“If you build it, he will come.” Yes, you’ve heard the Field of Dreams reference before, but never has it rang truer than with the Kansas City industrial market. The construction of 500,000-square-foot buildings suddenly ignited tenants’ interest in that space size, so much so that in the past two years Kansas City has experienced a tremendous surge in growth. In fact, Kansas City is now ranked No. 6 on the list of the top 10 U.S. industrial markets for speculative construction deliveries, according to Cushman & Wakefield.
Coming off a record 5.5 million square feet of positive net absorption in 2016, the market exceeded that number by 65.7 percent in 2017 with a staggering year-end total of 9.2 million square feet of absorption. Putting that kind of tenant demand into perspective is challenging. The consensus is that while Kansas City has enjoyed a boom period for the past few years, 2018 will prove to be the best year yet. For the past six years, the vacancy rate held steady, never going above 8.3 percent and never dropping below 7.1 percent.
To better understand just how fast this market is growing, let’s examine some of the largest industrial markets in the country such as Chicago and Dallas. These markets are two to five times the size of Kansas City as measured by inventory. The Chicago market absorbed 17.8 million square feet in 2017, but it had 1.2 billion square feet of inventory at year’s end. From a percentage standpoint, Chicago absorbed 1.5 percent of its total inventory while Kansas City absorbed 4.3 percent of its inventory.
In other words, Kansas City absorbed 51.2 percent of the volume Chicago did, despite working from a base just 18 percent the size of Chicago. Even better, Kansas City achieved this growth while maintaining a vacancy rate that shows a healthy balance between new construction and the market’s demand for space.
When measuring the amount of space absorbed per capita, Kansas City had the highest total of any established market in 2017, outpacing major established players like Dallas and Indianapolis, while also surpassing other rapidly expanding markets such as Atlanta, Memphis and Salt Lake City.
Kansas City’s long reach
Key drivers behind this growth of the local industrial market are location and logistics. For Kansas City, it’s all about the ability to reach 90 percent of the U.S. population within a two-day drive. Kansas City considers itself the true “middle-middle” of the country, with 22 million people located within 300 miles. The city’s large business infrastructure, its status as the largest rail center by tonnage in America, and operating in the central time zone are also huge advantages. And, at a time when clogged freeways make many cities undriveable, Kansas City has more freeway miles per capita than any other city.
Kansas City is drawing the interest of national and international corporate clients, as well as investors and developers. Since 2015, $456 million has been invested, and 14.7 million square feet of warehouse and distribution space has been built for companies, including CVS Pharmacy, Spectrum Brands, Kubota Tractor, Excelligence Learning, Staples and jet.com, as well as other national e-commerce companies.
The rise of e-commerce has greatly contributed to the market’s growth. Companies are using FedEx and UPS ground shipping to reach more consumers who don’t want to pay high shipping costs and find extended shipping days to be reasonable.
Manufacturing is another key player in this market, particularly in automotive, motor vehicle parts and communications equipment. The Kansas City manufacturing industry is expected to grow by more than 5 percent over the next 10 years, compared with 1.3 percent growth nationwide. The Brookings Institution recently named Kansas City the No. 2 auto hub in the country.
Northland Park, a nearly 300-acre industrial park located just east of I-435 on Missouri Route 210, is just one example of tremendous growth, with 799,000 square feet of new construction delivered and another 413,000 square feet underway. Tenants relocating from Executive Park, an area that has lacked major new construction for some time, have embraced the new, modern space. The recently delivered speculative buildings in Northland Park are all 100 percent occupied, and pre-leasing activity is strong for buildings under construction.
New construction continues
The market will continue its hot streak in 2018, with 1.9 million square feet of speculative construction already underway and strong pre-leasing activity in Johnson County and Northland Park. In addition, 1.5 million square feet of build-to-suit space is scheduled for delivery this year, with several million square feet of build-to-suit prospects in the pipeline. Developers will primarily focus on constructing buildings that range in size from 250,000 to 500,000 square feet.
Vacancies created by tenants moving from older buildings into new construction may cause the average asking rate for the market to dip, but the well-located new buildings are expected to achieve strong rents. Over the past two years, Kansas City has repositioned itself as one of the prominent industrial markets in the country, and it looks like that standing will be reinforced in 2018.
— By Joseph Accurso, Senior Director, and Whitney Kerr Jr., Managing Director, Cushman & Wakefield.