Speculative construction in Kansas City’s industrial market has exceeded the height of the last boom for a couple of reasons. On a macro level, the economy is improving, so it’s only natural that the local market would follow suit, especially given its logistical advantages. The development of intermodal facilities, the aging stock of existing product combined with no new construction in the past four years — plus a thriving automotive sector — are pushing this new wave of development locally.
During the first half of this year, the Kansas City industrial market has absorbed more than 2 million square feet of space, driving down the vacancy rate to 7.5 percent, slightly lower than the historical average of 7.6 percent and down from the peak of 8.4 percent in 2011.
We’re likely to experience an increase in vacancy during the next 18 months, however, as six properties totaling slightly more than 2 million square feet deliver. In fact, 2013 will post the most speculative development of the past decade, exceeding 2008’s total of 753,000 square feet.
New Logistics, New Product
One of the key demand drivers for the latest boom involves the more sophisticated approach to logistics on the part of Corporate America and even smaller end users. Tenants simply demand greater clear ceiling heights, space for truck turning and trailer storage, and more operationally efficient distribution and manufacturing properties.
Kansas City has more than its share of obsolete warehouses that were built decades ago and are no longer functional. You literally cannot give them away, but that’s not to say these properties are without upside. In the right hands, they produce some of the best opportunities for adaptive reuse and redevelopment.
The Crossroads area of Kansas City is a great example. The Crossroads is an old industrial area south of Kansas City’s downtown loop that had been in decline for decades. In recent years it has come back to life as a mixed-use district with great appeal to residents and businesses seeking an eclectic, urban environment.
Kansas City’s logistical advantages are a big demand driver, too. With four interstates crossing the region, the metro area has more freeway miles per capita than any other U.S. city. What’s more, Kansas City is the second largest rail hub after Chicago, and this helps drive a spate of intermodal development on both the Kansas and Missouri sides of the metro area.
In Edgerton, Kansas, Burlington Northern Santa Fe is developing a 1,000-acre project that includes the railroad’s 440-acre BNSF Intermodal Facility and a 560-acre inland port, Logistics Park-KC, with local partner NorthPoint Development. Ultimately, Logistics Park-KC is expected to support 7 million square feet of distribution and warehouse facilities.
Logistics Park-KC already has attracted a 327,000-square-foot build-to-suit for gifts and novelties wholesaler DEMDACO.
In Grandview, Missouri, the Kansas City Southern Railway Co. and CenterPoint Properties are developing the CenterPoint-KCS Intermodal Center at a former U.S. Air Force base. The project includes a 370-acre intermodal facility and 970-acre industrial park that can support buildings from 100,000 to 1 million square feet.
The response of occupiers to the intermodal developments will be interesting to observe. The success of the facilities hinges primarily on a subset of occupiers that are big receivers of inbound containers from Asia. A key selling point for the intermodal projects includes discounts on returned containers, which will be filled with agricultural commodities and then shipped back to coastal ports.
The viability of CenterPoint-KCS Intermodal Center and Logistics Park-KC hinges on proving these cost savings for occupiers who use 400 to 500 containers per year and must absorb the associated expenses. Drayage — the cost of transporting containers within the intermodal developments or to and from nearby distribution centers — also will be a determining factor.
Occupancy Drivers
For its part, the automotive sector has long been a viable piece of the Midwest industrial puzzle, especially in Kansas City. Ford Motor Co. has announced plans to invest $1.1 billion and add 2,000 jobs at its Kansas City Assembly Plant in Claycomo, Mo., where it produces the F-150 truck. Meanwhile, General Motors Co. is investing $2.5 billion in its Kansas City plant, which manufactures the Buick LaCrosse and Chevy Malibu.
These massive investments are sure to positively impact Kansas City’s industrial market and parts suppliers in the region, which already has resulted in 2.3 million square feet of net absorption locally since 2011.
Even though optimism for the Kansas City industrial market is at a five-year high, we expect rents to remain flat and possibly decrease due to the area’s new speculative construction. For the last five quarters, the asking rate on bulk space has been in the range of $4 to $4.21 per square foot, and it is likely to stay there for the balance of 2013 and into 2014.
We do see new construction as a catalyst for more robust capital markets activity. Unlike other markets throughout the Midwest and around the country, we have not seen a wave of investment sales and turnover in ownership. As new, high-quality development delivers and is absorbed, we anticipate heightened investor interest and pricing that will continue to propel optimism for the next 18 months.
— Whitney Kerr Jr., managing director, Cassidy Turley