Cameron Duff,
Kansas City Industrial Services Group,
Colliers International
Let’s examine some contributing factors that are encouraging new deliveries while still driving vacancy rates down and absorption up.
Spec Is King
The biggest story in the Kansas City industrial real estate market during the first three quarters of 2014 was the delivery of over 2.5 million square feet of Class A distribution facilities on a speculative basis.
It can be argued that, in the past, many prospective tenants considered locating a distribution center in Kansas City, but they ultimately selected a different market based on a lack of available inventory and the inability of some companies to wait on the extended timetable for a build-to-suit project. Developers that took notice of this trend and reacted by delivering space to the local market are currently being rewarded for their actions.
Much of the speculative development in 2014 centered around intermodal facilities, including 2.8 million square feet recently delivered or under construction by NorthPoint Development at BNSF Logistics Park KC in Edgerton, Kan.
Additional intermodal spec development included 351,520 square feet delivered by Trammell Crow Co. and Clarion Partners at the KCI Intermodal Business Centre near the airport in Kansas City, Mo., and 300,000 square feet delivered by CenterPoint Properties at the Centerpoint-KCS Intermodal Center in Kansas City, Mo.
The remainder of the significant spec development has occurred in infill sites in strong performing submarkets, including 369,768 square feet in Edwardsville, Kan., by Van Trust Real Estate Development; 341,000 square feet in Riverside Horizons by NorthPoint Development; 169,000 square feet in Kansas City, Kan., by Prime Investments, and 100,000 square feet in Executive Park, Kansas City, Mo., by Mid-West Terminal Warehouse Co.
With expansion and growth occurring so quickly for many companies, the necessary timing required to find viable building options for space users has diminished rapidly. Strong market fundamentals and continued demand for modern Class A space will continue to facilitate additional industrial development opportunities. The risk of overbuilding will remain limited based on the strong economic metrics related to the industrial market.
Driving Forces
So, who is leasing the speculative inventory delivered to the market in 2014? In the Kansas City market, most of the activity can be linked to one of two market sectors: e-commerce and the automotive industry.
The strongest performing industrial markets are located around inland distribution channels that are able to handle increased e-commerce capacity through intermodal or air cargo operations. Kansas City continues to be very well positioned — based on multiple intermodal operations and a centralized geography — to quickly deliver a growing e-commerce sector to the end consumer.
A few notable transactions in 2014 involving e-commerce and geographic-focused companies include the 500,150 square feet purchased by Flexsteel Industries, and 436,866 square feet leased by Kubota Tractor Corp. at BNSF Logistics Park KC; 369,768 square feet leased by sportswear distributor Alphabroder in Edwardsville, Kan; and 260,707 square feet leased by Amazon at Lenexa Logistics Centre in Lenexa, Kan.
Home to assembly plants for Ford Motor Co. and General Motors, Kansas City continues to solidify its position as a key automotive manufacturing market. Recent investments made in the local Ford and GM assembly plants continue to positively influence the market.
In 2013, GM announced it would spend nearly $600 million on facility upgrades and construction of a new paint shop at the Fairfax Assembly Plant, where the Chevy Malibu and Buick Lacrosse are produced. The capital investment locally accounted for over one-third of all GM’s announced expenditures on North American facilities for 2013.
In April 2014, Ford began producing the new Transit commercial van at the Claycomo Assembly Plant, where it already produces the F-150 pickup truck. Since the start of 2012, Ford has added 4,000 employees at the plant, including 1,200 workers in 2014.
The additional commitment and capital investments that both Ford and General Motors have made in these plants has increased the confidence of many automotive suppliers to open new facilities in Kansas City.
Challenge Manufacturing (423,928 square feet), Martinrea International Inc. (275,560 square feet) and Yanfeng USA Automotive Trim Systems (258,000 square feet) opened or announced new Kansas City facilities in 2014 to supply one or both of the auto assembly plants.
2015 Outlook
The classic “If you build it, they will come” mantra has proven true in Kansas City, especially in recent months. Strong market fundamentals and continued demand for modern Class A space will continue to facilitate industrial development opportunities.
Absorption continues to outpace new supply, therefore we expect developers to continue to deliver spec product to the market throughout 2015. This trend is clearly shown by the over 2.2 million square feet of speculative space currently under construction and slated to deliver in 2015.
By Cameron Duff, SIOR, CCIM, Senior Vice President,Kansas City Industrial Services Group, Colliers International. This story originally appeared in the January 2015 issue of Heartland Real Estate Business magazine.