dec-91 Dec-93 Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07
12 10 8 6 4 2 0 Cap Rate Compression 10 yr. Treasury Multi-Family Industrial Office Retail 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Viewpoint 1992-2006 1992
Underwriting More Credit Risk Higher Leverage Creative Financing
Concerns GDP vulnerability Energy Problem Rising Interest Rates Risk of Terrorism/Global Instability Securitization of Real Estate
Capital Flows IRR Capital Flows ($ Billions) 1995 IRR ESTIMATES % of Total Capital 2005 IRR ESTIMATES % of Total Capital % Change Private Debt Life Insurance Companies (1) $196.0 19% $255.0 9% 30% Banks & Mortgage Companies (1) $399.7 38% $855.7 31% 114% S&Ls and Mutual Savings Banks (1) $118.0 11% $361.3 13% 206% Pension Funds $21.8 2% $42.0 2% 92% Subtotal $735.6 70% $1,514.0 55% 106% Public Debt Government Credit Agencies $61.2 6% $73.0 3% 19% Commercial Mortgage Securities (3) $63.5 6% $613.9 22% 866% Mortgage REITS (2) $3.4 0.3% $23.4 1% 589% Public Real Estate Partnerships NA NA $0.2 0.0% NA Subtotal $128.1 12% $710.5 26% 455% Total Debt $863.7 83% $2,224.5 81% 158% Private Equity Pension Funds $102.4 10% $173.1 6% 69% Foreign Investors $28.62 3% $46.8 2% 63% Subtotal $131.1 13% $219.8 8% 68% Public Equity REITs (Equity & Hybrid) (2) $49.4 5% $288.8 10% 485% Public Real Estate Ltd. Partnerships NA NA $25.6 1% NA Subtotal $49.4 5% $314.4 11% 537% Total Equity $180.4 17% $534.2 19% 196% Total Capital $1,044.1 100% $2,758.7 100% 164% Sources: Federal Reserve, NAREIT, CMSA, Bureau of Economic Analysis, NCREIF, PriceWaterhouse Coopers, HUD, and Equitable Real Estate Investment Management
300 225 150 75 0 16 CMBS Annual Data (US Volumes) 169 93 74 74 78 57 49 52 37 26 203 223 2007 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 1995 $ Billions
Delinquencies Rates: Subprime vs. Commercial (60+ day)
Investors Seek Safety in Treasury Securities 6 5 2 Year 3 mo, t-bill (const. maturity) 2 yr, t-bill (const. maturity) 10 yr, t-bill (const. maturity) 10 year 4 3 Month 3 2 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Aug 20th
45 30 15 0 Avoid the CMBS Market 300 250 200 TTM ($ billions) 150 100 50 0 Dec-07 Monthly Totals Trailing 12 Months Apr-06 Jun-06 Aug-06 Oct-06 Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Feb-06 Dec-05 Monthly Total $ Billions
CMBS Spreads Over 10-Year Treasury
U.S. Home Prices have Fallen for the First Time Since the Early 1990s S&P/Case-Shiller Composite Home Price Index 25 20 15 % Change 10 5 0-5 -10 Nov-89 Nov-92 Nov-95 Nov-98 Nov-01 Nov-04 Nov-07
A Confluence of Apathy $6 Billions pulled busted $5 $4 $3 $2 $1 $0 J '04 A J O J '05 A J O J '06 A J O J '07 A J O 2007 Real Capital Analytics, Inc. All rights reserved.
Mortgage meltdown in a nutshell The buyer seeks a mortgage on a property that he/she cannot afford. Mortgage broker uses no-doc underwriting to secure a loan from a residential lender/bank. Banks package the loans and sell them on the secondary market. Investment bank securitize the loans. Subprime secured CMO s and CDO s do not meet the criteria of the big institutional buyers so credit enhancement is necessary. The investment banks get bond insurers to rate the CMO s and CDO s often with little regard to the underlying poor credit.
Debt Obligations now have AAA or BBB rating. The proverbial silk purse from a sow s ear. Rated obligations are now marketable to institutional investors. Delinquency rates spike to 18% of securitized loans in 2007, 3 times more than in late 2005. Publicity and market pressure bring this problem to the Front Page. Now credit insurers are at risk of losing their favorable ratings themselves. Investment banks are firing executives and laying employees. Layoffs by mortgage bankers and lenders are announced. Recent MBA convention was likened to a job fair. The residential lending market all but disintegrates and the CMBS market takes a sabbatical.
Cap Rates Then and Now Overall Capitalization Rate Comparison January - July 2007 August 2007 - February 2008 Loan To Value 80.00% Loan To Value 70.00% Mortgage Constant @ 6.0% 7.265% Mortgage Constant @ 6.5% 7.658% Equity 20.00% Equity 30.00% Equity Yield 10.00% Equity Yield 10.00% Overall Rate 7.81% Overall Rate 8.36%
Kansas City s Residential Market Single Family Building Permits 2002-2007 1400 1200 1000 Permits 800 600 400 200 0 2000 2001 2002 2003 2004 2005 2006 2007 Year Home Builders Association of Greater Kansas City Blue Springs Independence Lee's Summit Liberty Olathe Shawnee
Median Single Family Home Price Median Price $200,000 $180,000 $160,000 $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0 2000 2001 2002 2003 2004 2005 2006 2007 Missouri Year Heartland MLS All Areas Kansas
% Sold within 60 Days 90% 80% 61% 60%58% 86% 61% 66% 70% 71% 67% 64%63% 60% % Sold 55% 60% 58% 57% 64% 61%61% 50% 51% 53% 58% 55% 55% 40% 2000 2002 2004 Missouri Kansas 50% 48% All Areas Year 2006 Missouri All Areas Kansas Heartland MLS Area
Sales Volume # Sales 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 2000 2001 2002 2003 2004 2005 2006 2007 Year Heartland MLS Missouri Kansas All Areas
Kansas City Commercial Market
CBD Office Market Cycle
Office Vitals Major Submarkets CBD Plaza South Northland South JOCO North JOCO Inventory 13,000,000 SF Inventory 3,550,000 SF Inventory 5,500,000 SF Inventory 2,500,000 SF Inventory 13,000,000 SF Inventory 3,000,000 SF Vacancy 20% Vacancy Vacancy Vacancy Vacancy 13% 18% 25% 11.5% Kansas City MSA Totals All Submarkets Inventory: 41,750,000 SF Vacancy Kansas City: 15% - Suburban, 20% - CBD 17% - Overall IRR National Average: 13% - Suburban, 11% - CBD Vacancy 13.5%
Compass Corporate Center December 2007 Sale Price $140/SF Entered the market Mid-2006 Cap rate - 7.4% on stabilized NOI Building site sold for $7.85/SF
Perceptive Software Sale Price $184/SF 100% occupied, single tenant net lease Cap rate 7.5% 75% abatement for 8 more years
HOK Sport + Venue +Event 94,846 SF Rentable 288 car garage owned by Agency Sold $155/SF adjusted for abatement Cap rate - 7%
Gateway 1414 Genesee 100% occupied by Sprint Nextel 146,365 SF rentable Sale Price $89/SF Cap rate 9.02% Buyer is JV Orix and Boulder Net Lease
How does KC Measure Up Capitalization rates and sales volume KC vs.. St. Louis Minneapolis Denver Indianapolis Detroit Source: Real Capital Analytics
Sales Volume - $ Millions Detroit, $670 Minneapolis, $1,465 Denver, $3,893 Indianapolis, $352 Kansas City, $491 St. Louis, $1,161 Detroit Minneapolis Indianapolis St. Louis Kansas City Denver
7.00% St. Louis Cap Rates and Avg. Price 8.80% 7.70% 7.20% 7.00% Detroit Indianapolis Minneapolis Denver 7.20% Kansas City $140 $120 $100 $80 $60 $40 $20 $0 10.00% 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% $/SF Cap Rate
Retail Market Cycle
Retail Overview Plaza/ Midtown/ Downtown South KC Eastern Jackson Northland South JoCo North JoCo Kansas City, KS INVENTORY: 4,200,000 SF INVENTORY: 3,300,000 SF INVENTORY: 7,600,000 SF INVENTORY: 7,500,000 SF INVENTORY: 8,200,000 SF INVENTORY: 6,700,000 SF INVENTORY: 3,800,000 SF VACANCY: 424,200 SF 10.1% VACANCY: 458,700 SF 13.9% VACANCY: 722,000 SF 9.5% VACANCY: 675,000 SF 9.0% VACANCY: 623,200 SF 7.6% VACANCY: 589,600 SF 8.8% VACANCY: 558,600 14.7% Kansas City MSA Totals Inventory: 41,300,000 SF Vacancy: 4,051,300 SF or 9.8% IRR National Average: 7.3%
2007 RETAIL PROPERTY SALES Comparison by City Cap Rates and Avg. $/SF $200 $180 $160 $140 $120 $100 $80 $60 $40 $20 $0 $132 6.54% $161 6.72% $167 6.57% $171 7.17% 7.40% 7.20% 7.00% 6.80% 6.60% 6.40% 6.20% Indianapolis Denver Kansas City St. Louis $/SF Cap Rate Source: Real Capital Analytics
Slow Down in Kansas City Retail Property Sales in Kansas City SALES OF 2007 NEW ON THE MARKET Average Cap Rates 6.57% 7.08% Leasing Numerous projects have been slow going or postponed Source: Real Capital Analytics
Current Projects Current Projects Retail Square Feet Spring 2008 Status Tenants Announced Bass Pro (Johnson County) 625,000 Open One Nineteen 160,000 Crate and Barrel Open Z Gallerie, West Elm, Sullivan's Steakhouse, Soho Blue Ridge Crossing 350,000 Partially Open Wal-Mart, Starbucks, McDonalds, Verizon Wireles s Power and Light District 425,000 Partially Open Chefburger, Sprint Studio, Living Room, Peachtree Restaurant Corbin Park 1,100,000 Under Construction Von Maur, Best Buy, Barnes & Noble, Life Time Fitness (open) The Falls at Crackerneck 850,000 Under Construction Bass Pro Shops Antioch Center 515,000 Under Construction Prairiefire at Lionsgate 348,000 Under Construction The Shoppes at Liberty Triangle 350,000 Partially Open Planet Sub, Vintage Stock, Red Robin Summit Fair 550,000 Under Construction Macy s, Talbots, Coldwater, American Eagle City Center Lenexa 400,000 Under Construction North Oak Village 300,000 Under Construction Lowe s and Office Depot The Gateway 485,000 Construction Beginning February Prescott Plaza 72,500 In Development Plaza at the Speedway 865,000 In Development Wal-Mart Super Center, Best Buy, Office Max, and Michaels Adams Dairy Landing 600,000 In Development Negotiating: Target, Best Buy, Petsmart Sprint Land (College & Nall) In Bidding Process Three Trails 609,000 In Development Ridgeview Falls 140,840 In Development Deer Creek Woods 275,000 In Development Streets at Metcalf 900,000 In Development The Streets at Barrytowne 1,000,000 In Development Total 10,920,340
Retail Development in the Kansas City MSA
Corbin Park Vertical Construction Underway 135 th Street & Metcalf Avenue 1.1M Square Feet of Retail Major Tenants Include: Von Maur, Best Buy, Barnes & Noble, and Life Time Fitness (currently open)
Kansas City Power and Light District Tenants: Cosentino s, Sprint Studio, Living Room, Peachtree Restaurant, JoS. A. Bank, Famous Dave s, Bristol, Lucky Strike Lanes
The Falls at Crackerneck Including Bass Pro Shop Independence Last Year: Will this finally be a reality? This Year: It is a reality!
Summit Fair 550,000 Total Square Feet of Retail Major Tenants Include: Macy s Talbots Coldwater American Eagle
North Oak Village 300,000 SF of Retail Tenants Include: Lowe s Office Depot Construction Underway
Three Trails Development to encompass 400 acres of South Kansas City Set to Include: 1.1M SF of Retail 1.5M SF of Office 250 Hotel Rooms 18,500 Seat Stadium 12 Tournament Fields
Deals of 2007 Morgan Stanley buys The Legends at Village West for $214.5M (6.5% Cap Rate) Northridge Plaza sells for $42.8M Pavilion at Hartman Heritage bought by Inland Real Estate Corp for $39.8M (6.3% Cap Rate) Deer Creek Marketplace purchased for $38.05M (6.6% Cap Rate) Pinnacle Village sells for $30.31M Source: Real Capital Analytics
Apartment Market Cycle
Supply Trends by Submarket 2005-2007 40,000 35,000 30,000 2005 2006 2007 25,000 Units 20,000 15,000 10,000 5,000 0 CBD Plaza South KC East Jackson Northland South Johnson North Johnson KCK Source: REIS, Inc.; Compiled by Integra Realty Resources, Inc.
Occupancy Trends by Submarket 2005-2007 97.0% 95.0% 2005 2006 2007 93.0% 91.0% Percent 89.0% 87.0% 85.0% CBD Plaza South KC East Jackson Northland South Johnson North Johnson KCK Total Source: REIS, Inc.; Compiled by Integra Realty Resources, Inc.
Occupancy of Regional Markets 96.0% 95.0% 2006 2007 94.0% 93.0% 92.0% 91.0% Percentage 90.0% 89.0% 88.0% Indianapolis Columbus Denver St. Louis Kansas City Minneapolis Chicago National Avg Source: Viewpoint 2008
Cap Rates From Competing Markets Suburban Capitalization Rates 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 2006 2007 Percentage Denver Kansas City Chicago Minneapolis St. Louis Columbus Indianapolis National Avg Source: Viewpoint 2008
Transaction Volume by Market $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $ Volume (Millions) Inventory (Units) 475,000 425,000 375,000 325,000 275,000 225,000 175,000 125,000 75,000 $0 25,000 Denver Chicago Minneapolis Kansas City Indianapolis St. Louis Source: Real Capital Analytics, Viewpoint 2008
Market Status Development activity accelerating Moderate transaction volume Occupancy increasing Capitalization rates stabilize Multi-family benefits from subprime meltdown
New Developments Amenities in Demand Attached garages Gourmet kitchens Washer and dryer in unit
Johnson County Selected 2007 Activity Property Transaction Units Price Per Unit Cap Rate Lakes at Lionsgate North and South Sold 716 $88,338 5.5% Three Lakes Sold 256 $83,594 5.5% Lionsgate
Eastern Jackson County Selected 2007 Activity: New Supply Dunes at Eastland Center Chapel Ridge Apartments Complete 2008 completion (Phase I) 240 units 152 units Phase I 122 units Phase II Dunes at Eastland Center Chapel Ridge
Industrial Market Cycle
INDUSTRIAL VITALS 2007 By County Jackson Johnson Wyandotte Northland Inventory: 94,400,000 SF Inventory: 49,000,000 SF Inventory: 37,000,000 SF Inventory: 48,100,000 SF Vacancy: 8,800,000 SF 9.3% Vacancy: 3,300,000 SF 6.7% Vacancy: 2,600,000 SF 7.0% Vacancy: 3,500,000 SF 7.3% (no change) (up 0.4%) (down 0.4%) (up 0.2%) Kansas City MSA Totals Inventory: 228,500,000 SF Vacancy: 18,200,000 SF or 7.9% National Average: 8.26% (Source: Viewpoint 2008)
Rental Rate/Vacancy Rates Kansas City MSA Rental Rates Vacancy $6.00 12.00% $5.00 10.00% Rental Rate $4.00 $3.00 $2.00 8.00% 6.00% 4.00% Vacancy Rate $1.00 2.00% $0.00 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 0.00% 1996-2000 vacancy down/rents up 2001 through 2004 tough years for leasing Strong activity for large space leasing 2005-2006 showed strong recovery with no change in vacancy 2007 increased market activity 1,600,000 SF absorption Vacancy Rate: 7.9% Lease Rate: $5.05
Composition of Industrial Space Manufacturing 7% Distribution 58% Distribution Manufacturing Office/Flex Underground Office/Flex 24% Underground 11%
Major Industrial Deals In 2007 CenterPoint Properties closes purchase of land at former Richards Gebaur Fort Dodge Animal Health to build on 30 acres near College Blvd and K-7
Executive Park Sale - Keebler 1801 N Corrington 67,000 SF Sold to Monmouth Capital $72.00/SF
Jackson County Industrial Activity Former John Deere Kansas City 3120 E. 85 th Street 220,000 SF sold June 2007 for $14/SF Former House of Lloyd, Grandview 500,000 SF, Sold - $26/SF
Northland Industrial Activity Musician s Friend 702,000 SF Institutional Buyer Sold for $53/SF 7.2% Cap Rate
How does KC Measure Up Capitalization rates and sales volume KC vs.. St. Louis Indianapolis Memphis Nashville Source: Real Capital Analytics
Sales Volume - $ Millions Nashville, $184 Kansas City, $163 St. Louis, $284 Memphis, $358 Indianapolis, $186 Kansas City St. Louis Indianapolis Memphis Nashville
Nashville Cap Rates and Avg. Price 7.40% 7.60% 7.70% St. Louis Indianapolis Memphis 7.15% Kansas City $60 $50 $40 $30 $20 $10 $0 $/SF Cap Rate 9.00% 8.50% 8.00% 7.50% 7.00% 6.50% 6.00%