It’s been a remarkable 18-month run in the Kansas City industrial market. Developers are being rewarded for their patience and long-term land positions, and larger tenants finally have several options from which to choose among Class-A distribution facilities.
In January 2013, the vacancy rate in the Kansas City industrial market was a tight 6 percent, with barely any product available for users searching for modern distribution space of 200,000 square feet or more. At that time, I made some predictions about new construction, vacancy and absorption. Let’s review what happened.
Market Drivers
Kansas City recorded more than 3.5 million square feet of positive absorption in 2013 alone, adding another 800,000 square feet during the first two quarters of 2014. This demand was driven in large part by the automobile suppliers, online retailers and by governmental agencies.
At mid-year, the vacancy rate for Kansas City warehouse product had fallen to 5.6 percent, well below the national average of 7.3 percent. Average lease rates have moved up to pre-recession levels, as regional distributors and third-party logistics companies attempt to secure large blocks of space for their national footprints.
In 2013, the market delivered 2.4 million square feet of new industrial product, with another 2.3 million announced or under construction heading into 2014.
Kansas City has historically taken a conservative approach to development, evident by the significant amount of pre-leasing activity. The market has averaged 30 to 35 percent pre-leasing among newly announced projects, largely due to the lack of competition from national developers. Local developers tend to be more risk-averse and are generally using their own capital.
Through the first half of 2014, the market brought another 1.5 million square feet on line and announced plans for more than 2 million square feet of additional product.
Highlights of New Deliveries
Kansas City-based NorthPoint Development has led the way again in 2014, delivering 826,000 square feet of cross-dock product in two buildings located in its Logistics Park Kansas City. NorthPoint is developing the intermodal project, located in Edgerton, Kan., in partnership with BNSF Railway. NorthPoint has two more buildings under construction in the park, which will add another 900,000 square feet by the end of 2014.
Also on the Kansas side of the state line, locally based VanTrust Real Estate has delivered a 369,000-square-foot speculative cross-dock facility in Edwardsville. VanTrust has expanded into other industrial markets in recent years including Ohio, Kentucky and Indiana.
In upscale Lenexa, Kan., Block Real Estate Services is completing a speculative 260,000-square-foot distribution facility in its Lenexa Logistics Centre. Block is also completing a 66,000-square-foot office/warehouse building to fill out its College Crossing project in Lenexa.
On the Missouri side of Kansas City, CenterPoint Properties is going vertical with a speculative 300,000-square-foot distribution facility in its intermodal park in partnership with Kansas City Southern Railway.
Trammell Crow Co. with Clarion Partners is completing a speculative 351,000-square-foot cross-dock facility near Kansas City International Airport in its KCI Intermodal Business Centre.
NorthPoint Development is finalizing a 341,000-square-foot Class A distribution facility in its Riverside
Horizons Business Park, completing its fourth building in just two years.
Notable Transactions
Kansas City-based Smart Warehousing announced early this year that it will lease 575,000 square feet in the Logistics Park Kansas City project in Edgerton. Smart has expanded quickly into 25 locations across the county.
Alphabroder, a distributor of apparel products, signed a lease for the entire 369,000-square-foot cross-dock facility in Edwardsville. With its success here, VanTrust will likely build its Phase II project on adjacent land.
Martinrea International, a Canadian automotive supplier, signed a lease for 275,000 square feet as a build-to-suit developed by Tutera Real Estate in Riverside, Mo. The project will be a first-of-its-kind facility, housing production, assembly and distribution for General Motors in Kansas City.
Amazon.com will occupy the entire 260,000-square-foot Lenexa Logistics Centre I facility developed by Block Real Estate in Lenexa. Meanwhile, St. Louis-based Bunzl Distribution is constructing a 150,000-square-foot facility near KCI Airport in partnership with CBC Real Estate Group.
Final Predictions
The second half of 2014 should continue the rapid pace of the past 18 months, delivering another 1.5 million square feet of industrial space to the market. It wouldn’t surprise me if some national developers announced projects in the hopes of competing with the deep bench of local and regional developers.
Kansas City typically offers higher yields than they can get in Tier-1 cities, which drives institutional capital into the area. It remains to be seen whether the local distribution market will be able to support the 4 to 5 million square feet of Class A industrial product due to come on line over a three-year period. I predict that vacancy rates will rise to near 6.5 percent by January 2015.
Lease rates will continue to rise by 10 to 15 cents per square foot over the next 12 to 18 months as users begin to pay more for highly functional space in larger blocks. Annual net rates of $4.25 to $4.65 per square foot are the new normal here.
Historically, conservative local developers and a lack of institutional money pushing vertical development helped Kansas City avoid overbuilding. I predict a healthy marketplace in 2015 and 2016, but with vacancy periods increasing to 12 to 15 months for large blocks of space compared with six to nine months today for completed product. Local developers and strong equity-to-debt positions will carry the day again during this cycle.
— By Nathan Anderson, SIOR, CCIM, Managing Principal, Lee & Associates. This article originally appeared in the September 2014 issue of Heartland Real Estate Business.