Why Institutional Investors are Bullish on Kansas City Industrial Market
After years of trailing cities such as Dallas, Memphis and Indianapolis as major bulk distribution centers, Kansas City has emerged as a significant and large hub for the development of Class A industrial logistics centers whose development is backed by institutional money. The trend is transformational for our market and here to stay for three primary reasons:
(1) Institutional money — namely life insurance companies — has always allocated a portion of its funds for real estate. That money has found Kansas City.
(2) Local Kansas City developers, brokers and property managers are well-suited and eager to accommodate non-operating entities like life insurance companies to buy land, build projects on a speculative basis, lease up and manage the new developments, and sell them when the financial backers decide to cash in on their investments.
Kansas City has traditionally been a family-owned real estate development community comprised of five or six major players. None of these families has sold its portfolios to industrial REITs. Thus, there is a niche for institutional-backed, Class A development that is financed with deep pockets and brought to market by local developers.
(3) The biggest reason for large-scale Class A industrial development in Kansas City is that the five-county region is at the intersection of four primary U.S. rail spokes. All of the rail operators have developed, maintained and expanded their respective intermodal facilities.
That translates into the ability to accept, repackage and transfer massive amounts of container freight from U.S. and Canadian ports from the south, east and north — by rail or by truck — to other markets. Kansas City’s central location east of the Rocky Mountains has put a giant development dot on the map for industrial developers.
The trend of building large-format distribution centers began several years ago. Sporting goods retailer Coleman opened a 1 million-square-foot distribution center in 2009 in a deal backed by USAA. It was the first modern facility of its kind in Kansas City and a pure bulk distribution facility, which featured double-loaded docks (the building has dock doors on two sides of the building unlike older buildings with just a single dock), 32-foot clear heights and 8-inch floors that could handle greater weight.
Coleman’s project occurred about the same time that a pair of modern distribution center development deals also came to market.
Circa 2009, Pacific Sunwear leased a new 400,000-square-foot building in Johnson County (Sun Life Financial provided the majority of funding for development and construction and is the principal owner) and Pure Fishing Gear took 450,000 square feet of a new speculative building in Northeast Kansas City.
While we do have some large industrial buildings ranging from 1 million to 2 million square feet occupied by Hallmark Cards and JC Penney Co., those facilities were built in the 1960s and 1970s. Even if they were available for lease, they would not meet today’s requirements for modern distribution centers.
Notable Third-Quarter Deals
In one of the biggest move-ins during the third quarter of 2013, LMV Automotive Systems took occupancy of its 212,558-square-foot manufacturing facility at 3251 Heartland Drive in Liberty, Mo. The development represents one of the economic drivers in the region — the expansion of the automotive industry.
For example, in late November the Kansas City Council’s Planning and Zoning Committee supported the request by Grupo Antolin to open a 148,800-square-foot industrial building at 1601 Southern Road, where the Spanish company plans to produce headliners for the new Ford Transit assembly line at the Claycomo plant.
The city committed to backing a $10.5 million industrial revenue bond for the new facility. Ford has spent $1.1 billion on its Claycomo complex, where it builds Transit vans and F-150 pickup trucks while employing more than 4,000 people.
The biggest lease transaction in the third quarter of 2013 was a 280,000-square-foot build-to-suit for Xpedx in Wyandotte County. At the close of the quarter, nearly 1.9 million square feet of new product was under construction, according to CoStar Group.
The largest projects underway were Inland Port III, a 1 million-square-foot building that is 67 percent pre-leased, and Inland Port 1, a 500,000-square-foot building that is under construction on a speculative basis.
Healthy Net Absorption
The total inventory of the Kansas City industrial market is 262.5 million square feet contained in 6,542 buildings, according to CoStar. To put that figure into context, the Boston industrial market is approximately 495 million square feet, Raleigh N.C. has approximately 120 million square feet of industrial while Chicago has nearly 1 billion square feet of industrial space.
The average quoted asking rent at the end of the third quarter in the Kansas City industrial market was $4.07 per square foot annually. Meanwhile, the vacancy rate stood at 5.8 percent, down slightly from 5.9 percent at the beginning of 2013.
Net absorption for the first three quarters of 2013 totaled a positive 2.27 million square feet, which looks good on paper yet actually indicates that the pace of absorption decelerated somewhat from the prior year. During the fourth quarter of 2012 alone, industrial net absorption totaled a positive 2.35 million square feet, CoStar reports.
Sensing opportunity to expand services and manage more freight, Kansas City’s rail operators have beefed up their infrastructure, which in turn is driving demand for new industrial developments.
The new and expanded intermodal centers include Logistics Park Kansas City, which is a new 1,000-acre BNSF intermodal facility in southern Johnson County, and KCI Intermodal Business Centre, which is situated on 690 acres and adjacent to Kansas City International Airport.
The KCI intermodal center is served by Kansas City Southern (KCS), an international transportation holding company with reach to the very southern tip of North America. KCS is comprised of three primary railroads: The Kansas City Southern Railway Co., Kansas City Southern de Mexico, and the Panama Canal Railway Co.
Taken together, Kansas City’s intermodal facilities are world-class and capable of handling thousands of tons per day. Based on a growing global economy and improved infrastructure for distribution of goods, we believe demand for large-format distribution centers in the Kansas City region will continue for the foreseeable future.
— Paul Fogel, vice president, Karbank Real Estate Co./CORFAC International