HEARTLAND SNAPSHOT, SEPTEMBER 2004

Kansas City Industrial Market

In Kansas City, industrial speculative development has ground to a halt in the past 24 to 30 months, according David C. Hinchman SIOR, first vice president of industrial properties for CB Richard Ellis.

“Developers are cautiously reviewing the possibility of new development,” he says.

Potential build-to-suit activity of large industrial facilities greater than 150,000 square feet is at the highest level of demand during the past 6 months than it has been in 10 years. At present, there are six build-to-suit projects for ownership or lease of 60,000 to 425,000 square feet under construction, and there are potential projects of six to ten buildings, ranging from 200,000 to 1 million square feet. These build-to-suit projects that are currently under construction include the 60,000-square-foot Asian Foods project; the 74,000-square-foot Bunzel project; the 424,000-square-foot Kansas City Star Printing Plant expansion; the 200,000-square-foot Patriot Steel development; and the 280,000-square-foot Amerisource Bergen project.

The majority of build-to-suits are for high-bay bulk distribution facilities, Hinchman says. The speculative development that will follow at some point will be focused on the same type of product and smaller multiple tenancy distribution projects (20,000 to 80,000 square feet).

“The high demand for owner-occupied buildings and the strong interest in preleased facilities are due to current financing in the Kansas City industrial market,” says Lee Brodbeck, sales manager/broker for Fishman & Company. “There is a reasonably strong demand in the industrial lease space.”

With all of the construction, the Kansas City market is right on track with an average delivery of 2.4 million square feet through the second quarter of 2004, Brodbeck says.

The under construction or proposed build-to-suits are spread throughout the metropolitan area with no particular concentration, although some areas have seen more activity than others. The Northland area has received 1.7 million square feet, with 86,000 square feet currently under construction. In North Johnson County, Kansas, 30,000 square feet have been delivered and 12,000 square feet are under construction. South Johnson County has seen 26,200 square feet delivered, with 15,000 square feet under construction.

“New construction is underway or planned in the airport area, the executive park area, Johnson County and one major project to be announced this fall, roughly 50 miles from Kansas City. Other pending projects are ranging with expressed interest throughout the metropolitan area and the larger Kansas City region,” Hinchman says.

Kansas City recently has seen an interest from several regional/ national developers for projects in the Kansas City market, including Duke, First Industrial and Panattoni. “Each is aggressively pursuing potential projects in this marketplace although none have any projects under construction,” Hinchman says. IDI currently has one project under construction near the airport.

Kansas City’s overall average industrial net rental rate for the second quarter of 2004 was $3.75 per square foot, a 1.4 percent decrease from the first quarter, according to Brodbeck. Flex space decreased from $8.45 per square foot to $8.10 per square foot in the second quarter, a 5.15 percent drop, and the average rate for warehouse space stayed at $3.30 per square foot.

“Kansas City’s new spaces that are 20,000 to 50,000 square feet are leasing for $3.75 to $4.40 per square foot,” Hinchman says. Second generation space in this size range is leasing from $2.50 to $4.00 per square foot. There is only one new project with more than 100,000 square feet of spec space available. New generation spec space more than 100,000 square feet will likely lease from $3.25 to $3.75 per square foot. Build-to-suit space more than 100,000 square feet will lease from $2.75 to $3.25 per square foot. Second generation space more than 100,000 square feet leases for $2.00 to $3.25 per square foot.

Overall vacancy rates for industrial/flex buildings 10,000 square feet and larger are running at 10.58 percent. “On the other hand, Class A space, depending upon size range, is ranging from 3.25 percent to 4.25 percent vacancy,” Hinchman says. The overall industrial market had an absorption of 1.25 million square feet, with flex buildings absorbing 250,000 square feet and warehouse facilities absorbing 1 million square feet,” Brodbeck says.

The areas of most interest in the near future will be Edwardsville, Kansas, and Riverside, Missouri, due to the availability of land for projects and their ability to serve users who want an easy connection between the high-end executive housing in Johnson County, the airport and the Kansas City interstate system, Hinchman says. Johnson County, where most of the investment dollars in the past have gone, is running out of developable land for new projects. Eastern Jackson County, Missouri, is another area that developers may want to watch, according to Brodbeck.

As for the future of Kansas City’s industrial market, increased construction and fuel costs are having an impact on industrial growth. A stable labor market is helping to control those costs. “We have had a 1 percent loss of industrial jobs in our market this year,” Brodbeck says. “I expect that to be on the positive side by the end of 2004.”



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