Forecast: retail, small medical office to lead growth in area’s commercial real estate next year

10/03/2013 12:56 PM

10/03/2013 12:57 PM

Retail and medical offices show the most promise for growth in the area’s commercial real estate market next year — and even then the growth likely won’t be stellar.

The NAI Martens 2014 Forecast, released Thursday, said retail occupancy rates are increasing and rental rates are rising slightly. And demand by small health care providers is expected to drive the most growth in the office sector, the forecast said.

But the growth is relative to a slowly recovering economy, said NAI Martens president Tom Johnson.

“Neither one of these I would call exceptional,” Johnson said. “There are things happening, but it’s not going to be dynamic.”

The forecast said increasing retail occupancy rates and rents will probably continue into 2014. Wichita’s average triple net retail rent — which is rental fees minus utilities, property taxes and maintenance fees — is $15 a square foot for Class A space, the forecast said. Some newer retail spaces have triple net rents in the mid-$20-a-square-foot range, the forecast noted.

On the office front, the forecast said that vacancies had not declined much and new office construction has been limited to smaller buildings in suburban areas that have been pre-leased or are owner occupied. The bulk of Class A space and Class B office space is in northeast Wichita and the central business district. Suburban Class A space is commanding rents of more than $20 a square foot.

Growth in the office market will be confined largely to medical users, especially specialty medical users in smaller spaces focusing on convenience and access, the report said. Those specialty medical users include chiropractic, dental, urgent care and after-hours clinics. They “are the fastest growing category of small-scale medical office space,” the forecast said.

In 2014, the forecast said, it’s likely that no speculative office construction will occur in the area unless it’s for a building in which 50 percent of the space has been pre-leased prior to the start of construction.

In the industrial sector, the report said overall vacancies remain in the 8 to 9 percent range, which is where the area industrial vacancy rate has remained for several years.

“In the best years it was probably 6 percent,” Johnson said.

The sector is challenged by a lack of high quality buildings in the area, the forecast said.

“When you get down to quality, in-demand space … we are in somewhat short supply,” Johnson said.

Speculative construction on industrial property is expected to remain tepid.

“Those few buildings which have been brought to market face occupancy challenges due to their above-market rents,” the forecast said. The market average rent is $3.75 a square foot, while quality industrial properties are charging rents ranging from $9 to $17 a square foot, the forecast said.

Johnson said that, generally, landlords of area industrial space are content to have their properties fully occupied and cash flowing, even at lower rents.

But CEO Steve Martens said he expects Wichita industrial rents to move higher to more closely reflect rates in other areas of the country. He just doesn’t know when that adjustment will occur.

“We’re lagging a bit in industrial rates, but it will equalize,” Martens said.

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