Kansas City’s Industrial Market Shows Record Absorption in 2017

Over the last five years, Kansas City has seen a flurry of activity in the industrial sector. Since 2012, we have seen approximately 22.7 million square feet of new Class A industrial space hit the market, with speculative development and build-to-suits.

Considering that Kansas City had only about 14 million square feet of Class A industrial space prior to 2012, these additions have had a huge impact on our marketplace.

Joe Orscheln, CBRE

Joe Orscheln, CBRE

Prior to big box speculative development in Kansas City, it was hard to land large users due to lack of available product. These users did not have the time to wait for build-to-suit projects to be completed, so if product wasn’t readily available, they would move on to a different market. As a result, developers began to introduce speculative buildings, meeting this demand for new Class A product.

Kansas City has thus emerged as a major player competing for larger users and their requirements. This year alone we have seen record absorption numbers and are not showing any major signs of slowing down anytime soon. The two major drivers that are taking this space are e-commerce and logistics users.

The new demand for larger spaces has increased the average size of new warehouses by 206,882 square feet over the past 10 years. This figure is the fourth largest margin of increase in the country during that time. Buildings constructed between 2012 and 2017 in Kansas City are averaging a staggering 267,778 square feet, compared to 60,896 square feet for buildings constructed between 2002 and 2007 (see table).

Demand for efficient logistics space that facilitates quick movement of goods to consumers has caused warehouses to increase in size and height. The average new warehouse completed in the United States between 2012 and 2017 increased by 108,665 square feet (143 percent) since the last development peak between 2002 and 2007.

Distribution markets like Kansas City that serve major population regions and have land for new warehouses saw building sizes increase the most over the past few years.

E-commerce demands

E-commerce users require these larger spaces with taller ceiling heights to accommodate ever increasing inventories that move in and out of facilities faster than ever before. Nationally, warehouse ceiling heights rose by 3.7 feet, from 28.6 to 32.3 feet in total between 2012 and 2017.

The effects of large e-commerce users ripple beyond big box industrial space as well. Over the holidays, we typically see an uptick in demand for “pop-up” industrial space for e-commerce and mail delivery users looking for additional overflow storage and space for managing returned items.

These short-term leases can benefit both tenant and landlord, as tenants can reduce costs with a shorter lease commitment and owners can collect rent while looking for a long-term occupier for the space. As e-commerce continues its rapid growth, these short-term requirements will only increase.

New construction

Kansas City’s overall industrial vacancy hovers around 5.5 percent. A user coming to Kansas City today needing 500,000 plus square feet only has three options: VanTrust 716, a 716,000-square-foot speculative building with build-to-suit options for office space available; STAG Lone Elm Logistics, a 496,393-square-foot development in Olathe, Kansas; or NorthPoint’s LPKC Inland Port VIII, a 777,222-square-foot speculative space in the distribution-focused Logistics Park Kansas City.

However, there are many projects currently under construction that will add competition to the playing field. These projects include:

• Opus 56 Commerce Center — 230,000 square feet

• Trammell Crow/Clarion KCI Intermodal BusinessCentre — 202,000 square feet

• Westlink — 170,000 square feet

• NorthPoint’s Northland Park — two 413,000-square-foot spaces

• Midwest Gateway — 301,000 square feet and 186,000 square feet

Absorption trends

So, the question is, will it all get absorbed in a timely manner? With current absorption trends, these buildings should be occupied rather quickly, and there are certainly more planned to follow.

Logistics experts see optimal distribution routes to dense population centers from Kansas City, which will continue to bring new users to the market. In fact, nearly half of the absorption over the past three years can be attributed to new entrants to the Kansas City market.

Manufacturers and distributors continually try to position themselves as efficiently as possible to place products in our hands as quickly as possible, and that trend is still on the rise.

Kansas City has absorbed more than 23.6 million square feet of industrial space since 2013, and the total space taken has increased every year. The market absorbed 3,130,901 square feet in 2013. The 6,696,834 square feet absorbed as of the third quarter of 2017 has already broken absorption records for the market, not including the final quarter of the year.

The market dynamics in Kansas City are rock-solid from a leasing and investment perspective, which will spur more speculative building to accommodate the record levels of demand.

We have plenty more room to run and it will be exciting to see just how big a player Kansas City becomes on the national industrial landscape.

— By Joe Orscheln, First Vice President, CBRE. This article first appeared in the January 2018 issue of Heartland Real Estate Business magazine.

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