By David Zimmer, SIOR, Newmark Zimmer
The industrial real estate market in the metropolitan Kansas City area ended 2020 on a high note. 2021 will pick up right where 2020 ended, with no outward or visible signs of a slowdown.
New industrial construction is visible in every geographic sector of the metro area, with upwards of 2.5 million square feet of buildings under construction. Without exception, all these are high cube, modern distribution-type facilities intended to capture the ever-growing e-commerce, logistics and food and beverage sectors of the economy.
David Zimmer, Newmark Zimmer
With the one possible exception being the 880,000-square-foot office and distribution building for Urban Outfitters in Wyandotte County, all industrial construction underway is on a speculative basis with lease-up taking place before the buildings are placed into service.
Development activity is being sponsored by both local development entities and regional and national developers who state that Kansas City’s geographical central location, coupled with a skilled workforce and extensive transportation infrastructure, are the primary reasons why Kansas City has attracted numerous companies to establish major distribution operations over the past decade.
Investor appetite
In addition to new development activities, the investor market for industrial properties has also reached record levels. In one of the highest reported transactions, the 856,000-square-foot Amazon fulfillment center at 6925 Riverview Ave. in Kansas City, Kansas, traded for a reported $107 million or $125 per square foot in 2020. Other industrial sales, both single-tenant and multi-tenant properties, are trading at or above offering prices and setting records for sales in their respective submarkets.
Class B and C industrial properties are also seeing increased activity. These buildings with ceiling heights ranging from 18 to 24 feet and less than 15 percent office space are re-leasing quickly, thus affording investors little downtime between tenants. Because of the higher rents commanded in new construction, many portfolio owners of existing properties are raising their offering rents and converting them to a NN basis with annual rent adjustments, following the lead of new construction and further enhancing the value of their properties.
There is some redevelopment activity in the urban core for older or historic properties, but these are more on a one-off basis, handled by individual investor/owners, and while important to the urban areas, will do little to impact the tremendous activity in the outlying industrial areas.
Land costs
One negative that may slow smaller development activity in the Kansas City area are industrial land prices. There are no physical impediments to further development other than sewers and other infrastructure. Nearly all industrial sites where development is occurring are part of larger projects where the developer controls much, if not all, the available sites.
Recognizing the continuing high cost of improving raw land, those developers are quoting record-high land prices to those inquiring about sites for sale. If this continues to play out, industrial land prices will continue to escalate, and new development will consolidate to those who control major assemblages of land in the industrial corridors.
While the states of Kansas and Missouri have purportedly reached agreements regarding poaching of companies from across the state line, there is continual suspicion and looking over the other shoulder to make sure each is living up to their side of the deal. Both states appear to have comparable incentive packages to offer companies considering a relocation to the metro area. The Kansas City Area Development Council continues to lead the way in coordinating economic development activities on behalf of the 16 counties that fall under its purview.
For 2021, there does not appear to be anything on the horizon to slow this industrial surge. While some might say the Kansas City industrial market is overbuilt, and it may in fact be when compared with historic activity, companies from outside the metro area continue to evaluate Kansas City as a desirable place to establish operations. Companies already in our market continue to grow and expand, thus providing fuel that stokes the development fires.
Barring a significant resurgence of the pandemic or an overall collapse of the economy, it appears that the economy will continue to operate on all cylinders, having built the change in political power into the economic forecast. And so long as investors seek out industrial properties and developers can deliver product as promised, this industrial activity has a long runway ahead with little headwind in the new year.
David Zimmer is vice chairman with Newmark Zimmer. He is also an SIOR Foundation trustee. This article originally appeared in the January 2021 issue of Heartland Real Estate Business magazine.