The Topeka Real Estate Report

Industrial Real Estate Report

Ed Eller | Industrial Specialist
Kansas Commercial Real Estate

Sales and leasing of existing industrial real estate have been very strong for several years, the current result of which is the lowest vacancy rate and lowest availability of space we have seen in decades. As one might expect, rental rates have steadily risen over the past several years, as have costs of ownership (property taxes, insurance, common area maintenance, construction costs, etc.). In years past, we have discussed the industrial market with reference to geographic segments of the community. Today, the market availability of space is so limited, a community-wide view of types of space is more appropriate.

Small Business Industrial Parks

Small business industrial parks are characterized as typically 1-4 tenant buildings, with a mix of service and distribution tenants and a few light manufacturers. Vacancy is extremely low averaging less than 1% overall. Modified gross rents have increased substantially in the last 3-5 years, along with costs and values. Absorption has been limited, but very strong. Kansas Commercial has been associated with several new construction projects since 2019. One recent project was a 24,000-square-foot speculative building that went from 8% occupancy in the second quarter of 2022 to current occupancy of over 80%.

Medium Industrial Parks and Buildings

Medium industrial parks and buildings consist of freestanding buildings from 20,000 to 60,000 sq. ft. commonly with 1-4 owner/occupants or tenants. Sales of these buildings were strong in 2019-2021, with rising prices per square foot depending on location and functionality. Rents have increased significantly, with Class B modified gross rents rising generally $4.00-$5.00 per square foot per year to $5.00-$6.00 per square foot per year.

Class A building rents have been $6.00-$7.00 NNN-Roof and Structure with energy efficient, modern, functional structures, with new or newer offices, restrooms, etc. Class C buildings in this category in Topeka are concentrated on the south side of Topeka commonly referred to as the Forbes Area. Occupancy has been slightly lower for Class C buildings, but still very strong, typically above 95% in the last few years with steadily increasing rents and a move from modified gross leases to NNN-Roof and Structure leases.

Large Industrial Parks and Buildings

Large industrial parks and buildings would commonly be from 60,000 to 250,000 square feet with 5-20 tenants, with several important exceptions; namely single tenant regional and national manufacturers and distribution companies, i.e., Wal-Mart, Mars, Target, Home Depot, US Foods, Goodyear, Bimbo. Several strong local manufacturers, Ernest-Spencer, Koch & Co., Fairview Mills/J6 Enterprises, Bettis Companies, etc. also occupy this space and have made significant investments in expansion over the last several years.

Very significantly, the Forbes Industrial Park and various individual buildings have seen a marked increase in occupancy and rents in the last five years, where traditionally we have seen 20-30% vacancy and modified gross rents from $1.85-$2.25 per square foot per year now have occupancy above 90% and rents from $1.75- $2.25 NNN-Roof and Structure. Owners have also spent significant money rehabilitating and renovating the existing stock to increase material handling efficiency, lighting and energy efficiency.

PHOTO BY BRADEN DIMICK

Industrial Investment Properties

The market for quality industrial space is also strong with cap rates ranging from 7-8% in the last few years. Rising interest rates may dampen the appetite for existing leased properties by investors as the margin between cap rates and interest rates narrows. However, there is a significant counter current in the industrial investment community who are increasingly focused on the value of these properties relative to replacement cost. Land prices and construction costs, although minimally tested locally, are increasing substantially, which may lend validity to this sentiment.

New Industrial Development

Perhaps the most exciting element of the local market is the prospect of several new industrial developments in the planning stage for 50,000 to 450,000 square feet of buildings under consideration in 2023-2024. Affordable land prices and strong demand for space in a scarce market are helping to generate interest and activity in this arena among local and regional private and institutional developers. Several infill projects ranging in size from 3-15 acres are being considered around the community as well as a few larger projects in the 20–40-acre range.

The limiting factor locally has been the cost of extending municipal utilities to lower priced land versus developing on higher priced land already served by utilities, streets, etc. Projected and future rents are finally approaching a point where future investment in new development may allow for substantial growth of Topeka’s industrial base in manufacturing, distribution and wholesale trade.

Office Real Estate Report

Mike Morse | Partner
Kansas Commercial Real Estate

Brady Lundeen | Associate Broker
Kansas Commercial Real Estate

The increase of the cost of construction is being felt by all sectors of commercial real estate. New carpet and paint for a lease space a few years ago was $5.00 +/- per square foot and now is $10.00 +/- per square foot. A tenant used to be able to have other updates and changes to a space aside from carpet and paint. This is no longer. The increase in cost will eventually be passed along to the consumer. Lease rates will increase and/or tenants will be asked to participate in remodeling and updating expenses of lease spaces. Either way, the tenant will be paying a higher effective lease rate.

Small Office Users

The small office users of the community have returned to the office. The suburban office market is solid with limited spaces available to lease and very few office buildings on the market for sale. We often hear people comment that they see our signs all over and thus the market must be weak. This is not accurate. Unlike residential real estate when a sign is almost always for a full residence, our sign in front of a building is more often than notfor a single suite inside of a large building.

Downtown Office Market

The downtown office market is our current challenge. Many of our major employers are struggling with workers returning to the office. The market has large blocks of space available, and this is prior to Hill’s vacating the 150,000-square-foot building at 8th and Topeka. The revival of Downtown Topeka has been incredibly positive for all of Topeka and the office market. We need to continue to support this redevelopment.

The next greatest challenge we have in leasing spaces in downtown after the return of employees is parking. The City of Topeka has a two-hour free parking policy on Kansas Avenue and on the 100 blocks east and west of the Avenue. Unfortunately, this policy appears to be going away. This will impact office users that have customers/clients visit their downtown office. In addition, the city is going to increase parking rates in city-owned garages. This increase in cost goes directly to the bottom line of a tenant or landlord.

PHOTO BY JARED HITCHENS

Retail Real Estate Report

Mark Rezac | Partner
Kansas Commercial Real Estate

The retail market continues to be active in several sectors throughout Topeka while a few retailers are aggressively expanding.

The sectors that continue to see activity are the West and SW sectors of the market. There are several new construction sites that will see new retailers open by Q3 or the beginning of Q4. Rates have not increased much in these sectors, but we continue to have activity.

Downtown Retail

Downtown retail has not fully recovered from Covid. There continues to be several vacancies in the downtown sector and several retailers have closed. Similar to those looking for office space, parking availability is critical for downtown retailers that want easy, free and accessible parking for their customers.

Quick Service Restaurants

Quick Service Restaurants or QSR’s lead the pack on trying to find locations. With less seating, new floor plans and new operating procedures, QSR’s have changed their strategies due to the inability to find enough employees willing to work and the desire to have a drive-up window. Properties that have the ability for a drive-up window are in high demand. Not all QSR’s will have indoor seating and instead offer a carryout or drive-thru experience.

Retail Property Investors

There continues to be a high demand from retail investors looking to purchase property. The increase in interest rates barely slowed down investors’ interest in purchasing opportunities. More investors are looking for the “value add” properties. If a property is priced correctly, we see multiple offers from local, regional, and national investors. Some will purchase the property, sight unseen. True triple net investment properties continue to be in high demand.

With the increase in the costs of goods sold, higher wages, staffing challenges and the increase in real estate taxes, local and regional retailers will have to make some hard decisions as to the future of their business. Many are adapting to new ways of doing retail business.

PHOTO BY BRADEN DIMICK