The Real Estate Report For Metropolitan Kansas City

2007 Block & Company Inc., Realtors Block & Company Highlights of 2006 Real Growth services, asset/property management, and in- vestment/syndication services. In order to han- dle this growth, we have substantially improved TRANSACTIONS: our support services and technology including BLOCK COMPLETED IT’S BEST the following: YEAR EVER WITH TOTAL SALES Increased support and technical staff, AND LEASING TRANSACTIONS expanded network and datacenter infrastruc- IN EXCESS OF $795 MILLION. ture; completed several systems upgrades to our communications facilities and assets to provide for virtually unlimited growth potential MANAGEMENT: while decreasing operational expenditures; com- menced implementation of Yardi in our property BLOCK’S MANAGEMENT PORT- FOLIO REACHED 18 million Block & Company, Inc., Realtors is accounting department; installed wireless capa- SQUARE FEET, AN INCREASE OF now in its 67th year of business but in bilities in all our company offices including “real 1,300,000 SQUARE FEET OVER time” property management. These changes 2005. the last few years, we have seen many along with many more that are slated for 2007 significant changes to our company. will allow us to more quickly and efficiently han- DEVELOPMENT/ dle the many requests for real estate services hile many people may know that we from both our local and national clients. CONSTRUCTION: are one of the leading real estate bro- Also, Block & Company is not just a kerage companies in the Midwest and Kansas City Metropolitan area real estate ser- BLOCK COMPLETED RENOVA- W the largest in Kansas City, they may not know TION AND DEVELOPMENt vices company anymore. As a matter of fact, PROJECTS IN 2006 EXCEEDING that we also provide development services, asset we have completed transactions in 35 different $165 million. ADDITIONALLY, management services, property management states and in 187 cities. The Company has also BLOCK CONSTRUCTION SER- services, construction management services, increased its focus on the investment sector VICES, LLC, IN IT’S fifth YEAR investments and portfolio strategies, corporate providing investment and acquisition services OF OPERATIONS, COMPLETED PROJECTS TOTALING OVER $32 real estate services, and a host of others. Block to not only our third party clients but also to 1million. has become a vertically integrated real estate a host of 1031 investors, high net worth indi- services company which enables us to strategi- viduals and our Block Income Funds. With this INVESTMENT cally and seamlessly serve our clients. increase in activity has also come an expansion With our growth, we have also fo- of our company’s focus. Block opened a St. SYNDICATION: cused on a new branding for the company, and Louis office in 2006 and intends to expand that have changed the name of our annual market BLOCK COMPLETED $309 MIL- office to a full service brokerage, development LION IN INVESTMENT SALES report to “The Real Estate Report for Metro- and investment office. We are also looking at AND RAISED OVER $38 mil- politan Kansas City”. We also have a new tag other cities where we have accumulated a large lion IN EQUITY FUNDS FOR line “Real Estate. Real Strategies. Real Suc- portfolio of properties and where we may find it SYNDICATION OF NEW ACQUI- cess”. This new tag line is exactly what we are advantageous to open future offices. However, SITIONS AND DEVELOPMENT PROJECTS. all about; we are knowledgeable about all kinds our guiding principles for 2007 and beyond, of commercial real estate, and we develop and as we expand our operations, are to make sure implement real strategies for success no matter that we can continue to provide our clients with MULTI-FAMILY: what our client’s requirement is. the best in class real estate services, to develop Our company has also grown tremen- and implement the appropriate strategies for BLOCK COMPLETED OVER $20 dously over the last several years. While just MILLION IN INVESTMENT our clients, and to be successful in achieving SALES in ITS MULTI-FAMILY a few years ago Block and Company’s annual our client’s goals. Real Estate. Real Strategies. DIVISION IN 2006, ITS third sales were around $175 million, in 2005 we Real Success. FULL YEAR OF OPERATION. exceeded $750 million in sales volume and in 2006, we reached nearly $800 million. This Lead Contributors include: Kenneth G. Block, SIOR, shows tremendous growth which has come pri- CCIM, Principal and Harry P. Drake, CCIM, CPM, marily from our development and construction Senior Vice President Kansas City OVERVIEW While the national economy was not quite as strong in 2006 as in 2005, it continued to move forward at a comfortable overall 3.4% GDP (Gross Domestic Product) rate.

his slightly lower growth rate was not only expected but such issues as the war in Iraq, taxes, the minimum wage, health implemented by design after the federal government used insurance, and others. Certainly there will be a thrust by this Tits economic muscle to pull the reins back in on the econo- majority to “force” policy changes and to potentially reduce the my. In many respects, this impressive GDP performance in light U.S.’s role in the Iraqi war. At this point however, how the new of monetary tightening by the Fed shows just how robust the majority and these projected changes will effect the economy at 2006 economy was in terms of fundamentals. large in 2007 is still unknown. The current federal funds rate of 5.25% is a “gold-

ilocks” rate which means that it is high enough to slow the economy and reduce inflationary pressures but not so high as “...city officials to choke off business investment and throw the economy into a throughout the Metropolitan recession. For that very reason, the federal open market com- area have a new common goal of mittee decided to end the streak of 17 consecutive increases in making Kansas City a destination for the the federal funds rate at the 2006 August meeting, keeping it steady at 5.25% through year-end 2006. The committee did surrounding 7 state region of Kansas, not rule out the possibility that rates may even be reduced later Missouri, Illinois, Iowa, Nebraska, in 2007. Arkansas and Oklahoma. ” Business investment continued to exceed expectations during 2006 and improvement in the trade deficit stemming from expanded business abroad and the recent drop in the cost When forecasting the economy’s performance as it re- of oil were certainly major factors in the economy’s strength. lates to the real estate industry, it is clear that there are certain Some economists felt the U.S. economy was on the edge of re- critical issues that can negatively affect the health of real estate. cession midyear 2006, particularly with the housing market reg- First, job growth is extremely important because it drives the  istering some of the largest monthly drops in housing prices in demand for new office and industrial space and also affects con- recent history. Perhaps one of the strongest factors influencing sumer spending for the retail sector. While job growth had an the impressive GDP growth rate was that inflation continued to annualized growth rate of 1.2% in 2006 and added 1.8 million be lower than expected, hovering at a rate just under 2.2% for jobs, it is expected to slow to just 1% for 2007. Another major the year. With inflation remaining at low rates, the Fed has less concern is long term interest rates. The ten year treasury aver- reason to take contractionary action again after their string of aged 4.8% in 2006 and though it is projected to rise slightly in 17 straight interest rate increases between 2005 and mid year 2007 to 4.9%, this is substantially lower than earlier estimates 2006. These increases did just what they were designed for; of 5.5%. Clearly this bodes well for real estate investment as they cooled off the economy and lowered the threat of inflation. low long term interest rates attract more capital to the real es- The Fed saw text book results from their actions, and with the tate market. But, there will be other concerns such as the rate of slowing economy, the housing bubble shrank quickly and hous- consumer spending, potential renewed increases in energy prices, ing prices came down quickly as the economy cooled. the housing market and whether it can stabilize, rising inflation Forecasters now expect GDP growth to be about 2.8% and the falling dollar, trade and budget deficits, as well as numer- in 2007, down further from the 3.4% in 2006. However, the ous ongoing geopolitical concerns that can, and do, affect the outlook for the labor market continues to hold steady with pro- stability of U.S. economic markets. Specifically, the Urban Land jections for unemployment to rise just slightly to 4.8% in 2007, and Institute (ULI) and Price Waterhouse Coopers, LLC 2007 from the yearend 2006 rate of 4.7%. This historically low un- edition of “Emerging Trends in Real Estate” expects that returns employment rate suggests that the economy is still providing on most property types will remain satisfactory, although they new job opportunities, even as worker productivity continued do expect a more modest performance in 2007, with investment at record rates. Even so, after the 2006 midyear elections, returns reverting to levels closer to historical averages. They some economic changes may be in sight as the new democratic also expect coastal markets to continue as investment meccas majority in both the House and the Senate flex their muscle on and anticipate solid real estate absorption in most real markets. Their forecast again suggests that real estate will have a value market of the city. It is as if the increased activity in downtown edge over stocks and bonds and will again be the best investment has made Kansas City much more transparent to the national vehicle by the majority of investors. And, with the increased buy- investment community and the influx of capital into the market ing power of now adult “baby boomers,” this trend is even more has been truly remarkable. Considering that the local market likely to persist. has already had nearly $4.5 billion of investment in the down- The performance of the Kansas City area economy in town market alone and over $9.0 billion of total construction 2006 somewhat mirrored that of the nation, although again at activity in the Metropolitan area at large, it is no wonder that a slightly reduced rate. The area’s gross regional product (GRP) Kansas City is being looked at with new eyes. And, city officials grew at just over 3.0% in 2006 and is expected to slow to about throughout the Metropolitan area have a new common goal of 2.2% in 2007 before again rebounding to about 2.6% in 2008. making Kansas City a destination for the surrounding 7 state The region lagged behind the national average because the indus- region of Kansas, Missouri, Illinois, Iowa, Nebraska, Arkansas tries hit hardest by the slowing economy included transportation, and Oklahoma. With nearly 8 million people living within a 4 telecommunications, utilities, and the automobile industry, which hour drive of Kansas City, the expanding amenity base including are all significant industries in the local region. While a stabiliza- the Kansas Speedway, multiple casinos, the Royals, the Chiefs, tion was projected for these industries for 2006, they continued the Wizards, the T-Bones, the Brigade, the Nelson Atkins Mu- to decline slightly throughout the year, although there is new seum, the Liberty Memorial, Union Station and a host of other further evidence that they should stabilize in 2007. attractions deliver the critical mass necessary for Kansas City Employment in the region grew at about 1.3% in 2006 to become a destination location. In addition, with major new and is expected to decline to 0.9% in 2007 where it should re- amenities under construction including the $270 million Sprint main until early 2008. As a result, the region only added 17,100 Center downtown, the $850 million Power & Light District, and jobs during 2006 which will reduce to just under 15,000 in new the $340 million Kauffman Art Center, there is more reason jobs for 2007. Most of that job growth will be concentrated in than ever to believe that Kansas City is ready to become more service industry jobs such as medical, business management, and than just a regional center for tourist activity. food services. Much of this increased activity downtown and through- Locally, there was significant activity in almost every sub- out the community has continued to be spurred on by the many



Block & Company, Inc. continues to enjoy national exposure with over 67 years of operation.

Our experience now covers 187 cities in 35 states and we’re still growing. The evolving skyline of Kansas City now prominently displays the new H&R Block building, the Sprint Center, the Bartle Hall expansion and the burgeoning Power & Light District.  tax incentive programs that have been available including en- also ranked #1 in the Midwest and #11 nationally as a place for terprise zone incentives, tax abatement programs, TDD’s, Star entrepreneurs to start a business. Kansas City also remains a 5 bonds, MODESA, and tax increment financing (TIF), but as not- star metro area which designates it as one of the prime cities for ed in last year’s report, continued activity both in Kansas and future business locations and overall business climate. Kansas Missouri to reduce the definition of eminent domain and to force City also ranked #9 nationally in logistics, #6 on Kipplinger’s tax increment financing reform may substantially reduce the use list of 50 smart places to live, and is recognized in the top 25 cit- of these tools in the future. This, in turn, would diminish those ies nationally for availability of quality public education. Kansas major projects where these tools are essential. Specifically, urban City was also one of the top 10 metros for economic strength, projects, or projects in outlying areas where infrastructure is not and one of the top 10 cities in the country for philanthropy. in place, will not work economically because the incessant rise in Kansas City has the nation’s second largest rail hub with 5 major construction prices make the economics of providing space for railroads and more tons of freight pass through Kansas City than lease in these areas simply unworkable. Only incentive programs any other city in the nation. It also is the third largest trucking which take part of the infrastructure costs out of the developer’s hub due to the fact that it is only one of 5 cities where 3 major hands will allow this type of development to move forward. interstates meet; Kansas City has more freeway miles per capita The 2004 annual report noted that Kansas City was than any other city in the nation as well. Kansas City ranked truly “a hidden gem,” but it is not so hidden anymore. It has be- third in a national comparison of distribution expenses for major come increasingly clear that investors, tourists, and people look- cities. As it relates to lifestyle merits, Kansas City has been ing for a good place to live have discovered Kansas City and the known as the “City of Fountains,” with over 200 fountains and word is out. Accordingly, there are many reasons why Kansas more than any other city in the world except Rome. Kansas City City holds a high ranking in both lifestyle and business catego- was also named as one of the top destinations for arts ranking ries. For example, on the business side, Kansas City ranked #16 16th nationally, and will only get better with 3 major venues out of the top 40 real estate markets for business expansion. It opening their doors in 2007 including the new $200 million Block building at the Nelson Atkins Museum, the Copaken Stage metropolitan area. at the Repertory Theatre, and the Nerman Museum of Contem- Other organizations, such as the Kansas City Area Life porary Art at the Johnson County Community College. With a Sciences Institute (KCALSI), have partnered with a number of capital budget of $325 million, the Kansas City Performing Arts stakeholder institutions with the goal of discovering information Center will join this group with its opening in 2009. A study by and solutions for better plant, animal, or human health. Life the Arts Council of Metropolitan Kansas City noted that the arts sciences research expenditures will likely continue with double and cultural organizations and their audiences produced over digit increases over next five years thanks to KCALSI’s ten year $280 million in economic impact within the Kansas City Metro- goal of achieving $500 million a year in life sciences research politan region including an increased number of jobs, household expenditures. In 2006, these expenditures reached nearly $300 income, and government revenues. So it is clear that not only million annually which was another significant increase over the can the arts and cultural activities be enlightening to residents $265 million in 2005. The efforts of this organization and of the community, but they can also result in economic benefit its stakeholder institutions including the Stowers Institute for to the region. Medical Research, the University of Kansas Medical Center, the Perhaps one of the most desirable highlights of Kansas University of Missouri-Kansas City Health Sciences Center, Chil- City is that it ranks as one of the shortest commute times to dren’s Mercy Hospital, the Midwest Research Institute, Kansas work because of the city’s abundant grid lock free roads. Ac- State University, and a host of others, are helping Kansas City cording to a study by American City Business Journals, Kansas become known as the center for life sciences and bioterrorism City was the third least stressful city to live in, based on social research in the nation. economic factors such as poverty, unemployment, and insuffi- The creation of Kansas City SmartPort in 2001 by the cient housing. Greater Kansas City Area Chamber of Commerce, the Kansas Kansas City also continues to be one of the least expen- City Area Economic Development Council (KCAEDC), and the sive cities in the county for health insurance, ranking number 2 Mid-America Regional Council (MARC) has further capitalized on the list of the 50th largest metros. on the fact that Kansas City is at the center of both the NAFTA

rail corridor heading from Mexico to Canada as well as the Trans- “Kansas continental corridor from the east to the west coast. Now over $9 billion of global imports travel through Kansas City every City also is home to year. KC SmartPort is also having a significant role in planning some of the country’s largest the nation’s first inland Mexican customs facility for exporting life sciences companies and research goods to that country. In essence, U.S. exports would clear institutions. In fact, Kansas City dominates Mexican customs in downtown Kansas City and go directly into Mexico without stopping at the border. This customs facility, the animal health sphere with the presence which to date has been delayed by political wrangling, should  of companies representing nearly 40% open in the first quarter of 2007 and should significantly ac- of the $14.5 billion a year business in celerate the time it takes to ship goods into Mexico. the country and over 26% of the There is also the expectation of increased distribution activity in Kansas City due to the new Mexican rail line, the business worldwide. ” Lázaro Cárdenas-Kansas City corridor, which was made possible when KC Southern acquired Mexican railway Transportacion Ferroviara Mexicana. This acquisition created a seamless rail Kansas City also is home to some of the country’s larg- system from the heart of North America all the way to the west- est life sciences companies and research institutions. In fact, ern port of Lázaro Cárdenas and Michoacan. As part of this Kansas City dominates the animal health sphere with the pres- system, Mexican customs has agreed to cut the cost of trans- ence of companies representing nearly 40% of the $14.5 billion porting goods across the border from $100,000 per shipment a year business in the country and over 26% of the business to $55,000. This system will allow goods from Asia, which worldwide. Some of the major players located in Kansas City previously passed through Los Angeles and Long Beach ports, include Bayer Animal Health, Fort Dodge Animal Health, Boeh- to come through the Lázaro Cárdenas port and then up into the ringer Ingelheim Vetmedica, Hill’s Pet Nutrition and Intervet, Kansas City region by rail. This provides great opportunities for Inc. Bayer Animal Health is taking actions by providing seed Kansas City particularly because the city boasts the most foreign money for the Kansas City animal health and nutrition incentive trade zone space of any city in the country and the most under- with the goal of increasing Kansas City’s share of the national ground warehouse space in the world. This potential route has animal health market to 60% over the next 10 years. Kansas also spurred new announcements including KC Southern and City also has a commanding presence in life sciences research, Centerpointe Property Trust’s announcement of their 1,400 thanks in part to the Stowers Institute for Medical Research with acre intermodal facility at the former Richards-Gebaur Air Force its $2 billion endowment, making it the second largest of any life base south of Grandview, the $1 billion 1,000 acre intermo- sciences institution in the country and the largest located in one dal facility proposed by BNSF Railway in conjunction with The The $370 million IRS Regional Service Center nears completion and will be occupied in early 2007, with over 8,000 new employees to Midtown.

Allen Company in Gardner, Kansas, and Kansas City’s proposed $50 million Kansas City Missouri Public Library, the $26 million development of 600 acres of distribution and office uses at the Todd Bolender Center for Dance, the $15 million renovation KCI International Airport with developer Trammell Crow. The of the Music Hall at Municipal Auditorium, the $20 million im- City’s proposed development at KCI was outlined in the “Kasar- provement program for the Wheeler Downtown Airport, the $7 da Plan,” which was a blueprint for an “air focused city within million Rep Theatre project, and a host of others. a city” and the city’s recent acquisition of the former Farmland As always, Kansas City will face challenges in the years Industries headquarters building in 2006 showed their intent to ahead. But one major challenge that Kansas City successfully  “jump start” development of this project. met in 2006 was the approval by voters of a 3/8th cent sales tax to finance over $500 million of renovation projects to Kauff- “But one major challenge that Kansas man and Arrowhead Stadiums. Such improvements will surely expand revenues to the community from these major league City successfully met in 2006 was the sports franchises. And efforts are continuing by the new Kansas approval by voters of a 3/8th cent City Wizards owners to find, construct and finance a new world class stadium that will also provide new youth soccer facilities. sales tax to finance over $500 million The hunt is also on for a professional hockey and/or basketball of renovation projects to Kauffman team in addition to the Kansas City Brigade as headliners for the and Arrowhead Stadiums.” new Sprint Arena. All of these amenities add to the many other benefits of the community which make Kansas City a great place to live, work, and play. Major projects in the rebirth of Kansas City included the 2007 will again bring gradual growth in population, $850 million KC Live Entertainment District, $745 million of jobs, and GRP to the community. Kansas City’s strong leader- residential projects, the proposed $400 million East Village Proj- ship and the abundance of major projects now underway can ect, the $370 million IRS Regional Service Center, the $340 mil- only improve the desirability and attractiveness of the communi- lion Kauffman Performing Arts Center, the $276 million Sprint ty. Provided the increasingly strong public/private partnerships Center arena, the $200 million federal office building renova- throughout the metropolitan area persists, it is expected that tion, the $200 million Federal Reserve Bank of Kansas City, the Kansas City and its real estate investment activity will remain at $199 million Kansas City Star Press Pavilion, the $138 million increasingly high levels in 2007 and beyond. H&R Block Headquarters, the $135 million Bartle Hall expan- sion, the $120 million Childrens Mercy Hospital expansion, the Lead Contributors include: Kenneth G. Block, SIOR, CCIM, Principal Kansas City DOWNTOWN DEVELOPMENT

cant growth in residential development over the last several years, it’s interesting to note that in the downtown council’s 2004 resident’s survey found that 98% of respondents who planned to leave downtown, rated grocery shopping as incon- venient or lacking. They also noted that families with children were not coming to downtown due to a scarcity of amenities and further noted that only 5% of downtown households included children. Well, these problems have been mostly addressed in the last two years and in evidence, over 2,700 new residents have moved into the urban core during this period. Also, more than $507 million of new residential development has occurred in downtown since 2000. Over 2,100 residential units have been either recently completed or are currently under construc- tion, and with another 4,357 proposed units on the boards, together with another 1,560 units that are envisioned, opportu- nities for increased residential population, the major key to the success of downtown, is literally right around the corner. The recent announcement of a new Cosentino’s down- town gourmet market coming to the $850 million Power and Light District will also address the lack of a grocery store down- town. Additionally, a host of new amenities are also planned including many new restaurants and lounges such as Gordon Biersch Brewery and Restaurant, Mosaic Lounge, Famous The Liberty Memorial, the only World War I me- Dave’s Barbecue, Chipotle Mexican Grill, Bristol Seafood Grill, Vinino, China-BAR, six movie screens to be operated by AMC  morial in the country, which has undergone a $46 million renovation, opened year end 2006. Main Street Theatre, the Midland Theatre, Lucky Strike Bowling Lanes, Jos. A. Bank Clothing and many other new business yet If you ask most real estate experts what makes a great city, in- to be announced. The Power and Light District will certainly variably they will say a growing, vibrant downtown. Well if these help end what has been a daily exodus by most of the downtown experts are right, then Kansas City is definitely on its way. While population after 5:00 p.m. The completion of this District will the changes in downtown over the last few years have been quite basically transform downtown to more of a 24 hour destination evident to both area residents and out of town visitors, there for people in a six state region. And with the completion of this remains much anticipation about the many projects currently un- first phase of 425,000 square feet of retail and entertainment der construction as well as those still in the planning stages. space, a second phase containing nearly 1,000 residential new Downtown is defined as a complex combination of sev- units and as much as 1 million square feet of office space will be en niche markets from 31st Street on the south to the Missouri up next. The Power & Light District will also feature innovative River on the north and from State Line on the west to 71 High- architecture, open storefronts, broad brick paved sidewalks, ex- way on the east. These include the Central Business District, tensive landscaping, fountains and parks, almost none of which the River Market, the Crossroads Art District, the Freighthouse have been located in the downtown area before. District, the West Bottoms, Crown Center, and East Village. Other major projects in the Central Business District These 7 submarkets all have had either completed developments include the Sprint Center Arena which will seat 18,000 people or have projects in the planning or construction phases and as and house the National Collegiate Basketball Hall of Fame. The this redevelopment continues, the 50 year downward trend of Center will be used for athletic events and other live entertain- our downtown is finally being reversed. It appears that even our ment. Currently there are discussions ongoing with both bas- hometown leaders now understand a city does not thrive unless ketball and hockey franchises with the hope that the revival of its downtown thrives. downtown will attract new professional teams to our city. Also, First and foremost to the continued success of our the completion of the Bartle Hall Convention Center, the Federal downtown is residential growth. While there has been signifi- Reserve Bank of Kansas City, and the new Internal Revenue Ser- vice Center are three more major projects in the downtown core. These three projects alone, represent over $700 million in new investment, total over 1.7 million square feet of new space, and are expected to bring over 10,000 employees to the urban core. The new Kansas City Star press pavilion which began production recently, together with the newly renovated Hilton President Ho- tel, which opened 214 rooms at 13th & Baltimore, add another $245 million of projects completed this last year. Perhaps one of the most exciting projects currently planned for the downtown is the proposed new Kauffman Center for the Performing Arts, which is located just south of the Central Business District. Performing Arts aficionados are already mak- ing comparisons between the Kauffman Center and the famed Walt Disney Concert Hall in Los Angeles, California. The official groundbreaking for the $326 million facility was held on Octo- ber 6, 2006, and with financial backing now in place, this world class performing arts center designed by the world renowned ar- chitect Moshe Safdie, will truly put Kansas City on the map. The Kauffman Center will consist of three performing centers with a total seating capacity of nearly 3,700 people. The Kansas City Ballet, the Kansas City Symphony, the Lyric Opera, a restaurant and a Café will be housed in the Center. Perhaps one of the most exciting and quickly evolving projects on the east side of the Central Business District is the The 438,071 square foot Commerce Tower building East Village. Proposals include 12 square blocks east of the Civic sold to out of town buyer Hertz Investment Group, Mall between 10th and 11th Streets. The JE Dunn Construction Inc. for just over $20 million in 2006. Company will anchor this development with their new 175,000 square foot, five-story headquarters. Additionally, plans for from the suburbs to downtown and focusing national attention nearly 1,000 residential units and 85,000 square feet of ad- to one of the largest entertainment draws in the Metropolitan ditional retail space will bring the total investment in the project Kansas City area. Even innovative concepts for zoning are being to over $400 million. More importantly, the development of put in place by city officials and they are beginning to make a dif- East Village will remove blight in one of the remaining weak and ference. For the first time, there is a recognition of the profound deteriorating areas of the downtown core and will truly begin to differences between zoning and parking for urban areas versus  reshape downtown. suburban environments. A new zoning overlay allows for first Another exciting development parcel just north of the floor retail use without meeting suburban parking requirements. River Market is the 55 acre parcel adjoining the Richard L. Berk- While this may seem to be a small municipal decision, this one ley Riverfront Park. This project under the review and control change is having a tremendous impact on the success in the of the Port Authority of Kansas City, may be moving closer to Crossroads and Freighthouse Districts and is expected to spur reality and would be developed by Forest City Enterprises, Inc. additional new development opportunities. The development would consist of a water oriented, office, retail, What’s in store for Kansas City’s downtown core in and residential center. Recently, there were high level discussions 2007 and beyond is becoming more clear. Increased residential with representatives of the General Services Administration for population, a host of new retail, restaurant, and entertainment the possibility of constructing a building of more than 500,000 amenities, and perhaps even a new professional sports teams square feet to house various GSA groups. While the project is may be coming to our city. While these new development proj- still in the early stages of analysis, this truly could transform ects cause a disruption of services, traffic congestion, and frus- Kansas City’s Riverfront District to not only a place to work and tration, 2007 will be the year when downtown truly sees the reside, but as an exciting place to visit for tourists from around beginning of its transformation as many of the development proj- our region. ects open for the first time. This continued progress and excite- The Crossroads and Freighthouse Districts are also on ment about these new downtown developments is truly expected the move. Numerous new announcements totaling nearly 1,200 to bring increased interest to Kansas City, both by regional and units have been made regarding new residential projects in the headquarter office, as well as increased real estate investment, Freighthouse and Crossroad Districts, including the proposed which should spur more new and exciting opportunities for our ground up 17 story, 145 unit Broadway Condominiums at 19th downtown. and Broadway. Also, the First Friday’s that were started over a Lead Contributors include: Matthew L. Levi, CCIM, Vice President; and year ago in the Crossroads Art District are truly bringing people Matthew J. Spachman, Vice President Kansas City OFFICE Market

n both the national and local scene, the office market the last half of 2006, local landlords finally began to realize that rally that began in late 2005 continued into 2006. Na- new office construction, although greater than last year, has Otionally, office vacancy fell by over 30 basis points dur- been limited to all but build-to-suit or pre-leased projects. In addi- ing the third quarter, which marked the tenth straight quarter tion, increased construction costs are making relocation to new of decreasing vacancy. Office vacancy on the national level was offices more expensive for tenants, and large blocks of space in below 13.5% at year end, down from around 16.9% at the bot- more desirable buildings have been leased resulting in a decrease tom of the market in 2003 and 15.1% a year ago according to in overall vacancy. These changing conditions have allowed land- Reis, Inc. By the end of the third quarter 2006, overall vacancy lords to begin to increase both quoted and effective rents in all in the metropolitan area was down to 14.1%. During that same but the softest submarkets during 2006. This trend is expected time, thirty-seven new buildings with a total of over 1,484,000 to continue in 2007 with the newer better quality properties square feet came on the market. Even so, there was a tightening in the market that resulted in an increase in quoted rents. At the leading the way. Two factors seem to have worked together national level, quoted rates increased 1.8% and effective rents to keep landlords from reacting faster to these market realities. increased 2.3% in the third quarter alone. Locally, during the First, the larger, generally more desirable projects are primarily first three quarters of the year, rates increased a total of 1.26% institutionally owned and their ownership tends to take a more and another 0.4% in the last quarter as landlords began to react long range view of cyclical market conditions thereby tending to the decreasing vacancy rates throughout the market, thus to hold rents longer, even in the face of decreasing occupancy. beginning to reduce the gap between asking rent and effective Secondly, the Kansas City Metro Area has historically been slow rents to the tightest it has been in four years. The potential to recover from an economic slow down or higher than normal for continued increases in both quoted and effective rents and vacancy rates due to the relatively slow steady growth of the increased net absorption appears to be poised to continue on a local economy. national and local level in 2007 albeit at a reduced rate. What, if anything, will fuel a continuation of the in- Despite the increasing signs of a slowing economy in creases in quoted rents and effective rents in the coming year?

 The 72,368 square foot 9233 Ward Parkway building was acquired by a Block & Company sponsored investment group and underwent nearly $1 million of renovations. In each of the largest markets, dynamic influences will 580,632 square feet during the third quarter, and fell slightly to have an effect. In the Downtown market, the excitement of 490,226 square feet in the fourth quarter according to CoStar the Power & Light District, the completion of the Sprint Center Group, Inc. Arena and continued conversion and occupancy of residential The end of the fourth quarter saw the beginning of a units will all help refocus the market on Downtown and help in- drop off in absorption for Class A buildings with negative ab- crease demand for office space. The high vacancy and relatively sorption of 123,000 square feet. However, Class A office space cheap rents will motivate additional expansion which will allow led the way with 659,380 square feet of absorption during the landlords to begin to increase rates. On the Plaza, already one third quarter. The big tenant spurring that number was H & R of the tightest markets with the highest rents, the high cost Block’s move into 500,000 square feet of its new headquar- of construction and relatively low vacancy will keep rents up. ters building. Even with that anomaly, the result represents a  Along College Boulevard, the recent sale of Corporate Woods dramatic increase over the prior quarter for this building class at a premium price will provide all the motivation the new own- which recorded net absorption of only 64,800 square feet in ers need to begin to increase rents, and because of its size, as the second quarter and 127,000 square feet during the first rents increase in Corporate Woods, those increases tend to bring quarter. At the same time, the average quoted rent for class A rent in the rest of that submarket up. However, overshadowing space has increased from $19.45 per square foot at the end of the market is the relentless continuation of construction cost 2005 to $20.30 at the end of the third quarter, an increase of increases for tenant improvements which have become an impor- 4.4% in twelve months. While this is impressive, it is still below tant factor in driving rents up as well. the national average for rent increases. While the rest of the country really began to experience Class B space has likewise demonstrated positive net a dramatic turnaround in office absorption during 2005, Kansas absorption throughout the year, although it dropped signifi- City did not begin to see much of an upturn in market activity cantly from the first quarter lead of 273,127 square feet to until the later part of that year. Fortunately, that improvement the third quarter level of negative 77,656 square feet, it then has carried over throughout 2006 and, contrary to the national went back up to a whopping 535,632 square feet in the fourth trend which has seen positive absorption begin to decline slightly quarter. The reason was a slowing economy felt by tenants oc- in the last two quarters as the economy continues to slow, ab- cupying B space which typically are more likely to be smaller, sorption on the local scene has continued to increase through local or regional firms, and a continuation of B tenants moving the end of the year. up to A spaces where a few bargains were still available. At the Net absorption for the Metro area through the end of same time average quoted rents for B space still increased from 2006 was a positive 1,574,000 square feet and marked the $16.63 per square foot at the beginning of the year to $16.66 fourth straight quarter of positive absorption. It was a robust at the end of the third quarter. This is further substantiation The 104,821 square foot Pinnacle II and the 58,217 square foot Pinnacle IV projects are slated to be- gin construction in early 2007 to meet the increasing demand for Class A office space in South Johnson County. of the national trend toward increased rents, but at a reduced SOUTH JOHNSON COUNTY pace. Class C space is the only category that experienced As of the fourth quarter 2006, this submarket of 21.8 negative absorption during the period. Class C space, which million square feet reported approximately 2.3 million square is still experiencing conversion of some older buildings to resi- feet available, which includes approximately 122,837 square 10 dential or condominium use in the Central Business District and feet of sublease space. This equates to a vacancy level of 9.9% Freighthouse District, posted a positive absorption of 48,000 or 10.4% when including sublease space. This is a slight drop square feet through the end of the third quarter along with a as compared with 11.2% reported at the end of 2005. Class slight increase in rent. A properties reported a slight increase in vacancy levels during 2006 from 12.4% to 14.0% out of a total available inventory Overall, the Kansas City market is showing the same of 4.77 million square feet. Approximately 666,053 square trends as the national office market with continued reductions feet was reported vacant which included approximately 47,301 in vacancy and corresponding increases in quoted and effective square feet of sublease space within the Class A properties. rents. The difference here is increases in market activity and quoted rent seems to be lagging behind the national trends seen on both coasts and in the larger mid-west cities by about two quarters. Nationally, the slow down of the economy is already “...the relentless being reflected in slower absorption and less aggressive rent in- continuation of construction cost creases experienced during the last two quarters of the year. increases for tenant improvements which That trend is expected to begin to be felt in the Kansas City have become an important factor in market across the board during the first half of 2007. This anticipated further slow down in the market place may very driving rents up... ” well be hastened by the projects currently under construction, which total 1,041,000 square feet, the largest of which are the 220,000 square foot West Edge project on the Plaza which is Class B properties, which account for approximately 51.0% pre-leased to Bernstein-Rein and the 230,000 square 16.3 million square feet of this submarket, reported a decrease foot mixed-use Mission Farms project in Leawood. in vacancy levels from 10.8% to the current level of 9.3%. At the end of 2006, approximately 1.5 million square feet of class a slight change in vacancy levels from 9.2% at the end of 2005 B space remained available for lease as compared to 1.7 million to 8.7% reported at the end of 2006. Within the 160 Class square feet reported vacant at the end of 2005. Approximately B buildings surveyed, which provide approximately 6.97 million 73,736 square feet was available for sublease within the Class square feet, vacancy levels decreased to 10.7% or 748,457 B properties as compared to 95,789 square feet available for square feet from the 11.7% or 809,000 square feet reported at sublease at the end of 2005. the end of 2005. Class C properties reported 160,607 square Class C properties showed a slightly brighter picture feet, or 12.3%, available as of the end of 2006 compared to during 2006. This sector of 827,216 square feet within 46 164,776 square feet, or 12.6% at year end 2005. Leasing properties reported 92,056 square feet available at the end of activity remained relatively quiet in this submarket during the 2006 as compared to 100,724 square feet vacant at the end of year with net absorption of 79,044 square feet as compared to 2005. 80,519 square feet during the same time period in 2005. The South Johnson County office market as a whole dur- Rental rates within the submarket decreased slightly ing 2006 reported positive net absorption of 671,762 square during the year to the current level of $15.99 per square foot feet. This is a substantial decrease from the 833,140 square – down from $16.42 per square foot reported at the end of feet of office space absorbed during the calendar year 2005. 2005. Rental rates, however, continued to show modest gains to an average of $20.05 per square foot as compared to $19.57 re- ported at the end of 2005 for all classes of properties. CENTRAL BUSINESS DISTRICT AND SURROUNDING SUBMARKETS

NORTH JOHNSON COUNTY The Central Business District of Kansas City consists of several distinct areas. The core downtown market contained The North Johnson County office submarket contains within the “loop” is formally known as the CBD. Just to the approximately 9 million square feet of office space within 241 south of the CBD is Crown Center and the Freight House Dis- properties. This submarket reported an overall vacancy of slight- trict, and to the west of the CDB is the West Bottoms. The total ly more than 972,000 square feet, including approximately submarket consists of 21,677,754 square feet in 216 buildings. 30,182 square feet of sublease space. This equates to a slight Overall vacancy reported as of the fourth quarter 2006 was decrease in vacancy levels from the 11.7% reported at the end of 15.9%, or 17.5% when accounting for sublease space. Total 2005 to the current level of 10.8%. Class A properties, which available space was 3.8 million square feet, including 342,285 consist of 728,903 square feet within 7 buildings, also reported square feet of sublease space. Class A properties within the core

11 vacancy levels increased from 8.3% (231,886 square feet) reported at the end of 2005 to 10.9% (305,600 square feet) at the end of 2006. The Freight House District reported a substantial decrease in va- cancy levels during the calendar year 2006. Of the 36 buildings surveyed within the district that total approxi- mately 1 million square feet, 15.0% (155,437 square feet) remained avail- able for lease at the end of 2006. This is a significant decrease when compared to the 25.1% vacancy rate (258,818 square feet) reported at the end of 2005. The Downtown submarket reported positive net absorption of 131,106 square feet during the cal- endar year 2006 as compared with a negative absorption of 111,343 square feet during the calendar year 2005. Overall effective rental rates, despite the positive absorption num- bers, remained relatively stable at $15.86 per square foot at year end compared to $16.03 per square foot at the end of 2005. The Downtown market con- tinues to see increasing levels of ac- The 112,678 square foot Highlands I office building was sold by Opus tivity spurred by such notable new to DBSI-Discovery Real Estate Services at an 8.06% CAP Rate. projects as the H&R Block Corporate 12 CBD market, as of the end of 2006, reported a modest de- Headquarters totalling 500,000 square feet, the new Sprint crease in vacancy levels to 18.3% or 1.3 million square feet as Arena currently under construction as well as the entertainment compared to 21.7% or approximately 1.5 million square feet district being developed by the Cordish Company. Adding a new reported during the fourth quarter of 2005. Class B properties, level of activity and stability to the CBD are numerous residential which make up 10.4 million square feet of the overall submarket, condo projects either completed or under construction within reported an increase in vacancy from 12.9% to the current level this submarket. of 14.6%. As of the end of 2006, Class B properties had a total of 1.5 million square feet vacant. Vacancies in the 87 older Class C properties experienced a slight increase from 20.0%, or just over 732,000 square feet, to 23.8%, or 879,974 square feet, PLAZA/MIDTOWN during the calendar year 2006. The Crown Center submarket which is a residential, of- The Plaza/Midtown submarket consists of the three fice and entertainment district consisting of 5 million square feet areas: Midtown, Country Club Plaza and Brookside. These sub- in 32 primarily Class A & B buildings, reported a slight increase markets provide a total of 7.6 million square feet of office space in vacancy levels. Vacancy levels during 2006 increased slightly within 144 buildings. from 14.2% to the current level of 15.1% reported as of the The Country Club Plaza submarket is by far the most end of 2006. Class A buildings reported a decrease in vacancy desirable area of this submarket and contains nearly half of from 23% reported as of the end of 2005, or 462,730 square the total inventory, or 4.3 million square feet. Approximately feet which included 159,819 square feet of sublease space, to 440,748 square feet, or 10.2%, remains available for occupan- the current level of 20.7% with 417,332 square feet in vacant cy as compared to 267,372 square feet, or 6.2%, reported at square feet including 100,912 square feet of sublease space the end of 2005. as of the 4th quarter 2006. Within the 20 Class B buildings, Class A properties, which account for nearly 2 million square feet of the Plaza inventory, experienced a substantial in- reported an overall vacancy of 23.2% at the close of 2006 as crease in vacancy levels from 2.5% in late 2005 to the current compared to 21.1% at year end 2005. Of the 1.2 million square level of 6%. Of the 31 Class B properties, overall vacancy levels feet available for lease, approximately 440,000 square feet is increased from 10.6% reported at the end of 2005 to the cur- contained within the former Quintiles Building located just east rent level of 15.9% of Interstate 435 at the Grandview Triangle. The Cerner Corpo- The Midtown submarket, which consists of 3 million ration has recently announced plans to occupy all of the vacant square feet in 82 buildings, reported 13.9% or 416,331 square space within the building in early 2007. Taking into consider- feet, including approximately 22,307 square feet of sublease ation this activity, vacancy rates will decrease substantially from space, vacant at the end of 2006. This is a slight increase from the 21.1% levels reported at the end of 2005 to 14.9% when it the 375,515 square feet, or 12.5%, reported at the end of is occupied. Sublease space, which once plagued this submarket, 2005. The Midtown submarket is made up of primarily older is no longer a factor. Virtually no sublease space was reported Class B and C properties. Half of the total inventory within this available with this market at the end of 2006. Class A Build- submarket, or 1.6 million square feet, is within 34 Class B build- ings, which consist of approximately 1.54 million square feet ings and they accounted for 246,061, square feet of the total in 8 buildings, reported a substantial increase in vacancy levels available space. from 14.0% (216,109 square feet), to 24.8% (382,773 square The Plaza/Midtown market, during the calendar year feet) at the end of 2006. Of the 69 buildings totalling 3.3 mil- 2006, reported a negative absorption of 211,353 square feet. lion square feet that make up the Class B market, vacancy levels Average rental rates however, increased from the $18.15 per remained relatively stable at 24.7% (820,872 square feet) as square foot reported at the end of 2005 to $18.60 per square compared to the 25.9% (850,546 square feet) reported at the foot reported at the end of 2006. end of 2005. Class C buildings make up only 438,166 square feet within this submarket, and reported a substantial decrease in vacancy from 10.3% to 5.8% by year end 2006. SOUTH KC The Ward Parkway corridor, which makes up approxi- mately 2.98 million square feet of the South Kansas City office The South Kansas City submarket provides approxi- market, reported a substantial increase in vacancy levels from mately 5.3 million square feet of office space within 97 prop- the 11.9% reported at the end of 2005 to the current level erties over 10,000 square feet in size. This active submarket of 18.6%. Class A properties within this submarket reported a

13 The 260,000 former Farmland Industries headquarters at KCI Airport was purchased by KC Aviation Department to jump-start their new 640 acre business park.

substantial increase in vacancy levels from 2005 when vacancy 19.0% (1,350,016 square feet) reported vacant at the end of stood at 0%. Currently, 166,400 square feet of Class A space 2005. Four Class A buildings are located within this submarket. is available for lease within the Ward Parkway corridor which Vacancy levels in Class A properties were 0.7% this year as com- equates to a vacancy level of 14.3%, but over 88,000 square pared to 0% at the end of 2005. 14 feet is soon to be occupied by Burns & McDonnell expanding in Class B properties, which make up nearly two-thirds of the 9201 State Line Building. Class B properties, which consist the total submarket inventory (5.3 million square feet), showed of 36 buildings containing 1.65 million square feet also reported vacancy rates of 25.1 % (1,332,783 square feet) at year end a modest decrease in vacancy from 24.7% (407,674 square 2006. This is a slight increase from the 24.4% (1,289,987 feet) at the end of 2005 to the current level of 20.1% (331,764 square feet) vacant at the end of 2005. Of the 66 Class C square feet). buildings containing approximately 1.35 million square feet, va- The South Kansas City submarket continues to attract cancy levels increased from 6.6% to the current level of 8.1% new and expanding companies. During the calendar year 2006, (113,631 square feet). the South Kansas City submarket reported positive net absorption of approximately 121,477 square feet as compared to a nega- tive absorption of slightly over 300,000 square feet reported for the calendar year 2005. Rental rates however decreased sub- “The South Kansas stantially from an average of $16.80 per square foot reported City submarket continues at the end of 2005 to the current level of $13.71 at the end of 2006. to attract new and expanding companies. ” NORTH OF The RIVER The North of the River office market reported nega- The North of the River office market consists of approxi- tive net absorption of approximately 26,615 square feet during mately 7.1 million square feet in 176 buildings. Overall vacancy 2006. Rental rates also were down with the overall average rate levels of 19.9% (1,423,418 square feet) were reported at the per square foot decreasing from $14.82 reported at the end of end of 2006. This equates to a very slight increase from the 2005 to the current level of $13.73. EAST JACKSON COUNTY MISSOURI average of $15.04 per square foot during 2005 to the current average rate of $14.21 per square foot. The East Jackson County submarket market stretches east from the Kansas City CBD to Blue Springs, and from Liberty in the north, down to Interstate 470 on the south. The market consists of 185 building containing approximately 5.75 million SOUTHEAST JACKSON COUNTY square feet. At the end of 2006, approximately 1,034,170 square feet, or 18.0% of the overall submarket, remained va- The Southeast Jackson County office market is a relatively small cant as compared to 870,962 square feet (15.5%) at the close segment of the office market that accommodates small to me- of 2005. Class A properties, which consist of 348,646 square dium sized service companies. Consisting of 58 buildings con- feet within 5 properties, continue to have the highest vacancy taining a total of 1.58 million square feet, 252,045 square feet, at 29.2%, even with 101,729 square feet available for occu- or 15.9% of the submarket, remained available for occupancy pancy. Class B buildings provide a total of 3.1 million square feet at the end of 2006. This represents a modest decrease from within this submarket and report 18.4% (583,288 square feet) the 17.8%, or 276,190 square feet, reported available at the vacancy levels as compared to 14.3% (437,828 square feet) end of 2005. Of the 34 Class B properties, which make up reported at the end of 2005. Class C office space, consisting of approximately two thirds (1,058,107 square feet) of the total 2.22 million square feet in 94 buildings, reported vacancies of inventory, reported 18.1% or 191,326 square feet available at 15.3% or 340,853 square feet, which is a negligible increase the end of 2006 as compared to 20.1% vacancy reported at from the 14.7% or 323,137 square feet reported vacant at the the same time period of 2005. For the 19 Class C buildings end of 2005. containing approximately 349,693 square feet, vacancy levels East Jackson County continued to see an increase in decreased from 10.8% to 9.5% by year end. activity primarily due to newer office projects in the medical and Leasing activity within this submarket during the cal- service sub-sectors that are either completed or under construc- endar year 2006 produced a positive net absorption of approxi- tion to fill a pent up demand for new quality office facilities. mately 51,244 square feet as compared to a positive net absorp- Net absorption of office space in this submarket during 2005 tion of 71,889 square feet reported during the calendar year was reported at 98,330 square feet. However absorption took a 2005. Rental rates continue to increase and this submarket turn during 2006 with a negative absorption of 109,435 square reported an average direct lease rate of $16.89 per square foot feet. Rental rates also decreased during 2006 from an overall as compared to $15.66 reported at the end of 2005.

15 The 126,383 square foot Mission Corporate Centre was sold to a Block & Company sponsored invest- ment group at an 8.5% CAP Rate.

New Construction: In addition, the General Services Administration is beginning to 16 explore the possibility of building a new building downtown in Local new construction deliveries topped 1.4 million which to consolidate 500,000 square feet of its offices. Ground square feet in 2006, the majority of which was pre-leased or is also expected to be broken in early 2007 on the final phase of build to suit space and fortunately did not have a telling im- the Pinnacle Corporate Centre project in Leawood, Kansas. The pact on overall vacancy rates in the marketplace. At present, four-story, 104,000 square foot Pinnacle Corporate Center II in addition to the aforementioned West Edge and Mission Farms and the three-story, 58,000 square foot Pinnacle Corporate Cen- projects, Applebee’s International is planning to complete their tre IV will complete the four building complex started in 2001 by new 150,000 square foot headquarters building late in the year a development group led by Block & Company. in Lenexa. Park Place is under construction in Leawood and will have 235,000 square feet of office space for lease in a 7 story office tower plus another 118,000 square feet above its retail Rental Rates: shops. In the Northland, Briarcliff is set to break ground this winter on a new 210,000 square foot building. Corporate Medi- The average full service rental rate for both direct and cal Plaza III, the last 61,000 square feet of the three building sublease space in the 2,746 buildings surveyed by the CoStar Corporate Medical Plaza project at Interstate 435 & Nall is under Group across all classes of buildings in the Metro area was construction in Leawood and the 42,000 square foot Legacy $16.95 per square foot. This represents an increase of .83% Medical Plaza building is nearing completion in Lee’s Summit. over the average at the end of 2005 and is further evidence that In the public sector, re-development of the seven block although Kansas City landlords are enjoying an increase in rental Power & Light District by the Cordish Group in the Central Busi- rates, the increases here are lagging behind those reported on ness District continues, and the IRS is moving into their new the national level. The average Class A quoted rent was $20.30 facility in the Crown Center/Union Station area. JE Dunn is at the end of 2006, average Class B quoted rent was $16.66 planning to develop its new corporate headquarters and spear- and average Class C quoted rates were $13.52, all up somewhat head redevelopment of the East Village project starting in 2007. over the third quarter. At the end of 2005, the average Class A Factors for 2007 that may Slow office recovery (1) Job growth will slow in 2007 which can work to limit demand for office space and Sam Chandan, chief economist at Reis, Inc., believes steep energy prices and a weakening housing market could very easily hamper job growth in 2007. In August non-farm payrolls increased by 188,000 jobs but one month later in September, the increase dropped to 51,000 jobs. By the end of the year, non-farm job growth was expected to reach 1.8 million for the year compared to 1.98 million in 2005.

(2) Efficiency minded tenants are controlling their occupancy costs more effectively today by backfilling space they already lease rather than expanding. Big office users are working hard to use space more efficiently and the result is a reduction from an average of 250 square feet per employee to 175 square feet per employee, according to CoreNet Global. This is happening most often when large space users relocate to buildings with larger more efficient floor plates. Tenants striving for more efficiency in space utilization will have a direct impact on net absorption.

(3) The economy is slowing down: During the third quarter 2006, it grew at the weakest pace in three years. Gross Domestic Product only increased 1.6%, which was down significantly from the second quarter level of 2.5% and the first quarter level of 5.6%.

(4) An increased supply of new office space will certainly impact the market. Reis, Inc. is projecting 46.4 million square feet of new office space will be completed in 2006, a substantial increase over the approximately 37.2 million square feet added in 2005.

(5) Merger-driven consolidation and further technological gains are two additional factors that would further limit office market expansion. Slower job growth, more efficient utilization of office space, a weakening economy, and increased supply are all factors working against landlords’ efforts to increase rents and continue to reduce vacancy. The result will be a slowing of net absorption and rent increases in 2007 to about half what they were in 2006. quoted rent was $19.45, and for Class B it was $16.88. The upward increasing costs of new construction and leasehold im- 17 decrease in Class B quoted rents reflects the overall decrease in provements and higher interest rates will continue to put pres- lease absorption experienced by landlords with Class B product sure on rents. By the end of 2007, the overall vacancy rate will during the last half of the year as tenants took advantage of be just under 13.5% due to slower absorption and the average still attractive rates in Class A properties and “moved up.” It is quoted rental rate for all building classes will continue to edge up anticipated that the gap between Class A and Class B rents will as landlords try to reclaim some of the losses they have sustained widen throughout 2007. in the last three years. Nationally, predictions are for rents to increase from 2.5% to 3.0% in 2007. Locally, an increase of the overall average quoted rents by up to 1.0% is more likely due to SUMMARY & OUTLOOK the softer nature of this market. Our outlook for 2007 for the office market is there- Across the country, the classic recovery of the office fore, moderate. There is an expectation for continued positive market has continued during the past year. 1.8 million new jobs absorption but at a level less than 2006 and modest increases in during 2006 resulted in a low 4.5% unemployment rate at year quoted rents which will still lag behind average increases at the end which has continued to spur demand for office space in the national level. Current vacancy is still too high and average rents service sector. Despite increased new building construction, too low to encourage significant new development for projects vacancies have dropped across the board and rents increased that are not pre-leased or built to suit. Replacement costs for throughout the year. most tenants are just too high given the overall softness of the Locally, the general slowdown of the economy will show market. 2007 will see a continuation of a slowly improving local itself as positive absorption continues to decrease during at least office market, which, unfortunately, will continue to lag behind the first half of the year. At the same time, gradually decreas- the National level. ing vacancy and the lack of significant new spec construction Lead Contributors include: Philip M. Hansen, SIOR, Vice President; and will continue to allow landlords to gradually increase rents. The Estel C. Hipp, Vice President. Kansas City Industrial Market

A Block & Company Investment Group Acquired this 382,000 square foot bulk warehouse building located at 5101 Speaker Road in Kansas City, Kansas. The Block & Company leasing team made the largest industrial lease of the year with Excelligence, which leased 100% of the property less than five months after closing.

America’s ever growing appetite for foreign made Compared with traditional trucking, rail is more fuel efficient consumer goods is straining the nation’s logistic and is not hindered by rising insurance and labor costs or 18 the shortage of drivers and the lack of funding for highway network and fueling demand for new distribution infrastructure. Currently, the nation is seeing a rail renaissance: space to serve expanding U.S. seaports. Burlington Northern Santa Fe (BNSF), Kansas City Southern (KCS), Norfolk Southern and Union Pacific, which all maintain ith consumer spending boosted by home equity freight routes through Kansas City, are seeing increased activity. loans and historically low interest rates, the nation Last year, KCS purchased the Mexican railroad TFM, and in doing Wcontinued to draw in more containerized merchandise so, pieced together a route to the deep-water port of Lazaro as consumption of imported goods in the U.S. continues to Cardenas, located on the west coast of Southern Mexico. The rise. Kansas City’s history and current standing as the second port is seen as a viable option to the west coast’s Inland Empire busiest rail center in the country bodes well for continued port system (which is currently at capacity) to get goods into the distribution warehousing growth locally. As the U.S. has shifted U.S. Containers unable to be serviced on the west coast needed from balanced import and export to an economy dominated a distribution destination in the U.S. and thanks to KCS’s new by imported goods, the importance of proper infrastructure to route, Kansas City itself stands at the other end of the artery. move those goods from port to end use destination becomes And, more importantly, Kansas City is well poised to handle critical. Unfortunately for retailers and the logistic companies industrial traffic: With over 17 million square feet of foreign trade that serve them, America’s rail and truck distribution systems zone space, much of which is a feature unique to Kansas City, are hard-pressed to keep up with the increasing volume of underground business parks, which supply constant temperatures goods. With high fuel costs and east – west rail lines already and are relatively inexpensive to utilize as warehouse space, three at capacity coupled with increasingly tougher federal limits on interstate highways, including the Interstate 35 NAFTA corridor, truck operating hours, logistic companies have been forced to and the possibility that U.S. 71 Highway could be upgraded look at new ways to get products distributed. in the future to interstate status. Additionally, SmartPort, part One option that may prove profitable for Kansas City’s of the Kansas City Economic Development Council, is moving industrial market comes by way of north-south rail traffic. forward with plans to open a customs facility that would clear truck freight for export to Mexico. This joint effort of U.S. and miles southwest of Kansas City. This could help spawn billions Mexican officials would result in the first customs house run of dollars in new investments and elevate Kansas City’s ability to by a foreign country in the U.S. Kansas City will thus function compete with similar size markets. Privately owned warehouse much like a dual U.S./Mexican port at the border. This will and distribution facilities could be constructed on the remaining result in savings of both time and money and should not only 1,000 acres, similar to the plans at the International Freight increase shipments from Mexico, but from Asia, as well. Gateway development. With the center of both the NAFTA rail corridor heading With all of these factors, a larger trend is here to stay from Mexico to Canada and the Trans-Continental corridor from and that is that national developers are looking seriously at the east to the west coast, Kansas City may be becoming the Kansas City as one of the next rings of cities that will see larger transportation and logistics center of North America. Along with distribution centers. Additionally, after three decades of companies this distinction comes the requirement of new infrastructure consolidating their scattered warehouse operations into massive to handle the additional cargo exchanges. What is now being national distribution centers, there is now a trend toward adding called International Freight Gateway, the former Richard- smaller regional distribution centers in order to keep inventory Gebaur Air Force Base in Grandview, Missouri, will be developed closer to consumers. The regional distribution centers are being by Chicago based Centerpointe Properties Trust and will serve selected based on their proximity to the seaports, inland ports, as an intermodal yard for KCS. In addition, BNSF’s 45 acre and the intermodal developments, which should lead Kansas City Argentine yard in Kansas City, Kansas is already working at to become a breeding ground for these distribution centers. capacity to keep up. Cargo cranes are putting in overtime to Kansas City’s strategy will be to position itself as a offload containers from rail cars to truck beds. The BNSF’s rail national and regional distribution hub. The area will need more line route from Southern California to Chicago is the shortest space that is readily available to seize opportunities. The trend and fastest route and goes through Kansas City. This route will of the big box retailer and manufacturing company distribution all be double tracked for the entire length by 2008, which will center interest in Kansas City has been predicted for some time. allow greater flexibility and speed. Because of that, BNSF in Now it appears to be developing a momentum with build to suit conjunction with the Allen Group of San Diego, is now planning projects announced and many others on the drawing boards. to develop a 350 acre intermodal yard in Gardner, Kansas, 30 For Kansas City to be successful in attracting additional new

19 investments, it should have adequate development sites and and well-educated workforce available. At the end of 2006, facilities to backup its marketing efforts. The opportunity to bulk industrial/warehouse space totaled 238M square feet garner a significant increase in investment appears to be upon in 4,967 buildings. In 2006, net absorption was positive at us, but the proper parks are needed to accommodate the large 788,000 square feet. This brought the vacancy rate down users available when the demand is presented by the marketplace. from 8.26% in 2005 to 8.07% in 2006. Rental rates climbed Although Kansas City is thought to have an abundance of land, slowly throughout 2006 and are expected to continue to rise land that is suitable for industrial development with the necessary through most of 2007, as supply tightens and absorption infrastructure is in surprisingly short supply. The standard size remains positive. Average quoted rates for this product type for many of these developments is 1,000,000 square feet, stood at $4.60 gross per square foot at year end. which can require 60 to 120 acre sites, requiring rail, highway and support infrastructure to be viable. FLEX SPACE

“ This product type offers space from 16 to 24 foot ceiling In the last twelve heights, with much higher automobile parking ratios than the months, the velocity of more traditional industrial/warehouse facilities. Generally, there is more elaborate landscaping, a higher finish level, including 250,000 square foot and larger showroom and office space, that comprises between 25 and users has increased dramatically 50% of a building, and more glass space to accommodate that finish. Generally, these tenants are quasi office users, with a and it is expected to continue in distribution or light assembly group, who want to keep their the next 24 months. ” operations under the same roof. The statistics for this product type improved during 2006, as compared to the prior year. Again the primary market for this type space is Johnson County, but the overall statistics As there is an increased demand for big box cargo are strong with about 679,577 square foot of leasing, creating distribution facilities, the region continues to work hard to position a net absorption of approximately 434,651 square feet. New itself as a distribution hub and regional and national developers construction delivered in 2006 was up 223,971 square feet and have come calling. In the last twelve months, the velocity of 113,000 square feet of that was in Lenexa – 35,000 in Olathe. 250,000 square foot and larger users has increased dramatically Overall, vacancy decreased in 2006 to over 11%, compared and it is expected to continue in the next 24 months. Where to 15.75% in 2005. At this time there is less than 100,000 Kansas City used to see one or two transactions a year in that square feet of product under construction for 2007 delivery, but 20 size range, there have now been six in the last year. Demand for we feel that the south markets will have new announcements 250,000 square foot or larger speculative buildings are starting very soon. We also feel that there will be more build to suit to increase. And, with numerous companies not willing to wait activity in this product type and that Lee’s Summit will have on build-to-suit transactions, they may go to other developments increased activity. Of the nearly 2.4 million square feet available that have the speculative space available. only about 90,000 of that is sublease space so it would appear that tenant stability in this product type is firming. As with times past, when our vacancies decrease we see rates firm up – this time more than expected – from $5.40 psf PRODUCT TYPEs at year end 2005 to about $7.67 psf now. We are expecting to gain stability in this product type. If the office market continues to become firm we may see occurrences of the return of office INDUSTRIAL & WAREHOUSE users to the flex market, for economic purposes, but it does not appear that that will happen anytime soon. Although Industrial and Warehouse space covers a broad range of users, it is most descriptive of users seeking to store and distribute industrial and consumer products. Newer developments have focused on the high cube distribution space UNDERGROUND DEVELOPMENT characterized by ceiling heights of 24’ and higher, large bays, In addition to the traditional industrial/warehouse ESFR sprinkler systems, cross-dock loading, and large truck and flex space as noted – all built above ground, there is over maneuvering and parking areas. The balance of the product 25,000,000 square feet in subsurface throughout the Metro typically is for users seeking light manufacturing/assembly area. The subsurface or underground developments are unique facilities, because of the strong transportation infrastructure The 175,058 square foot Crossroads Distribution Center, located at 11350 Strangline Road in Lenexa, Kansas, was purchased by Lennox Distribution Center, LLC in 2006 for a startling 5.83% CAP rate. to Kansas City, which is home to nearly 90% of the Country’s and light assembly users, who do not create pollutants, and who developed underground space. This subsurface warehouse space require constant temperature, the benefits are exceptional. will always have a significant effect on the above ground warehouse distribution market. The cost to construct 100,000 square feet subsurface is one third of what it would cost to construct 100,000 “The subsurface or underground square feet above ground. With the cost of construction being developments are unique to Kansas less, the result is that the rental rates for subsurface warehouse/ 21 distribution/manufacturing space is generally significantly lower City, which is home to nearly 90% of than the comparable space above ground. For those companies the Country’s developed underground that can utilize clear heights of 16’ or less there are a number space.” of advantages to the subsurface property. Due to the cost of construction, the lease rates are usually significantly less. The Space Center of Kansas City, who owns, leases, and subsurface space, being 75 feet to 100 feet below the surface, manages the 4.7 million square foot Space Center Executive offers a constant year round temperature. The constant year Park, and 1.5 million square foot Space Center Summit, and round temperature requires significantly less utility consumption, Hunt Midwest who owns 4.8 million square feet of subsurface thereby lowering the operating and occupancy cost for the space, with the capacity to develop an additional 5 million tenant. Manufacturers whose manufacturing processes function square feet, continues to lead Kansas City in overall subterrain in the subsurface space seem to have a real advantage, because development. Meritex Subsurface and Carefree Industrial in most instances the productivity of the laborers and technicians represent significant competition, along with the Rush Creek increases because the employees are not subject to the extreme Underground in Liberty, Missouri, which opened in 2004, temperatures associated with the above ground space. and the continued expansion of the other existing subsurface Twelve percent of the total Metropolitan Area industrial communities, the underground developers have their own serious square footage is subsurface. The lower cost to construct, lease competition. Meritex Subsurface is proposing to add additional and occupy subsurface property will always have a detrimental space of about 400,000 square feet. Rush Creek Underground pull on the above ground lease rates. However, not every user can in Liberty, Missouri is proposing 1,500,000 square feet at take advantage of this type of space, because of limited ceiling average rents of $3.00 per square foot. Solar Woods Business heights and reduced useable space, due to the massive limestone Park at Interstate 435 & Truman Road is proposing development columns that support the subsurface interior. Conversely for of multiple building spaces, approaching 1,000,000 square feet many food storage and distribution companies, as well as storage above ground and 4,700,000 square feet subsurface. MAJOR MARKETS The big news for 2007 will be the new $1.2 billion intermodal facility planned for Gardner, Kansas, on 1,000 acres of ground just outside of Olathe. JOHNSON COUNTY There is a continuing moderate absorption of space with nominal new construction trending to lower overall Johnson County vacancy and stabilized or slightly increased rents. Front Johnson County Kansas makes up the southwest portion end concessions in rent and tenant finish allowances are still of the metropolitan Kansas City market and is well served by prevalent in this market, particularly in newer construction. The Interstate 35 and Interstate 435. Interstate 435 is the highway last quarter 2006 combined Johnson County vacancy is 7.1% that encircles the city. Most development in Kansas City has closely compared to 2005 last quarter vacancy of 5.8% and 2004 followed the paths of these major highways and, in many cases, last quarter vacancy of 7.6%. The combined average rent for has produced planned business parks with protective covenants all product types in this market was $6.88 per square foot, in place. These planned parks go from straight forward space decreasing about $0.18 per square foot from the previous with few amenities to those that include generous landscaping quarter, overall but varying up as much as $0.40 to $0.60 per and appeal to the image-conscious user that requires flexible, square foot average compared to the period a year earlier in yet efficient space. With excellent access to the KCI airport, 2005. Separating out the space rates into warehouse/industrial Downtown Kansas City, a multitude of hotels, restaurants, and and flex building segments, the respective average rates were upscale retail and residential subdivisions, Johnson County will $6.61 per square foot and $7.33 per square foot. continue to lead all of the industrial submarkets again in 2007. 2006 leasing increased overall but is still impacted, to The Johnson County market continues to draw the a certain degree, by the effect of historically low interest rates majority of the regions’ industrial development due to a large and perceived benefits of ownership as compared to leasing. At number of existing businesses and several small developments the same time however, there is very little product for sale in this that serve as incubators for a company to grow into larger segment of the market. One exception is Building 28 within the buildings. Lenexa, Olathe and Shawnee are the primary Pine Ridge Business Park that offers the first industrial condo benefactors of this development. Space under construction at space in Johnson County in increments of 4,600 square feet and end of 3rd quarter 2006 was in excess of 709,840 square feet. up. Response has been good with 3 units sold. Building 29, also

22 Construction began in late 2006 on a 59,196 square-foot industrial building located in Pine Ridge Busi- ness Park at 81st Street and Flint in Lenexa, KS. The project offers condo style ownership, allowing users to “purchase” their space with all the advantages of ownership in a prestigious business park. in the 56,000 square foot range, will begin construction soon. as tax incentives. The flex market had positive absorption of With 1,360 flex and industrial buildings, totaling 231,131 square feet and the industrial market had negative net 49,058,598 square feet, the older buildings in the Johnson absorption of 388,522 square feet out of the overall Johnson 23 County market continued to have modest activity and newer County market, which created a total negative net absorption of buildings had greater success. This section of the market is still 157,391 square feet by end of 2006. This is the first year of affected by geopolitical and economic factors, as well as mergers, negative net absorption in two years, since the sluggish markets acquisitions, and business failures. Of the total market, flex seen in 2002 and 2003. buildings represented 5,103,441 square feet in 196 structures. The largest Kansas City area leases this year were signed Sublease space available at year end was 244,851 square feet in other submarkets because of a lack of availability of bulk in industrial product, up considerably from 2005, and 12,735 100,000 square foot plus inventory in the Johnson County Mar- square feet in flex buildings, down considerably from 2005. ket, but some notable transactions in Johnson County included There are 328 owner-occupied buildings that make up Advantage Framing’s lease of 51,550 square feet of warehouse 18,560,699 square feet or 38% of the market, and currently space in Olathe, Interstate Flooring for 54,112 square feet at represent 182,883 square feet of vacant space. With 352,768 Kansas Commerce Center Building 16 in Lenexa, 1 & 1 Internet square feet coming available in the next 30-90 days, Lenexa, for 54,421 square feet at College Crossing Business Park, in Kansas is the leader in owner-occupied product type with over Lenexa, Vertis for 57,000 square feet in Lenexa, Shelter Distri- 8,513,257 square feet. The largest such project that began bution Company for 63,000 square feet in Lenexa, and a renew- in 2006 was Musician’s Friend totaling 702,000 square al of 67,776 square feet for Bedrock International. Shawnee feet. Existing Lenexa firms that undertook expansion in 2006 Quality Snacks leased 25,200 square feet and Capital Fullment included Equiss Computer Systems and Interstate Flooring. The Group leased 23,755 square feet in Pine Ridge Business Park. most notable project in Johnson County this year was Pacific Johnson County is expected to see continued growth in terms of Sunwear’s plans for a 400,000 square foot distribution center absorption due to continuing existing inventory levels and a con- expandable by an additional 400,000 square feet. Key to their sistent corporate migration to this high-profile submarket. With decision was highway and rail access in the region, as well business parks like College Crossing, and the development there 24

This three building, 448,478 SF portfolio located in the Paseo Industrial District in North Kansas City, was acquired by a Block & Company sponsored investment group in 2006.

of 2 new buildings that were completed in June, 2006 at College velopment scheduled for delivery in 2007 include Phase 3 and 4 and Strang Line Road, Pine Ridge West with its 54 acres of de- in College Crossing Business Park, with almost 124,000 square velopable ground, Southlake, Renner Ridge, Lackman Place and feet of industrial space coming available by the 2nd quarter other high quality environments, there is prime ground available 2007. Multiple small buildings of 15,000 square feet are also for immediate development. 2007 will see continued absorption being proposed in Deerfield Park in South Johnson County. which will create pressure for additional new developments. While Wyandotte County almost tied this market in 2006 product deliveries, Johnson County continues to draw the majority of the region’s industrial development due to a large number of existing businesses and several small developments EXECUTIVE PARK MARKET/NORTHLAND PARK that have always served as incubators for a company to grow into larger buildings. Economic incentives and investor funding The Executive Park/Northland Park submarket includes play major roles in development. those areas immediately north and south of the Missouri River on Johnson County has always been the most active sub- the east side of Downtown Kansas City. Interstate 35 services market in terms of speculative development of office/warehouse this market on the west with Interstate 435 on the east. The and distribution product. Most of the growth follows Interstate sub market now totals 28 million square feet with around 5 mil- 35 to the southwest into Johnson County. Some speculative de- lion square feet developed underground, 11.4 million square feet of owner occupied space and 11.6 million square feet of non- the industrial real estate market in the form of new development owner occupied space. have been slow to materialize. In 2004, the rebuilt Chouteau Executive Park is Kansas City, Missouri’s premier Indus- Bridge, connecting North Kansas City with Executive Park, was trial Park. Executive Park is a 1,200 acre industrial park that was re-opened, which helped increase access. The more utilized Inter- developed over twenty-five years ago and is almost completely state 35/Paseo Bridge was closed for extensive repairs and re- built out, with only a few development opportunities remaining. paving for much of 2005. This bridge is expected to be replaced There have been no owner occupied buildings constructed for in 2008. The Paseo Bridge closing and rerouting of traffic in- over three years except the 360,000 square foot building oc- creased exposure to Executive Park, which caused vacancies in cupied by Medline Industries in 2005. Speculative building con- Executive Park increased from 7.0% to 10.0% in 2006. Accord- struction was limited to one 154,000 square foot speculative ingly, net absorption was a negative 101,000 square feet in this building by Hunt Midwest in Northland Park in 2003, which is sub-market, with no other significant new construction. still seventy percent vacant. On the East side of Executive Park, Average rental rates were opposite the vacancy trends, east of Interstate-435 there is just less than 80 acres remaining with lease rates rising to $4.62 from $4.54 per square foot with the infrastructure in place for additional new construction by year-end for warehouse space and holding steady at $6.26 and development. However, this land has congested access to for flex. Although average asking lease rates for flex properties Front Street, although a redevelopment project on Front Street remained the same, the effective rates saw slight increases. Ef- set to begin in 2007 should improve this access. With the excep- fective rates for bulk warehouse/distribution space ranged from tion of a few minor infill sites any new development opportunities $3.75 to $4.00 per square foot. in Executive Park, south of the Missouri River will be limited to Noteworthy leases included Wagner Industries, a third the acreage east of Interstate-435, between the Missouri and party logistic company, leasing 472,000 square feet from Industrial Big Blue Rivers. Park Realty and Musician’s Friend leasing an additional 81,500 Northland Park and northeast Clay County have sub- square feet to compliment its existing 250,000 square feet in stantial areas of undeveloped agricultural land. The municipalities Executive Park. Musician’s Friend is planning on relocating into in this area reflect less than 2% growth in population over the a brand new 700,000 square foot facility that will be expandable past 10 years. Future demographic projections do not indicate to 1 million square feet, and is being developed by Panattoni, to significant population or base employment growth for this quad- replace its existing facility. In Executive Park, Corporate Express, rant of the metropolitan area. Therefore, significant changes in through an out of town developer, is proposing to build a new

25 250,000 square foot facility to replace its existing facilities in interstate access to the majority of metropolitan area highways East Jackson County. is why these older facilities are still highly utilized. Notable deals which took place in 2006 included deals with Spicers Paper which leased 85,112 square feet, Architectural Specialties which leased 53,000 square feet, and Norandex/ “The $80 million Reynolds Distribution Company leased 45,864 square feet. Areas to watch for future activity include Riverside, levee, which was completed depending on what happens with the continued proposed mixed- use development at Interstate 635. The $80 million levee, which in early 2006, has given the city was completed in early 2006, has given the city of Riverside an of Riverside an opportunity to opportunity to compete for future industrial development. The levee opened 1,200 acres to development. Plans call for office/ compete for future industrial warehouse space, bulk and light industrial, with some retail development.” development to service the potential new businesses north of the river. With freeway and rail access, Riverside is finalizing details for a commercial and light industrial development at 9 Highway and Interstate 635. The plan is to form a ramp off of Interstate 635, which would give access to 500 acres of land that would NORTH KANSAS CITY/RIVERSIDE be zoned commercial/light industrial. The location, being 15 minutes from both Downtown Kansas City and KCI, makes this The North Kansas City/Riverside submarket, north and a highly accessible area and could have a very promising future. west of Downtown Kansas City, totals just more than 21.5 One of the retail developments, Briarcliff, which primarily million square feet as of year-end 2006, and vacancies stood at focuses on the retail sector, hopes to have the same effects on 5.0%; a slight increase over the 2005 year-end vacancy rate of the community that were seen with the Zona Rosa development. 4.0%. The average asking lease rate was $5.37 on a gross basis The most dramatic Briarcliff project is under way: an $80-million at year end. This market has limited land availability, especially condominium development on the southern tip of the area’s in North Kansas City, and generally includes a broad mix of both prominent ridge. Once an abandoned rock quarry, this property manufacturing and warehouse/distribution product. Even so, is destined to become The Ravello at Briarcliff: 264 upper-end close proximity to GM/Fairfax and Ford/Claycomo plants keeps condominiums that will include underground parking and as this market volatile as it moves up or down in correlation with much as 2,800 square feet of space. This area can provide the current situation of the automotive manufacturing and sales additional services for future Riverside district companies. market. 26 As such, on a cyclical basis, this market is more prone to react to interest rates considering the generally accepted correlation between industrial manufacturing and loan rates for KCI AND AIRWORLD end customers. Though this is true for the submarket in general, no individual owner is heavily impacted due to the multi-year, The KCI/Airworld Industrial submarket has a total fixed rate nature of lease terms. inventory of just under 4.3 million square feet as of year-end Many of the non-owner occupied distribution buildings 2006. Overall vacancy rates stood at 7.0%, down substantially in this submarket were constructed in the 1970’s and early from 2005’s 16.0%. This continues to be the highest vacancy 1980’s. These buildings are typically 20 to 22 foot clear and rate of all metropolitan submarkets, due in large part to it have leases ranging from $2.50 per square foot to $3.25 per being the smallest submarket in the Metro area and having the square foot gross. The rates and the quality of these buildings greatest reliance on the air cargo traffic business. Quoted rental make them highly competitive with buildings located in all rates range from $3.75 to $8.00 per square foot gross. Large the other submarkets, and, together with substantially lower tracts of land are still available although there are developers property taxes and a lack of an earnings tax for individuals and considering development on a speculative basis, including the corporations, this market is a strong competitor to the Executive two large mixed use projects that have shown signs of activity, Park/Northland Park market. This, of course, is only true for users including OPUS Development’s 200 acre Congress Corporate who do not require high cube modern facilities. It is important to Center and Karbank & Company’s KCI Airport Technology note that the majority of these aging older warehouse/distribution Park. The Corporate Center, which focuses on office, flex and complexes suffer from some functional obsolescence, such as industrial/warehouse space, has not seen any new activity since limited turning radius, shallow truck courts, narrow column two build to suits were completed in late 2004. The build out spacing, aging infrastructure, limited parking for trailer storage could eventually exceed 2,000,000 square feet. It is anticipated and employee’s. However, the centralized location, immediate that this Park, located far from the center of the Metro area, will take many years to build out. Another development opportunity and a Northland Developer’s offering of parcels as small as 1.5 that shows promise, but no groundbreaking, is the KCI Airport acres in Congress Business Park with plans to also construct a Technology Park that could provide up to another 900,000 20,000 square foot multi-tenant spec building. square feet of office/technology/research and development type facilities and again, could take many years to see its full “The gains made by Wyandotte County potential. Kansas City International Airport recently selected Trammell Crow as its master developer of the 640 acres in in 2006 illustrate the rising profile of its business park, located on the 10,000 acre property, to Kansas City among national distributors further the community’s infrastructure. The Airport is looking and the ability of sub-markets within the for development on the site that brings industrial, office and commercial space and that combines the value of the space with city to attract business...” on-site and nearby transportation benefits. This “aerotropolis,” which describes a growing trend of major international airports WYANDOTTE COUNTY becoming the center of economic activity, is a goal for the Airport Commission and the City to better serve the needs of Wyandotte County contains several business districts potential developers and manufacturers. KCI presents a prime and industrial parks that represent a variety of product types opportunity for developers, manufacturers, shippers and freight of various ages. The submarket is home to large manufacturing forwarders looking to expand their businesses. facilities in Fairfax, distribution facilities clustered around Recent activity in this market includes K & Company’s intermodal shipping in Turner, small office/warehouses with new expansion into an additional 45,000 square feet to compliment infill distribution in Armourdale, and new distribution centers in last year’s 165,000 square foot industrial lease, AFC’s expansion Edwardsville. Heavier manufacturing and construction uses are into 50,000 square feet on Northwest Ambassador Drive, and interspersed in and around these major nodes. Many of these Case New Holland’s consolidation of three Midwestern plants into nodes experienced notable industrial activity in 2006. a new modern facility in Cameron, Missouri, 50 miles northeast Overall, Wyandotte County regained nearly 500,000 of Kansas City. Other activity includes Kansas Auto Auction’s square feet of net absorption in 2006. Its total industrial purchase of 70 acres to relocate its facility from Elwood, Kansas inventory of close to 39.2 million square feet remains heavily

27 weighted toward warehouse and bulk distribution space with global soap and personal care products manufacturer. Wyandotte 38.5 million square feet of warehouse and bulk distribution County granted substantial real property tax abatement to lure and less than 680,000 square feet of light industrial and flex the new national headquarters away from other locations in Ari- space. Warehouse and bulk distribution spaces tend to be zona, Texas and Canada. In another major victory for local manu- more functional, newer, and more desirable; while the light facturing before the end of the year, General Motors announced industrial and flex spaces are more often functionally obsolete a $208 million upgrade to their Fairfax Assembly Plant to build manufacturing spaces repositioned as small office/warehouses the redesigned 2008 Chevrolet Malibu. These deals were driven or converted to heavier uses. This market condition is reflected by Kansas City’s central location, economical operating costs, in vacancy rates for the two product sub-types. Warehouse and Kansas tax abatement for real estate, machinery and equipment, bulk distribution product ended 2006 with a vacancy rate of relatively high capitalization rates, and Wyandotte County’s cen- 4.0%. Light industrial flex product finished the year at 10.0% tral city location and access to interstate highways. vacancy. The gains made by Wyandotte County in 2006 illustrate The year’s most notable deals were in warehouse and the rising profile of Kansas City among national distributors and bulk distribution product with a couple of big exceptions. In the the ability of sub-markets within the city to attract business and metro area’s largest distribution warehouse deal of the year, Ex- sustain speculative building growth through regionally specific celligence Learning Corporation, new to the Kansas City mar- operational efficiencies and pro-business government initiatives. ket, opened a 382,000 square feet distribution center at 5101 Look for similar gains in 2007. Speaker Road in the Turner Industrial District. In Armourdale, Prime Development completed a 101,000 square feet specula- tive building now 50% leased to Tire Centers, Inc. Midpointe Corporate Centre in Edwardsville totaling 405,000 square feet, EAST JACKSON COUNTY/DOWNTOWN and recently leased to OfficeMax and LaGasse Bros., was sold to DCT Industrial Trust at year-end. After announcing that it would The East Jackson County sub-market includes the Cen- close its historic Armourdale soap plant at the end of 2006, tral Industrial District, historic industrial areas throughout the Colgate-Palmolive sold the facility to VVF Limited of Mumbai, Blue River Valley in Kansas City, Missouri, and planned parks India. The acquisition will be the first United States plant for the and industrial districts in Grandview, Blue Springs, Raytown,

28 The KC Star completed construction on its new 424,000 square foot production facility in downtown Kansas City, Missouri in 2006. Independence, and Lee’s Summit. Executive Park, Kansas City, Little Blue Parkway, just north of Interstate-70 in Independence. Missouri’s largest planned industrial development, is treated as Despite delays, transfer of the Richards-Gebaur Memorial Air- its own distinct submarket. However, downtown Kansas City, port from the FAA to the Port Authority of Kansas City, then to Missouri, is included in this submarket. the CenterPoint Properties Trust, remains on track. In May 2006 As Downtown Kansas City, Missouri rejuvenates and the Environmental Protection Agency awarded the Port Authori- 29 more historic industrial buildings are converted for adaptive re- ty of Kansas City two grants totaling $400,000 to clean up the use, the contribution of this area to the overall industrial mar- former airport site. Plans for the 1,400-acre property include a ket picture continues to diminish. One notable exception is the distribution hub and intermodal facility connecting deep water Kansas City Star Print Production Facility completed early in Mexican ports with Kansas City’s Interstate crossroads through 2006. This 424,000 square feet modern manufacturing facility the north-south tracks of the Kansas City Southern Railroad. represents an anomaly in the otherwise functionally obsolete, The future development will be led by CenterPoint Properties multi-story storage and single-story service product comprising Trust and Hunt Midwest Real Estate Enterprises, Inc. and will be most of downtown’s industrial building stock. A more typical called the Richards-Gebaur International Freight Gateway. deal was completed by Crescent Electric in the first quarter of With nearly 89 million square feet of combined ware- 2006 when they relocated to 52,000 square feet of vacant, house distribution and light industrial flex space, this is the multi-story space on the east side of downtown. In the West city’s largest sub-market as well as its most disjointed one. While Bottoms Industrial District, that is adjacent and to the west of over 1.1 million square feet of industrial space was absorbed in Downtown Kansas City, one new building was built in 2006. 2006, overall vacancy remained high. Warehouse distribution The 15,000 square feet Scotts Lawn Service Building is now vacancy fell to 8.0% in 2006. Light industrial flex vacancy fin- being offered for sale to investors. ished the year at 11.0%. Expect numbers to improve in 2007 Notable suburban East Jackson County deals were com- as newer suburban product in Lee’s Summit and Independence pleted by Hallmark Cards, which took 149,000 square feet of continues to gradually affect overall vacancy in this mostly old underground storage space in Independence, and S & T Enter- stock industrial sub-market. prises, which completed shell construction of the 40,068 square feet Barett Park industrial condominiums in Blue Springs. Bill Lead Contributors include: Michael R. Block, CPM, Principal; Gene Kidwell broke ground on Building One in Centerpoint Industrial Elsas, Vice President; Zach Hubbard, Sales Associate; Jason Allen, Park. The new development has access to recently completed Sales Associate and Scott Cordes, Sales Associate. Kansas City RETAIL Market

30

The recently renovated 46,420 square foot Valle Vista Shopping Center was purchased by a Block & Company sponsored investment group.

2006 was a record setting year for retail space being planned, and it’s easy to see how vacancies may potentially become a problem in this market. According to Property & Port- construction with developers delivering almost folio Research, Inc., this is the second highest amount of planned 3,000,000 square feet of retail space to the space in the country. Given the region’s lack of a geographic market. This was more than double the average stopping point such as a coast, major lake or mountain range, delivery over the last 20 years, and it is likely to residential growth is expanding in all directions. And as goes the adage: retail follows rooftops. have a significant impact on the market for the next Last year’s report indicated that one of the primary driv- several years. ing factors in the booming retail expansion was the strong resi- dential development and resale market. Many people believe that ccording to the ICSC, the national average for retail space the recent strength in consumer spending has been fueled in part per capita in major markets is 20.2 square feet. In the by the refinancing of home equity. Across the country in 2006, AKansas City market, there are over 36 square feet of retail the housing market began to soften, prices flattened, inventories space per person. One result of the large delivery of space was grew and home loan interest rates moved up. The retail market an increase in vacancy rates from 9.7% to 10.1%. There are at is beginning to see the effects of these factors. least 2,600,000 square feet of additional retail space under con- Most of the new construction is in Lifestyle Centers, struction at this time. Add to this the 17,000,000 square feet new urban centers and mixed-use developments. Major proj- ects recently opened or under construction are Cornerstone in foot and Class B small shop space rates range from $10.00 to Leawood, Corbin Park in Overland Park, The Legends in Kansas $18.00 per square foot. City, Kansas and the East Gateway in Mission, Kansas. Addi- tional mixed use projects are planned for all areas of the city. “2006 also saw the continued trend Lease rates continue to see upward pressure for small shops in new Class A specialty centers and Lifestyle projects, of tearing down vacated big boxes primarily due to the increased costs of construction. Rates in the and replacing them with small range of $27.60 to $37.70 per square foot, with net charges in the range of $5.00 to $10.00 per square foot, depending on the shops. The land cost in this type specific city and property location, are the norm. With rates at of redevelopment is lower, thus the these levels, many local retailers and independent operators are being priced out of the higher end market. These smaller retailers rents for the small shop users can with little depth or staying power will be relegated to the second ultimately be very competitive.” generation developments. Big-box lease rates vary depending on both the location and local building codes, which can increase In Kansas City, restaurants, drug stores and banks con- construction costs and therefore the rental rates. New big box tinue to expand with residential growth pushing pad site land lease rates are in the range of $9.14 to $16.25 per square foot. prices to new levels. New high profile locations continue to show Existing second generation larger spaces are priced in the range strong sales, which increases the demand for freestanding sites. of $5.00 to $9.00 per square foot. Even lower yet, some former It is rare to find available second generation pads in good ar- K-Mart spaces have gone for $3.00 per square foot. eas. However, the recent acquisition of Osco Pharmacies by CVS 2006 also saw the continued trend of tearing down va- will bring some excellent, but probably overpriced, freestanding cated big boxes and replacing them with small shops. The land drugstore buildings to the market. cost in this type of redevelopment is lower, thus the rents for Land costs rose further in 2006, especially in the sub- the small shop users can ultimately be very competitive. New urbs, as a result of demand driven by strong retail expansion. Class A retail rates for well located anchored conventional retail The competition for premier sites in new centers has been in- centers continue in the range of $18.00 to $28.00 per square tense with prime shopping center pad sites commanding between

31 The new 110, 000 square foot Bass Pro project at 119th & Renner in Olathe, Kansas will anchor a new 140-acre, $268 million retail development at that quadrant that will include an additional 450,000 square feet of retail, restaurants and specialty stores. $18.00 and $26.00 per square foot. Large tracts of land for Interstate 35 in Liberty has seen the most activity. Wilshire Plaza new retail developments are valued from $4.00 to $7.00 per and two additional centers totaling 400,000 square feet located square foot. However, we are now seeing the beginning of an at Interstate 35 and Highway 152 made it to market in 2006. oversupply of these pad sites in some markets where developers The Liberty Triangle on the east side of Interstate 35 on High- need these higher pad sales to make the retail development eco- way 152 is soon to see a new Lowe’s and a proposed 400,000 nomics work. square feet of additional retail space as well as the Schoal Creek 32 Plaza project planned for 300,000 square feet are currently un- der construction at the southwest corner of northeast Flintlock and Highway 52. Briarcliff Village is now open and is leasing “Retail growth is quickly. One proposed center at Maplewoods Parkway and M-1 flourishing throughout the 40 did not materialize, having failed to draw lead tenants due to its inferior location. Metro North, which is anchored by JC Penney, Highway, Interstate 70 and M-291 Dillard’s and Macy’s, will become the Streets at Barrytowne and Highway intersections. ” will offer 2,300,000 square feet of retail, office and residential space. Redevelopment is set to begin in 2007.

EAST JACKSON COUNTY MISSOURI

SUBMARKET OVERVIEW Retail in Eastern Jackson County continues to expand with several new shopping center developments. The new Inter- change at Interstate 70 and Blue Valley Parkway is a primary factor in fueling retail development in the Independence area NORTHLAND KANSAS CITY, MISSOURI, previously starved for new retail development. Construction PLATTE COUNTY AND CLAY COUNTY continues on the Bass Pro center which should come to market with 70,000 square feet of retail space in late 2007 in addition The Northland retail submarket remains one of the fast- to the 160,000 square foot Bass Pro store, a 220 room hotel est growing segments in the metropolitan area. Development and an 18,000 square foot conference center. Over the next along Barry Road and Highway 152 from Interstate 29 east to five years, developers plan to bring up to 600,000 square feet of retail space to market. Retail growth is flourishing throughout the area’s wealthiest neighborhoods. the 40 Highway, Interstate 70 and M-291 Highway intersec- Shawnee Mission Parkway in Northwest Johnson Coun- tions. Even though Noland Road at 40 Highway experienced a ty has also seen continued significant growth. New retailers in boost when Hy-Vee took the former K-Mart location, it also lost the area include nearly all the big box chains. Although slower Best Buy. This intersection continues to be a second tier location to come to fruition than planned, several new shopping centers compared to M-291 and 39th Street. The Blue Ridge Mall at in western Shawnee on 7 Highway are planned and developers Interstate 70 and Blue Ridge, is being redeveloped by Red Devel- are presently prospecting for anchors. opment Company, and the new Wal-Mart is well underway. Another active area is Blue Springs with numerous pro- posed additional retail developments. Block & Company is plan- KANSAS CITY, KANSAS ning a new 900,000 square foot center near the new Home De- WYANDOTTE COUNTY pot and Wal-Mart at I-70 and Adams Dairy Parkway. At 40 Highway and 7 Highway, developers are proposing redevelop- The new NASCAR racetrack at Interstate 70 and Inter- ment on three of the four corners. Both areas are vying for state 435, the 780,000 square foot Nebraska Furniture Mart, the remaining national retailers not presently represented in this Cabela’s 175,000 square foot retail store, the T-Bone’s minor market. Residential growth in Blue Springs, both north and south league baseball stadium, the Great Wolf Lodge and numerous of Interstate 70, moves forward at a strong pace, spurring strong restaurants continue to thrive. The Legends, a new 800,000 retail development. Activity along Highway 7 can be seen as far square foot Lifestyle shopping center that opened in early 2006, south as Colbern Road where a number of small strip centers are appears to be thriving. Plaza at the Speedway, a 865,000 planned. square foot grocery anchored center, at a total cost of $144 Extremely strong growth has exceeded expectations in million, has been announced by Block & Company for the north the Lee’s Summit area as retail development pushes to all corners side of Parallel just across from the legends. of this city. The largest new development in Lee’s Summit, The Summit Woods Crossing Shopping Center located at Interstate 470 and 50 Highway, is nearly 100% occupied. The Walk at DOWNTOWN/MIDTOWN/PLAZA AREA Lee’s Summit was a 700,000 square foot Lifestyle Center in the SOUTH KANSAS CITY, Missouri planning stage, however it ran into political difficulties due to the large taxpayer subsidy requested by the developers, Greenpoint The resurgence of downtown/midtown residential space Development, and now appears to be dead. Summit Fair is being is a significant driving force for the creation of new retail in planned for a Spring 2008 opening at the SEC Interstate 470 and the core city. Condominium prices are reaching and exceeding US 50 comprising 550,000 square feet. Smaller retail develop- $1,000,000 in several properties. Those buyers are fueling the ments are continuing to pop up along US 50 on the east side of demand for more and better retail options in Midtown. the city. The Longview Farms project continues to grow with In conjunction with this Midtown resurgence, Block & 33 12,000 square feet of a planned 50,000 square feet of retail Company has continued the expansion of the successful Mid- space now open and leased. town Marketplace (Costco, Home Depot) by adding another 8,000 square feet of shops. Planning is underway for rede- JOHNSON COUNTY KANSAS velopment of the old Trinity Hospital Campus to include about 40,000 square feet of new retail in addition to some office space New development in this submarket continues to be in and about 450 residential units. the south between 119th Street and 135th Street from State Line The new KC Live entertainment district is well underway Road to Interstate 35. The most active corners are 135th and in downtown Kansas City. Anchor Tenants have not been an- State Line, 135th and Metcalf/Blue Valley Parkway, 135th and nounced, but expectations are running high. The project also Blackbob and all along 151st Street. New retail buildings and includes 2,000 residential units. This district is the cornerstone small developments are coming online throughout the Johnson of about $2 Billion in redevelopment in the city’s downtown County area. Notable projects include Corbin Park, Cormac’s area that includes retail, office, residential and the new 22,000 1,100,000 square foot center under construction at 135th & seat Sprint Arena. Metcalf, Cornerstone at 135th & Nall (partly completed and As in prior years, the Plaza continues to prosper and opened), Olathe Pointe at 390,000 square feet and a 450,000 show strong sales per square foot resulting in the City’s high- square foot Bass Pro project at SEC Interstate 35 and 119th est rents and occupancies. A number of tenants have relocated that is nearing completion. Metcalf South in Overland Park is or expanded. The former Sak’s building has been remodeled scheduled to be transformed in 2007 into Streets at Metcalf, and now hosts Eddie Bauer, Sony Style and Burberry. Sony and a 1.3 million square foot mixed-use project that features retail, Burberry are new to the market. Construction of several new office and residential. Crate & Barrel has opened their new store shops and restaurants added to the Plaza’s desirable tenant mix. at 119th & Roe. It will anchor a 160,000 square foot high-end National eateries tend to target the Plaza first when planning an retail center to take advantage of its location adjoining some of entrance to the Kansas City market. The 35,442 square foot Wakarusa Shopping Center in Topeka, Kansas was purchased by a Block & Company sponsored investment group.

East of the Plaza is the new Blue Parkway Town Cen- first quarter of 2007. Additional growth of super and junior ter, with a grocery anchor that just opened. This center is the boxes is being proposed on the east Raymore side, as residential 34 only new 2005 shopping center in Midtown. Land acquisition development explodes in this area. Block & Company has plans is under way for the Citadel Plaza at 63rd & Prospect. This gro- for a proposed 400,000 square foot center at M-58 and Dean cery anchored center is expected to ultimately comprise about in Raymore, Missouri. 250,000 square feet of shops and restaurants. The overall proj- ect envisions demolition of the Metro Plaza center to create an office park and redevelopment of the Landing Shopping Mall at OUTLOOK 63rd & Troost. The 95th and Interstate 435 area, which includes the Retailers have high hopes for increased consumer spend- Bannister Mall, is the next target for a total redevelopment, al- ing. With employment growth continuing, the consumption base though no formal plans have been proposed. The Bannister Mall for the national and local economies will expand, thus driving the and Benjamin Plaza have large vacancies and a redevelopment demand side for retail products. These factors translate into the of this entire area is likely. Wal-Mart has announced that it will potential for a continuation of the development expansion seen close their Hypermart in Benjamin Plaza. The store contains during 2003 - 2006. 2007 will see developers continue to build 270,000 square feet and is a concept that Wal-Mart tried but and sales volumes of tenants should increase by about 5.0% per- abandoned in favor of the smaller concept (195,000 square feet) cent. Vacancy rates will likely remain at or slightly above the cur- such as the new store at Blue Ridge mentioned above. rent levels due to the large volume of space coming to market. Further south, Grandview is seeing new development on Although the overall outlook remains optimistic in terms the south side of Highway 150 and along Highway 71 where of the viability of retail, taking a careful look at the underlying the new Harley Davidson test track will be located. The former space market fundamentals and the effects of interest rate hikes K-Mart on the west side of Highway 71 at 139th Street is being on consumer spending and housing development is prudent. redeveloped and anchored by a new Red X. Belton/Raymore just Lead Contributors include: Stephen J. Block, Principal; Richard B. completed a new Target, Home Depot and Kohl’s development Hamill, CCIM, Vice President; Michelle Herman, Sales Associate and with a new Lowe’s under construction scheduled to open the Mindy McKenna, Sales Associate. Kansas City Investment Market After noting in last year’s report the national invest- others have lowered expectations for unleveraged returns from ment market was considered “white hot,” it would 9-10% just three years ago to 6.75-7.25% today. With long have been hard to believe that 2006 could be bet- term interest rates remaining attractive in 2006 and construc- ter; yet, both nationally and locally the velocity of tion costs rising throughout the year, real estate prices, although investment sales continued to escalate due to the possibly going higher in 2007, should remain, for the most part, extraordinary flow of capital into real estate. below replacement costs. Fundamentally, the economy remains strong. The gross ccording to statistics published by Real Capital Analyt- domestic product (GDP) grew at a rate of 3.5% in 2006, which ics, even though U.S. pension fund investment rose more was slightly higher than the 3.4% in 2005. Unemployment fell Athan 44% in 2005 over that in 2004, pension funds further during the year and at year end stood at only 4.7% after placed nearly $60 billion into property markets in 2006, up consistent drops from 5.5% in 2004 and 5.1% in 2005. Even another 15% over 2005. Additionally, foreign acquisitions of overall job growth accelerated to 1.8% in 2006, which was U.S. real estate continue to be very strong and insurance compa- slightly above the trailing 20 year average. Finally, with the sta- nies are back aggressively in both equity and debt investments. bilization of long term interest rates in the middle to upper 4% Also, CMBS issuance reached an all time high of $169 billion, range for 10 year treasuries, all of this good news was beneficial providing a source of higher leverage debt financing that did not to investment sales activity nationally as 2006 total volume for even exist just over one decade ago. the four major property types (office, multi-family, industrial & retail), increased to $272 billion, an 11.3% increase over 2005. This marked the tenth consecutive year of increased real estate investment which naturally caused cap rates to further decline to “And, even as cap an average 6.2% for all property types in 2006 from 6.7% in rates were compressed due to 2005. this increased investment activity The National Council of Real Estate Investment Fiduciary Index (NCREIF) which now tracks over $200 billion of pension again in 2006, cap rates in the United owned real estate, showed actual cash from investment returns States still remain nearly 200 to 250 declined slightly in 2006 to 5.9% from 6.2% in 2005. How- ever, overall investment returns in 2006, which include income 35 basis points higher than those in appreciation for all sectors, still exceeded 16.0%. This is down Western Europe. ” from the 19.18% in 2005. These substantial returns continue to drive increased investment activity from pension funds and other investment sources. What is remarkable is that in a period Each year major research organizations track invest- of ten years cap rates, according to records kept by NCREIF, ment activity around the country in order to recognize shifts in dropped from the mid 9.0% range for all property types to an investment velocity and pricing. For example, the late 2006 sur- average of just 5.2% for multi-family, 6.5% for industrial, 6.3% vey conducted by the National Real Estate Investor and Marcus for retail, and 6.1% for office. Even these reduced cap rates, & Millichap Real Estate Investment & Brokerage Co., revealed which cause higher sale prices, were somewhat offset by the that 69% of investors planned to increase their investment ac- perceived (and in some cases actual) increase in net operating tivity in real estate again in 2007. While this is down slightly incomes, lowered vacancies, and the stabilization of properties from 74% of investors anticipating the same for 2006, it as markets continued to absorb space. This kept investment shows that the level of interest in real estate continues to remain capital in real estate instead of it being redeployed in the bond surprisingly strong. Though part of the decline may be expected and equities markets. given the substantial price increases that occurred in 2006, real Another interesting trend is an increased demand from estate, relative to other investment alternatives, remains very the “user” sector as baby boomers look to buy real estate in- compelling. And, even as cap rates were compressed due to this stead of lease. This has caused a structural change in the de- increased investment activity again in 2006, cap rates in the velopment market in many cities as developers look to produce United States still remain nearly 200 to 250 basis points higher office, industrial, and medical condominium product to meet this than those in Western Europe. But this gap may be decreas- demand shift. The trend could not have come at a better time ing as major investors like LaSalle Investment Management and for developers, who are faced with increasing construction costs The 671,468 square foot Kansas Commerce Center portfolio, consisting of 11 buildings and 43.78 acres was purchased by Multi-Employer Property Trust at a 7.0% Cap Rate.

and persistently lagging lease rates. REIT’s share price and the underlying assets of the REIT, and the Pension funds have continued to be the single larg- high cost of Sarbines-Oxley Act compliance. While the acquisi- est source of capital fueling the institutional and private equity tion by the joint venture of the Blackstone Group and Brook- funds’ ongoing appetite for acquisitions. The funds are con- field Properties of Trizec Properties in 2005 for $8.9 billion sur- tinually searching for yields that will allow them to generate the prised many, other announcements in 2006, such as Blackstone 36 necessary income to meet their rising long term obligations and Group’s acquisition of CarrAmerica for $5.6 billion and its most have learned that real estate as an asset class provides this for recent announcement of the $80 billion proposed privatization several reasons: the real estate markets’ past successful per- of Equity Office Properties Trust show that continued changes formances across all property types, world wide appeal for real are still expected in the REIT market. Since private equity buyers estate due to technology which allows easier access to informa- see the substantial long term cash flows available from REITs, tion and research, and greater investor scrutiny, transparency but because of REIT regulation requirements favoring low lever- in financial reporting, which help pension funds understand and age with debt, private firms see the opportunity to acquire REITs better control their real estate investing activity. As always, and use higher leverage to do so. It is expected that several consistent cash flows and portfolio diversification are crucial as more REITs will be privatized in early 2007 because public real funds attempt to provide solid sources of long term capital to estate trades at a discount to the private market. And, the huge meet obligations. Interestingly, while pension funds up until ap- availability of private capital that was unseen and unheard of just proximately 6 years invested only 4.0% of their total assets in a few years ago makes the public REIT vehicle less necessary as real estate, in 2006 this number was nearly 12.7%. This huge equity sources are more readily available now. shift in asset allocations is causing a structural shift in real estate The REITs that do want to stay in the market have al- investment and investment returns as more money chases fewer ready launched their own private equity funds such as Prologis deals. In fact, when accounting for investors beyond pension and AMB Property Corp., since they recognize that the avail- funds, including tax exempt endowments, high net worth indi- ability of capital and benefits of private ownership outweigh the viduals, life insurance companies, and foreign investment activ- advantages of the REIT vehicle. So, the biggest REITs are now ity, the total investment in real estate reached $118 billion in looking at new opportunities globally versus nationally due to 2006. new REIT-like legislation being enacted in many countries and op- 2006 also saw an increasing trend toward REIT priva- portunities for property acquisitions at higher investment return tization. Two reasons for this trend are the disparity between a rates than those available in the U.S. real estate market. One last vehicle for investment activity that really ac- es, Inc., Westwood Financial, Cobalt Capital Partners, Invesco, celerated again in 2006 was the TIC vehicle. The TIC (tenant in Multi-Employer Property Trust, LaSalle Investments, Quadrangle, common) vehicle has expanded the options for buyers and sellers LLC, Crow Holdings, Investors Real Estate Trust and a host of of real estate seeking to avoid the payment of capital gains tax others. The changing dynamics of the national market have now on property sales. Tax avoidance has caused this phenomenal simply made Kansas City an attractive secondary market and an growth in TIC investments from $1.78 billion in 2004 to well excellent place for deploying investment capital because invest- over $9 billion in 2006, an increase of over 400% for the last ment rates of return in this marketplace are exceeding those in two years. primary markets by as much as 100 to 150 basis points. How- ever, many of these out of town institutional investors may not have correctly focused on exit strategy, as sale cap rates will be “The changing lower than primary markets by the same 100 to 150 basis points dynamics of the national market due to lower growth rates. have now simply made Kansas City a strong secondary market and an excellent place for deploying PRIVATE INVESTOR ACTIVITY investment capital... ” Private investors in Kansas City continued to hold a competitive advantage over that of out of town and institutional investors, at least on deals up to about $10-15 million. They A TIC investment is not a new form of property owner- know the market, they know the buyers and sellers, and much of ship but it has allowed smaller investors to own a share of an the private investor activity is off market acquisitions. However, institutional quality property such as a Class A office building, while personal relationships have allowed local private investors industrial facility, or a retail shopping center. However, there are to have a significant advantage over out of towners, this trend problems with this vehicle when misused. The TIC sponsor, in has been changing over the last several years as the influx of each case, purchases the property at a much lower price than it national brokers representing multiple portfolio sales has brought is sold to the TIC investors and in many cases the price that TIC more visibility and clarity to the disposition process. investors pay is far above market. Additionally, if the TIC spon- Much of the new private investor activity is due to an sor does not own any of the real estate, then the sponsor has no influx of investors from the east, west and south sections of the vested interest in the performance of the property or in the long country where investment returns are simply not as favorable. term preservation of the asset. Unfortunately, major decisions can require unanimous agreement and in many of these spon- Even so, private equity funds like the locally managed Block In- sorships, there are up to 35 members, so reaching unanimous come Funds are able to show continued investment success and 37 agreement is quite difficult. In some cases, leasing, financing, growth because the Fund operators not only understand real es- and the selling decisions can be gridlocked by one investor. Also, tate from a management, leasing, and development standpoint, most commercial real estate requires a source of capital to repair but they are able to use their investment knowledge in acquiring and maintain the property during the hold period as well as to both off market and relationship driven deals. provide tenant finish for new tenants. As no TIC investor is ob- ligated to fund future capital or operating needs, the long term future of many of these TIC investments should be of concern. However, those real estate professionals that bring a small group OFFICE MARKET of 1031 exchange buyers together with proper capitalization, purchases property at market prices, and executes a strategy Continued demand for office investments in Kansas City with an agreed to game plan for the operation of the property, has yielded higher prices and significantly higher investment have a more likely program for success. activity than 2005. Both local and national office investment In the local Kansas City market, 2006 was another activity has increased due to investors’ belief that office prices exciting and dynamic year. Kansas City, which had previously were still attractive to replacement costs and that market funda- been considered a secondary or tertiary market, has continued mentals were improving. These factors are increasingly accurate to become more visible and desirable to institutional buyers who as new construction prices for office exceed $175 to $185 per have had success previously in this market or who are looking for square foot. Additionally, vacancy rates have continued to de- rates of return not available in other primary markets. Many of cline which is causing a slight increase in office rents and a cor- the national and international players are now in the local mar- responding increase in net operating income. ket and include RREEF, Colony Realty Partners, CBL & Associ- There were some very significant transactions that oc- ates Properties, Inc., Capital Lease Funding, Inc., Ranier Capital curred in the local market place in 2006, including the biggest Management, United Companies, Passco Real Estate Enterpris- office portfolio sale in the history of Kansas City: the sale of The 2,177,573 square foot, 22 building Corporate Woods office park sold for a record breaking $286.7 million to Stoltz Real Estate Partners and Urdang Capital Management, Inc. Corporate Woods office park. This sale of 2,177,573 feet of location, occupancy, and continued expectation for appreciation. office in 22 buildings was for $286.7 million allowing the New Additionally, there continued to be a larger number of buyers York State Pension Fund to sell to a joint venture of Stolz Real that were only interested in acquiring Class A properties which Estate Partners and Urdang Capital Management, Inc. Other drove capitalization rates lower. Prices for Class A properties significant sales included the sale of the 109,362 square foot ranged from a low of about $120.00 per square foot to as high 38 Waddell and Reed building to WR Company, LLC in a 1031 tax as $179.00 per square foot, while Class B sale prices range from deferred exchange transaction, the Tiffany Center I and II build- a low of $70.00 per square foot to a high of nearly $130.00 per ings totaling 151,450 square feet to Murphy Properties, LLC, square foot. Overall prices continued to increase over 2005 by the 94,886 square foot Timberlands office building to Investors nearly 5.2%, which is a significant increase as compared to only Real Estate Trust, the 575,118 square foot Overland Park In- a 3% value increase between 2004 and 2005. ternational Trade Center to Rubicon Investments, the 126,383 square foot Mission Corporate Centre to a Block sponsored in- “Class A properties, which are newer of- vestment group, the 438,071 square foot Commerce Tower of- fice building to Hertz Investment Group, Inc., and the sale of the fice buildings located in prime locations, 121,800 square foot Southcreek III and the 112,678 square showed capitalization rates decreasing foot Highlands I buildings to DBSI-Discovery Real Estate Ser- to a range between 7.1% and 8.7%...” vices. Smaller investment sales included the 97,393 square foot North Point Tower to DBSI, the 72,368 square foot 9233 Ward Parkway building to a Block sponsored investment group, the As usual, the most significant office investment activ- 57,246 Southcreek Corporate Centre II building to Triple Net ity occurred in south Johnson County, although there was in- Properties, LLC, and the 97,518 square foot Holmes Corporate creasing activity in Johnson County, South Kansas City, and the Centre I to HRPT Properties Trust. Northland, and the emerging eastern markets of Lee’s Summit, Class A properties, which are newer office buildings lo- Independence and Blue Springs. cated in prime locations, showed capitalization rates decreasing Again, 2006 saw an increase in user/investor activity to a range between 7.1% and 8.7%, while capitalization rates which was primarily in smaller free standing buildings of fewer for Class B buildings ranged from 8.5% to 9.6%. Class A prop- than 30,000 square feet. In many cases, purchase prices exceed erties continued to sell at a premium of about 85 basis points $250.00 per square foot as the high cost of construction for over Class B properties due to differences in property quality, these smaller facilities continued to escalate. Additionally, other prominent office buildings were being bought by users or specu- Employees Retirement System marked the end of their ownership lators such as the former Farmers Insurance Company building since the early 1980’s when they joint ventured the original at 10850 Lowell Avenue purchased by Cleveland Chiropractic development of the park with the now defunct Kroh Brothers College and the former Farmland headquarters building which Development Company. was purchased by the Kansas City Aviation Department as part Other significant transactions included the sale of the of its effort to jumpstart development on its proposed 640 acre 238,659 square foot North Face building to Adaplis, LLC, a office and industrial business park adjoining the KCI airport. local user/investor, the 175,058 square foot Crossroads Distri- bution Center to Lennox Distribution Center, LLC, the 452,831 square foot four building Belger portfolio to a Block sponsored INDUSTRIAL investment group, the 100,940 square foot Corporate Express, Inc. building to a Block sponsored investment group, the sale The industrial sector saw a continued high volume of of three separate industrial condominium units totaling over investment sales activity due to availability of bigger portfolios 681,000 square feet in the 11901 Grandview Road building to coming to market. While the local and industrial market has not Oddball Investments, LLC and The Nicholson Group, both local been known for large portfolio sales, 2005 and now 2006 have investors, and the sale of the Midpoint Corporate Center two been the exceptions. 2006 saw the sale of the TA Industrial building, 405,000 square foot portfolio to new market entrant portfolio of 1,664,046 square feet to new market entrant Co- DCT Industrial Trust, Inc. In the industrial sector, capitalization balt Capital Partners as well as the 671,468 square foot Kansas rates continued to drop again over 2005 with Class A property Commerce Center portfolio being sold to Multi-Employer Trust. capitalization rates ranging from 7.0 to 8.10% and Class B As in 2005, these sales were due to a major repositioning by property capitalization rates ranging from 8.2 to 9.4%. two large institutional investors that felt it timely to dispose of While new building development activity continued to their local industrial portfolio positions to redeploy their capital be limited, there may be dramatic changes on the horizon for in other geographic markets. In the case of the T.A. Realty’s area distribution development and therefore investment sales. industrial portfolio, this sale marked the end of their ownership Though Kansas City’s location along the NAFTA Highway (In- of industrial real estate in the Kansas City market since their first terstate 35) has made it a strong regional industrial center, with investment in 1993. The sale of the Kansas Commerce Center the proposed redevelopment by KC Southern of the Richards by AEW Capital Management on behalf of the Kansas Public Gebaur Air Force Base as an intermodal foreign trade zone, and

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The 1,664,046 square foot, 9 building TA Portfolio sold to Cobalt Capital Partners, new to the Kansas City market, for $55.5 million. Burlington Northern’s announcement of its $1.2 billion intermo- by their owners with the help of specialist Alberta Development dal development on 1000 acres near Gardner, Kansas, there are Partners. signs that Kansas City may become more of a national industrial As noted earlier, capitalization rates have continued to center. Combine this with the new Lazarro Cardenas port in drop as most Class A retail centers ranged from 6.5 to 7.0% and Mexico which would provide increased rail freight along Inter- Class B shopping center cap rates ranged from 7.0 to 8.5%. state 35 into Kansas City, together with the proposed Mexican If retail development activity remains strong, expect customs facility in Kansas City which would be the only one in some of these newly developed projects to be sold by developers the country, and it is clear that Kansas City may be ready to in 2007 and 2008, as they try to capture large profits due to experience a growth in distribution activity not seen in the past. low cap rates. If new development activity occurs and projects in the range of 500,000 square feet up to 1,000,000 square feet come to frui- tion, as occur in other major industrial centers, the local market “What is clear is that can also expect increased investment activity in the industrial condominium buyers will buy sector. product in desirable locations but will pass over locations which do not offer immediate access to services such as RETAIL PROPERTIES those offered on the Country Club It seems like there is nothing that will slow down re- Plaza. ” tail development activity in the Kansas City Metropolitan area. The high level of consumer spending in this part of the country and the continued growth of residential in farther outlying ar- MULTI-FAMILY eas have sponsored additional shopping center developments in order to serve these new markets. Clearly, the use of tax incre- Multi-family cap rates have begun to stabilize as the ment financing and other government incentives have been key local economy has continued to follow the same pattern. How- in allowing these projects to move forward as ground prices, ever, one trend that slowed substantially in 2006 was the ac- infrastructure costs, and construction costs continue to rise dra- quisition of well built and well located multi-family complexes for matically. condominium conversions. Because there are a large number Some of the more significant sales included the 107,770 of condominiums flooding all sectors of the market, and with square foot State Line Center to Westwood Financial, a package the housing market seeing recent sales price declines, a shift of of three centers including the 210,058 square foot Regency buyers going back into single family residential versus condo- miniums occurred in 2006. This trend is expected to continue 40 Plaza Shopping Center, the 236,927 square foot Westbrooke Village Shopping Center, and the 133,137 Pinetree Plaza to in 2007 making condo conversion projects less likely except in HSM/WDC Regency, and the 105,325 square foot Shannon and around the Country Club Plaza. Valley Shopping Center to Balls Foods Stores. Other signifi- There were, however, a number of significant sales in- cant sales included a package of shopping centers including the cluding the 400 unit Barclay Club Apartments, the 317 unit 176,052 square foot Ten Quivira Shopping Center, the 208,354 Heritage Hills Apartments to Sterling Advisors, the 476 unit square foot Brywood Shopping Center, and the 49,000 square The Preserve to DRA Advisors, LLC, the 193 unit The Enclave foot Devonshire Shopping Center to T-L Ten Quivira, LLC. at Town Center to The Peterson Companies, the 155 unit Royal Again, there were a large number of smaller centers Woods Apartments to McDonnell Royal Woods, LLC, and the that saw a high level of investment activity and this continued to 272 unit Manor Homes of Fox Crest to ITEC Properties. There produce lower capitalization rates and higher prices for sellers. were also a number of smaller sales such as the 184 unit High- Some example sales include the 35,807 square foot Lenexa lands Apartments to a California based investment group, the Plaza Shopping Center to a local investment group, the 81,505 100 unit Devling Place Apartments to Elliott Trust and the 120 square foot Bed Bath & Beyond and Borders Books buildings unit Stoneybrook of Raytown to Stoneybrook Acquisition, LLC. to Winston KC & Weber KC, the 37,048 square foot Highland Class A product capitalization rates ranged from 5.8% Plaza Shopping Center to Westwood Financial, and the 99,750 to 6.6% while Class B capitalization rates ranged from 6.9% square foot 13351 Mission Road Center to a private fund spon- to 8.8%. There continued to be a large spread in capitaliza- sored by Copaken White & Blitt. tion rates between Class A and Class B product again due to There was also an increase in redevelopment activity location, property condition, and future condo conversion op- surrounding indoor malls. In the last year, the Mission Shopping portunities. While it was anticipated that 2006 would see only Center sold to Cameron Group, LLC for redevelopment, and late a slight additional compression in capitalization rates, expect last year had the announcement of the proposed redevelopment 2007 again to be very stable with perhaps another 15 to 20 of Metcalf South Shopping Center and the Metro North Mall basis point compression. The 210,058 square foot Regency Plaza Shopping Center was sold as part of a three shopping center package to HSM/WDC Regency by Weingarten Realty Investors.

As noted earlier, the condominium conversion epidemic to the national and local investment outlook are the potential for that was widespread in 2003 through 2005 slowed down dra- a continued rise in energy and construction costs, a decrease in matically in 2006 in Kansas City. There still remains, however, consumer spending, long term interest rate hikes, continued ter- an enormous interest in condo conversion projects and new rorism, emergence of third world markets such as China and In- 41 condo projects in and around the Country Club Plaza. The dia, among other factors. Availability of construction materials availability of retail, restaurant, and entertainment options in is of key concern as the lack of materials substantially increases the Country Club Plaza has drawn interest by both local and construction prices which further fuels inflation concerns. national developers. What is clear is that condominium buyers 2007 will again see the retail market in Kansas City will buy product in desirable locations but will pass over loca- leading development and investment activity for the fourth year tions which do not offer immediate access to services such as in a row, with multi-family again running a close second. How- those offered on the Country Club Plaza. This is perhaps one ever, increased desire both locally and nationally for office prod- of the reasons why the conversion of the former BMA Tower at uct and expected improvement in fundamentals should make the 31st & Southwest Trafficway, which was purchased last year by demand for office products substantially higher causing a fur- SWD Communities, LLC, has continued at a slower pace than ther compression of capitalization rates. And finally, industrial expected. Its future success may be more heavily based on properties will see increased activity and perhaps a further com- attractive sale pricing due to its lack of immediate amenities. pression in capitalization rates as Kansas City becomes viewed as a stronger future industrial center. One thing is clear, the high demand for real estate will SUMMARY & OUTLOOK continue as investment returns in this sector remain favorable compared to those found in the equity and bond markets. Ad- In 2007, the national economy is expected to remain ditionally, the increased interest by pension funds, life insurance stable although GDP growth should be at a slightly slower pace companies, 1031 investors, high net worth individuals, and than in 2006. Job growth which was at the 2.3 million job global investors will cause a strong availability of capital to be level in 2006 will be difficult to sustain in 2007 with current es- forthcoming again in 2007, both nationally and locally. timates at only 1.95 million jobs. As always, the major concerns Lead Contributors include: Kenneth G. Block, SIOR, CCIM, Principal Investors Chart and Sales Records

OFFICE PROPERTIES SIZE (NRA) SALES PRICE / PER SF CAP RATE BUYER/SELLER Corporate Woods $286,750,000 Buyer: Stolz Real Estate Partners & Urdang Capital Mgmt., Inc. 2,177,573 GSF 7.4% College Blvd @ Antioch, Overland Park, KS $131.68 Seller: New York State Pension Employees Retirement Fund Overland Park International Trade Center $46,000,000 Buyer: Rubicon Investments 575,118 GSF 6.0% 6800 W 115th Street, Overland Park, KS $79.98 Seller: OPITC II, L.C. Commerce Tower $20,875,000 Buyer: Hertz Investment Group, Inc. 438,071 NSF N/A 911 Main Street, Kansas City, MO $47.65 Seller: Tower Properties, LLC Former Farmland Industries Headquarters $13,000,000 Buyer: Kansas City Aviation Dept 260,000 GSF N/A 12200 N. Ambassador Drive, Kansas City, MO $50.00 Seller: Pritzker Realty Group, L.P. Southcreek III 234,678 GSF 12900 Foster Street, Overland Park Kansas $33,036,705 Buyer: DBSI-Discovery Real Estate Services 121,800 GSF 8.06% $140.77 Seller: OPUS Highlands I 112,678 GSF 10740 Nall, Overland Park Kansas Mission Corporate Centre $8,735,000 Buyer: MCC Associates, LLC, et al (Block Sponsored Inv. Group) 126,383 GSF 8.5% 5800 Foxridge Drive, Mission, KS $69.12 Seller: Marley Associates, LLC and Centennial Building Co., Inc.

RETAIL PROPERTIES SIZE (GLA) SALES PRICE/SALES PRICE PER GLA CAP RATE BUYER/SELLER Regency Plaza $31,620,000 Buyer: HSM/WDC Regency 210,058 GLA 8.00% 9228-84 Metcalf, Overland Park, KS $150.53 GLA Seller: Weingarten Realty Investors Ten Quivira Shopping Center $11,700,000 Buyer: T-L Ten Quivira, LLC 176,052 GLA 8.78% 12010 Shawnee Mission Pkwy, Shawnee, KS $66.45 GLA Seller: Coventry Real Estate Partners Westbrooke Village Shopping Center $23,486,000 Buyer: HSM/WDC Regency 160,451 GLA 8.00% 7353 & 7405 Quivira, Shawnee, KS $146.37 GLA Seller: Weingarten Realty Investors State Line Center $18,346,125 Buyer: State Line Op. Co. c/o Westwood Financial 107,770 GLA 6.62% 7600-7628 State Line Road, Prairie Village, KS $170.23 GLA Seller: SM Properties, L.P.

Shannon Valley Shopping Center $10,500,000 Buyer: Balls Food Stores 105,325 GLA 11.7% College Blvd. and Quivira Rd., Overland Park, KS $99.69 GLA Seller: Highwoods Properties

INDUSTRIAL PROPERTIES SIZE SALES PRICE / PER SF CAP rate BUYER/SELLER TA Industrial Portfolio (9 buildings) $55,500,000 Buyer: Cobalt Capital Partners 1,664,046 GSF 7.75% Kansas City Metropolitan Area $33.35 GSF Seller: TA Associates Realty Kansas Commerce Center $48,950,000 7.0% Buyer: Multi-Employer Property Trust (11 bldgs + 43.78 acres) 671,468 GSF $72.90 GSF (With land) Seller: Kansas Public Employees Retirement System 95th & Lackman Road, Lenexa, KS 11901 Grandview Road, Units 1 & 2 $10,586,044 Buyer: Nicholson Group 465,375 GSF 8.60% Grandview, MO $22.74 GSF Seller: N. American Real Estate Opportunity Fund Buyer: PID Associates, LLC, et al (Block Sponsored Belger Portfolio $7,170,000 Projected 452,831 GSF Inv. Group) 1307, 1600, 1800 Vernon & 1201 Saline, NKC, MO $15.83 GSF 11.18% Seller: Larry Belger & Associates Buyer: 540 Westport Associates, LLC, et al (Block 5101 Speaker Road $5,775,000 Projected Sponsored Inv. Group) 382,000 GSF Kansas City, KS $15.12 GSF 9.81% Seller: John Belger & Assoc., L.P. & Larry Belger & Assoc., L.P. Northface Building $10,500,000 Buyer: Adaplis, LLC 238,659 GSF Vacant at Sale 16910 W. 116th Street, Lenexa, KS $43.99 GSF Seller: KC Renner, LLC Crossroads Distribution Center GROSS$9,000,000 SF SALES PRICE PER UNIT Buyer: Boulder Greene MULTI-FAMILY 175,058CLASS GSF 5.83% BUYER/SELLER 11350 Strang Line Road, Lenexa, KS # OF UNITS$51.41 GSFCAP RATE AFTER RESERVES Seller: Wiston Property Management, Inc. Heritage Hills Apartments 489,528 GSF $67,824 Buyer: Bridges at Fox Ridge NF L.L.C. B 5250 Foxridge Drive, Mission, KS 317 7.0% Seller: Mission Associates Ltd Partnership Manor Homes of Fox Crest 435,468 GSF $114,993 Buyer: Foxcrest Investments A 6151 NW 90th Street, Kansas City, MO 272 6.1% Seller: Line Creek Development Partners I, LLC Barclay Club Apartments 378,733 GSF $69,188 Buyer: SES BP Barclay, LLC B 3800 NW Barry Road, Kansas City, MO 400 N/A Seller: Barclay Club Apartments Plaza Garden South Apartments 346,993 GSF $102,600 Buyer: Plaza Gardens Partners, LLC B+ 7100 W. 141st Street, Overland Park, KS 250 6.1% Seller: Plaza Gardens South of O.P., Inc. Royal Woods Apartments 455,067 GSF $36,814 Buyer: McDonnell Royal Woods Apartments, LLC C 7000 Crabapple Lane, Kansas City, MO 455 7.9% Seller: LTVO Hanover Partners, L.P. Kansas City Multi-Family Market

Four Winds Apartments, a 350 unit complex located in Overland Park, Kansas, sold to California-based investment group Passco Cos. LLC for $60,000 per unit. The Kansas City multi-family market in 2006 can basis points below the 2005 average. Strong employment was, 43 in part, the result of continued job growth in the Kansas City be summed up in one word: Fundamentals. market. Kansas City employers added approximately 6,000 new jobs in 2006, with companies like Cerner, Applebee’s, Garmin, fter four years of increasing vacancy and slowing rent YRC, Ferrellgas and Commerce Bank leading the way. According growth, 2005 showed the first real signs of revival in the to a recent Kansas City Star article, the top employers in the Amulti-family market. In 2006, improving fundamentals Kansas City marketplace expect to grow their workforce by as propelled the apartment market to its strongest position in nearly much as 4.5% in 2007. As job growth continues, the housing five years. Occupancy improved 60 basis points to 92.6% in market will continue to tighten as demand for housing increases. 2006, compared to 92.0% in 2005. South Overland Park led The second fundamental of the multi-family market is the the way in occupancy growth at 5.5%, an improvement of 1.2% amount of new supply being brought to market each year. For- from 2005. Other Johnson County submarkets followed suit tunately for owners of existing apartment properties, multi-fam- with Olathe at 5.8%, North Overland Park at 6.2%, Mission/ ily permits fell consistently from 2001 to 2004, leading to less Prairie Village at 6.6% and Shawnee/Lenexa at 6.9%. All John- than 1,000 new units being constructed each year from 2003 son County submarkets showed occupancy improvement from to 2006. One other positive for apartment owners was the con- 2005. Consequently, rent growth for the entire metro area was tinued conversion of multi-family units into for-sale condomini- 1.8% during the year, the strongest rent growth in the Kansas ums in the Downtown and Plaza submarkets. This limited new City market since 2001. It is important, therefore, to examine construction and restriction of supply in key submarkets served the major fundamentals that impact the supply and demand re- as a catalyst for more than 1,000 units of positive absorption. lationship in the housing market leading to this positive trend. It should be noted, however, that multi-family permits The first major fundamental for any healthy multi-family in 2006 grew to over 2,000 for the first time since 2002, market is jobs. Unemployment in the Kansas City area hovered in meaning the delivery of new product is expected to increase the 4.5% to 4.7% range for most of 2006, between 30 and 50 in 2007 and 2008. A growing percentage of these planned developments incorporate multi-family housing as part of mixed-use projects that also feature retail and office com- ponents in a lifestyle center. The trend toward lifestyle centers is anticipated to grow, but not expected to have a large, immediate impact on the volume of construction for traditional garden-style complexes. In the long run, this trend could result in a shift of preferred product type and is something that should be monitored over the coming years. The third fundamental for the multi-family market is one common to all types of real estate: location. Kansas City has been recognized by national developers as a central hub in the international logistics chain. Burlington Northern Santa Fe Railway has proposed a $1 billion intermodal distribution facility in Gardner, Kansas, in the southwest quadrant of the Kansas City market. The intermodal facility is expected to create 12,000 jobs and generate more than $58 million in tax revenue over the next ten years. Musician’s Friend and Pacific Sunwear recognize the strategic location of Kansas City, and have added 700,000 and 800,000 square foot distribution centers, respectively. These developments continue to fuel the job market, which, in turn, fuel the demand for housing. These three major fundamental improvements in the Kansas City market caused the average rental rate to grow to $664 in 2006. The submarkets leading this rent growth trend were somewhat surprising with Midtown lead- ing the way at 4.7%. Other strong submarkets included Southern Overland Park at 3.0%, Shawnee/Lenexa at 2.9% and Southwest Kansas City at 2.8%. The notable Plaza and Downtown markets posted gains of 2.5% and 1.4%, re- spectively. While the gains appear modest, they are a wel- The 250 unit Plaza Gardens Apartments sold at a come relief for apartment owners who experienced flat to 6.1% CAP Rate and a value of $102,600 per unit. slightly negative rent growth over the previous five years. 44 These improvements in the rental market com- 5.90%. These cap rates indicate that multi-family buyers are bined with continued historically low interest rates fu- willing to pay a 100 to 150 basis point cap rate premium for eled another hot year in the multi-family investment apartments as compared to Class A office or industrial prod- market. More than 7,500 units traded hands with an es- uct. Buyers in these transactions are anticipating strong rent timated market value in excess of $500 million. See the in- growth over the next three to four years to help them meet pro- vestment chart on page 42 for some of those notable deals. jected returns. Section 1031 exchanges have also continued to motivate many buyers, impacting underwriting return criteria. Property Weighted Average Weighted Average The outlook for 2007 mirrors what occurred in 2006. Job Class Price Per Unit Cap Rate growth is expected to continue in the Kansas City area, though this A $94,347 6.00% growth may be at a slower pace in 2007 than in 2006. With the upturn in multi-family permits, new supply is expected to increase B+ $92,552 6.10% at a higher rate than in the previous two or three years, but is still B $56,458 7.19% expected to be well below historical averages. Overall, market con- C $49,378 7.62% ditions are expected to remain generally favorable for multi-family owners with slight to modest improvements in occupancy, absorption D $16,087 9.43% and rent growth. As the interest rate environment continues to be ALL $65,974 7.53% favorable for multi-family buyers, capitalization rates are expected to remain below historical levels, but are not anticipated to compress The weighted average sale price per unit in Kansas much further. Continued demand for apartment product is expect- City during 2006 was just under $66,000. The capitaliza- ed to generate strong sales activity in Kansas City during 2007. tion rate for all product types was approximately 7.53%, indicating continued cap rate compression from 2005, with Lead Contributors include: Aaron M. Mesmer, CCIM, Investment Sales capitalization rates for Class A product reaching as low as & Acquisitions BLOCK & COMPANY’S SERVICES

45

Block & Company’s extensive list of services continues to evolve based on the needs of our growing number of local and national clients, truly making us one of the midwest’s leading full-service real estate companies.

Real Estate. Real Strageties. Real Success. BLOCK FUNDS

2006 was a busy year for the Block Funds team. Our objective of providing our investors a means to invest in commercial real estate assets and at the same time Block Fund II diversify the risk among a portfolio of quality income producing assets, has continued 3080 Northfield to be successfully met in our Block Funds. Our latest fund, Block Fund II, which we Roswell, GA began in early 2006, currently has 11 properties in the portfolio and is anticipated to be fully invested by Mid-February, 2007. Corporate Express 2006 marked the second full year of operation for Block Income Fund I, L.P Lenexa, KS and was a partial year for Block Income Fund II, L.P. A complete list of Block Fund II, Executive Hills East L.P. holdings can be found in the adjacent chart. Kansas City, MO The investment goals of Block Income Fund I were to provide an 8.0% cash on cash return and a 15.0% leveraged annual IRR to our investors. Fund managers are Lakeside at Spalding Triangle 46 pleased to report these objectives were exceeded in 2006 with cash returns of 8.23% Norcross, GA and a leveraged annual IRR of 18.8%, without accounting for any property apprecia- tion. Block Fund II is currently paying a 7.5% cash on cash return as projected on the Machine Labs Building invested equity and is also expected to exceed its projected return of a 14.5% lever- Lenexa, KS aged annual IRR. Pine Ridge Bldg. 21 Due diligence and investment screening are two of the major reasons why our Lenexa, KS Block Fund returns are exceeding expectations. The acquisition team for Block Funds understands that a complete assessment of the physical, economic and market aspects Rubicon at Highlands of each property is the only way to accurately determine the value of the asset. Our Smyrna, GA team completes an exhausting 130 point checklist for each asset under contract. The Valle Vista Shopping Center team also screens hundreds of deals each week and only pursues those that are located Lee’s Summit, MO in markets that are in the recovery or expansion phase of a cycle. The team will not purchase an asset in a market that is in a hypersupply or recession cycle and will not Westview Business Center pay above replacement cost for an asset. Lithia Springs, GA Equity commitments are now being raised for Block Income Fund III, L.P. This fund will mirror the structure of the first two funds but will have an equity goal of $50 Two Sun Court million. Norcross, GA

For additional information on our Block Funds or Block Fund III, please call Ken Block at 816-932-5551 or Brian Beggs at 816-932-5568 Lead Contributors include: Brian R. Beggs, CCIM, CFA, Director of Acquisitions or visit our website at www.blockfunds.com. Plaza Corporate Center College Crossing Business Park

MMG Worldwide

BLOCK CONSTRUCTION SERVICES, LLC The following are a few projects where we provided construction services in 2006: ver the last five years, Block Construction Services, LLC has excelled in providing construction services Corporate Medical Plaza I, II & III Oboth within and outside of the Kansas City market Overland Park, Kansas area. With construction management volume of over $30 mil- (160,000 square foot medical) lion for a second consecutive year, Block Construction Services has continued to expand and refine its construction manage- College Crossing Buildings C&D ment and development expertise and services. In 2006 alone, Lenexa, Kansas Block Construction Services provided construction manage- (136,000 square foot industrial facilities) ment and development services on over 160,000 square feet of medical office, 140,000 square feet of light industrial and Entercom Communications 60,000 square feet of office/warehouse “flex” product. Ad- Mission, Kansas ditionally, our staff shepherded a host of renovation projects ($5 million office renovation w/ relocation) in existing office, industrial and retail properties, as well as handled 78 different tenant improvement projects. Owners often need an independent firm representing Kansas City Bone & Joint Clinic 47 them to handle all aspects of move relocation, site selection, Overland Park, Kansas budget evaluation, contract administration, project manage- ($2 million tenant improvement project and relocation) ment, and a host of other technical and advisory services. Block Construction Services personnel have a complete under- Pine Ridge West Building 28 standing of the construction process and are able to handle Lenexa, Kansas aspects of even the most unique project. Schedules and bud- (59,000 square foot office/warehouse “flex” facility) gets are generally the most critical items to be addressed, and communication is an absolute necessity. Block Construction Kansas City Urology Care Research & Cancer Center Services has the ability to provide accurate and articulate Overland Park, Kansas direction to partners, institutional and private investors, cli- ($3 million tenant improvement project with linear accelerator ents and tenants, and brings an owner’s perspective and an vault construction) expert’s knowledge to every new or expanding project. Block Construction Services representatives are also specialists in working with electrical, structural, mechanical, civil and archi- Carondelet Orthopaedic Surgeons tectural sub-contractors to insure a project gets completed on Overland Park, Kansas time and within budget. ($1 million tenant improvement project) In 2007, Block Construction Services intends to fur- ther expand its portfolio of services to include other aspects 9233 Ward Parkway of relocation management such as lease administration and Kansas City, Missouri audits, space and utility utilization analysis, and facilities op- ($500,000 tenant improvement project) eration and management in an effort to further assist our cli- ents. Lead Contributors include: Brad Simma, Director of Construction Kansas City Economic indicators National Trends in the U.S. ran near 2.2% during 2006 which is the highest rate recorded since 2001. The aggregate inflation rate includ- The national economy grew at a brisk average rate of ing energy was more than a point higher at 3.3% toward the 4.25% over the first two quarters of the year while the latter end of 2006. This suggests that consumers were doing their two quarters began to experience what the Fed was aiming for: part in keeping the economy going in 2006 by leveraging more a soft economic landing. Certainly, the fundamentals of the na- and more credit for discretionary purchases. Such consumption tional economy remain strong, but persistently high energy costs activity increases the relative amount of money in the economy coupled with growing deficits (both consumer and governmen- and leads to a classic demand driven inflation scenario. This is tal) were clear red flags to current Fed chairman Ben Bernanke specifically the kind of spending the Fed aims to curb by keeping that changes in monetary policy were in order. Critical factors in interest rates slightly elevated. 2007 should see a dip in infla- 2006 were interest rate changes, inflationary concerns, and the tion due to two factors. First, energy prices should moderate due housing market plateau; and each of these factors have a bearing to current supply gluts and due to speculative sellouts. Second, on the direction of the economy in 2007. consumer-driven inflation is already being driven down due to interest rate levels and the end of the so called housing bubble. With consumers maxed-out on their borrowing ability from both Interest Rates traditional credit sources and the more recent home equity loan craze, consumers will find it hard to keep spending levels at After 17 consecutive hikes in the economically influen- 2005 and 2006 levels this coming year. tial federal funds rate, the Fed decided it was time for a break in mid 2006 and kept rates steady at 5.25%. The impetus for this policy change was to effect the desired so called economic soft Kansas City Trends and Outlook landing where the Fed challenges consumer driven inflation with midlevel interest rates. The Fed does this while keeping a close 2007 will bring a similar pattern of growth for the eye on business investment levels so as not to squelch the econ- greater Kansas City metropolitan area as compared to the na- omy by making corporate barrowing unaffordable. Preliminary tion as a whole. The gross regional product (GRP) grew at evidence suggests that this goal is being accomplished, though just over 3.0% during 2006 and this rate is likely to decline to 48 the long term effects of these policy changes will not be clear un- 2.2% during 2007. The slowdown is primarily a result of Kan- til mid to late 2007. At the very least, broad market indicators sas City’s concentration of telecommunication businesses and such as the S&P 500 suggest that investors remain confident financial service businesses that have been slower than other in- that the economy is moving in the right direction and that cur- dustries to add new jobs after the recent economic dip. Income rent interest rate levels are not causing equity investors to shift growth for the region is anticipated to grow at a slightly faster money from stocks to interest sensitive bonds. In all likelihood, rate than GRP reaching an average of 2.3% during 2007 as the the Fed will continue with a neutral stance throughout most of strong job growth in 2006 will put pressure on employers to up 2007, only balking if business investment or general confidence wages across many job classes. As employment growth tempers indicators dip too low, which could cause a rate reduction. in late 2007, personal income growth will decline again slightly as well. Most of the current job growth is in service industries, particularly medical services, business management and food service. Overall, the region will experience moderate growth Inflation during 2007 as inflation worries are kept at bay and job growth remains steady in most local industry sectors. Just as in 2005, this past year held broad based con- cern for both consumers and businesses alike in terms of infla- tion. Energy prices had been rising steadily since 2003 up until mid 2006 when the sector finally took a break. This pause in Sources: University of Missouri Economic Dept., Dept. cost growth is partly due to the end of much of the speculative of Commerce, Bureau of Labor Statistics, Kansas City buying that has been plaguing the sector, but it is also due in Chamber of Commerce, Mid-America Regional Council. part to the sector’s new resilience in the face of geopolitical concerns. Even with energy excluded, the core inflation rate Lead Contributors include: Zach Batson 1st QT/2007 OFFICE - CLASS A MARKET STATISTICS Market Inventory # of Buildings Overall Vacancy YTD Leasing Activity YTD Net Absorption Avg. Full Service Rent Downtown 7,533,138 23 18.4% 217,027 578,018 $16.65 East Jackson County 348,646 5 29.2% 11,223 8,268 $20.66 Kansas City, Kansas 401,530 5 6.3% 13,507 877 $15.01 Midtown 2,009,817 10 7.4% 42,418 (87,935) $25.69 North Johnson County 728,903 7 8.7% 13,616 8,613 $19.74 North of the River 493,435 4 1.0% 0 (3,682) $22.50 South Johnson County 4,671,572 35 14.0% 361,349 344,083 $21.74 South Kansas City 1,543,647 8 24.8% 4,500 (166,664) $19.00 Southeast Jackson County 219,353 6 31.7% 4,498 7,219 $23.92 TOTAL OFFICE - CLASS A 17,949,850 103 15.72% 668,138 674,359 $20.47

OFFICE - CLASS B Market Inventory # of Buildings Overall Vacancy YTD Leasing Activity YTD Net Absorption Avg. Full Service Rent Downtown 10,762,371 108 14.0% 375,677 274,641 $15.57 East Jackson County 3.184,195 97 15.8% 76,935 (5,675) $16.46 Kansas City, Kansas 944,410 23 13.4% 38,780 139,986 $14.60 Midtown 3,597,349 66 14.9% 85,639 (200,649) $18.59 North Johnson County 6,970,225 160 10.9% 331,228 78,941 $16.59 North of the River 5,308,739 106 22.6% 224,090 (37,180) $13.78 South Johnson County 16,548,354 290 9.3% 709,090 142,466 $18.86 South Kansas City 3,322,955 69 24.2% 233,215 91,271 $15.84 Southeast Jackson County 1,058,107 34 18.5% 17,755 41,572 $15.20 TOTAL OFFICE - CLASS B 51,616,705 953 16.0% 2,092,409 525,373 $16.17 TOTAL OFFICE CLASS A + B 69,566,555 1,061 15.86% 2,706,547 1,199,732 $18.59

WAREHOUSE/BULK INDUSTRIAL Market Inventory # of Buildings Overall Vacancy YTD Leasing Activity YTD Net Absorption Avg. Gross Rent KCI/Airworld 3,330,732 54 4.0% 136,629 123,824 $5.17 North Kansas City/Riverside 20,942,819 449 5.0% 805,289 (371,564) $5.37 Executive Park/Northland 27,695,546 277 8.0% 416,021 (178,107) $4.62 Wyandotte County 38,505,556 755 4.0% 1,159,042 483,825 $3.71 Johnson County 43,921,957 1165 6.0% 1,295,806 (381,632) $6.61 East Jackson County 84,800,569 1906 8.0% 1,546,123 1,029,776 $4.19 TOTAL WHSE/BULK SPACE 219,197,179 4,606 5.8% 5,358,910 706,122 $4.95

LIGHT INDUSTRIAL/FLEX Market Inventory # of Buildings Overall Vacancy YTD Leasing Activity YTD Net Absorption Avg. Gross Rent KCI/Airworld 964,918 16 17.0% 8,620 99,176 $5.37 North Kansas City/Riverside 614,068 11 1.0% 5,008 (366,556) $5.91 Executive Park/Northland 318,393 12 22.0% 27,182 (167,654) $4.76 Wyandotte County 678,398 25 10.0% 30,193 499,450 $3.84 Johnson County 5,103,441 196 10.0% 481,581 (121,014) $6.81 East Jackson County 3,834,969 131 11.0% 121,993 1,147,032 $5.17 TOTAL LIGHT INDUSTRIAL/FLEX 11,514,187 391 11.8% 674,577 1,090,434 $5.31 TOTAL FLEX + INDUSTRIAL 230,711,366 4,997 8.8% 6,033,487 1,796,556 $5.13 MARKET STATISTICS Continued RETAIL Estimated Percent Market Inventory Vacant Vacancy SF Avg. Rental Rate Under Construction South Johnson County 13,765,646 7.6% 1,051,066 $16.94 2,660,000 North Johnson County 13,315,719 8.8% 1,167,338 $12.78 1,575,000 Kansas City, KS 4,813,377 14.7% 708,137 $9.53 100,000 North of the River 10,513,067 9.0% 947,593 $12.74 1,900,000 Midtown/Downtown/Plaza 6,185,651 10.1% 624,745 $14.15 425,000 Independence/Blue Springs 11,268,315 12.5% 1,410,906 $9.78 920,000 Lee’s Summit 3,677,341 6.4% 236,015 $21.57 600,000 South Kansas City 6,347,538 13.9% 882,863 $11.21 150,000 TOTAL ALL MARKETS 69,886,654 10.1% 7,028,663 $13.32 8,330,000 Compiled by Block & Company with the assistance of CoStar

MULTIFAMILY Unit Overall Avg. Net Absorption Avg. Class A Average Class B/C Vacant Market Inventory Vacancy (Units - Past 3 yrs) Rent (w/out utilities) Rent (w/out utilities) Units South Johnson County 35,100 6.5% 780 $806.00 $647.00 2,291 Downtown 3,900 7.3% 1,030 $856.00 $457.00 285 Plaza/Midtown 2,300 5.5% (30) $906.00 $629.00 126 East Jackson County 15,600 9.4% 420 $678.00 $562.00 1,459 Wyandotte County 8,300 7.1% 100 $676.00 $491.00 590 Northland 16,100 7.7% 450 $709.00 $571.00 1,243 South Kansas City 23,000 7.8% (30) $680.00 $522.00 1,805 North Johnson County 13,000 6.4% 220 $764.00 $664.00 837 MSA TOTALS: 117,300 7.4% 2,940 $759 $568 8,635 Compiled by Block & Company with the assistance of Integra Realty Reources

COMPILED BY BLOCK & COMPANY, INC. REALTORS COMMERCIAL REAL ESTATE BROKERAGE, PROPERTY MANAGEMENT AND DEVELOPMENT 700 WEST 47TH STREET, SUITE 200, KANSAS CITY, MO 64112 PHONE: 816.756.1400 FAX: 816.932.5598 EMAIL: [email protected] WWW.BLOCKANDCO.COM Presented by Block & Company, Inc. Realtors

Block & Company Inc., Realtors 700 W. 47th Street, Ste. 200, Kansas City, MO 64112

Phone: 816.756.1400 FAX: 816.932.5598 Email: [email protected] www.blockandco.com

Real Estate. Real Strategies. Real Success.