The Nexus of North America Trade

Logistics, warehousing and distribution are adding a thick strand to the a web of a diverse Kansas City economy. 

 It really doesn’t take a Ph.D. in geometry to figure this out: Start with a circle. A big one. From any point on the circumference, draw a line to the exact center. For the sake of argument, we’ll call that a radius. Now sweep that line 360 degrees, with your starting point the center of an overlapping circle. OK, then: How much of the original circle did you cover? No matter how big your circle is, the intersection will account for barely more than a third.

That’s your object lesson of the day in what makes Kansas City such a hot emerging market for logistics, distribution
and warehouse operations. Because when you get right down to it, you can get there from here, and, on average, a lot faster than from most any place else.

While it may seem blindingly obvious to anyone in a coastal town, at least half the potential distribution area in their “circles” is made up of . . . water. And dolphins don’t buy cars or shop on-line. As more companies with major logistics operations are realizing, moving products across the greatest amount of land—crisscrossed as it is by highways, rail lines and even waterways, with millions of consumers therein—is increasingly important to managing supply-chain costs. 

But the Kansas City logistics evolution is not just about the tens of millions of Americans who live within a one-day drive, the 256 million within a two-day drive, or nearly all 320 million just three days out from Kansas City. What’s really reshaping the logistics push here is the dramatic change in consumer buying patterns. Increasingly, American shoppers demand faster, more efficient means of distribution. In the past three years, Kansas City has witnessed an explosion in industrial construction for warehousing and distribution, and the buildings aren’t just going up in size, they’re getting bigger.

And coming off the construction lull that saw the occasional building go up only when specifically ordered by a company, this new breed is being built on a spec basis, without tenant commitments—and still they’re filling up as fast as they can be completed. 

What’s changed? For one, the market is now positioned before the right developers, a trend that tracks with the opening of the major intermodal facilities by BNSF with its Kansas City Logistics Park in southwest Johnson County,
the Centerpoint KCS Intermodal Center in south Kansas City, and the KCI BusinessCentre atm Kansas City International Airport. Anticipation, in fact, is behind a number of new  construction projects in the region:

Screen Shot 2016-05-31 at 9.29.33 AM• NorthPoint Development, in one of the most notable projects of the year, announced last spring that it would erect the largest spec building in the history of Kansas City: Inland Port XIV, an 822,104 square-foot behemoth at Logistics Park, and the first in the market with a 36-foot clear height, which open in 2016. It’s already been leased as a distribution center for

• Even before that project was done, Hunt Midwest announced a 126-acre expansion of its surface business park, including buildings that would range from 200,000 square feet to 875,000 square feet. That’s part of a far more ambitious plan that will yield more than 7 million square feet of Class A industrial space, and Hunt Midwest projects investing $450 million during a 25-year build-out.

• Newmark Grubb Zimmer is rolling out a 496,150-square-foot building at the Lone Elm Logistics Center, not far from the logistics park near Gardner. It, too, will feature 36-foot ceilings, and will be offered to clients seeking space for warehouse, e-commerce or distribution operations.

• And up north, Trammel Crow and Clarion Partners are collaborating on Logistics Centre IV, a 432,600-square-foot building at KCI Intermodal BusinessCentre. It’s the third one put up in the 687-acre industrial park that has runway access to Kansas City International Airport, and part of a 182-acre first phase that will eventually yield 1.8 million square feet of space (and 5.4 million when the $216 million park is built out).

Kansas City has always been a center of national commerce in some form, even before the nation went fully transcontinental in 1890. But in recent years, it has emerged as the go-to site for logistics expansion and modernization efforts at a time when that entire sector is undergoing profound changes. In 2015, in fact, Material Handling & Logistics ranked Kansas City No. 4 on its list of the Top 50 U.S. Logistics Cities.

The continuing rise of e-commerce, increases in outsourcing of transportation functions by U.S. businesses, nearshoring with businesses in Mexico, improvements in just-in-time supply chain management, advances in intermodal rail operations, along with new technology and the rise of Big Data—even a shortage of truck drivers
nationwide—all are factors that work alone or in various combinations to foster new opportunities.

Part of that is the convergence of four interstate highways here. Perhaps the most vital of those is I-35, the so-called NAFTA Superhighway, starting near the Mexican border on the south and ending up near the shores of Lake Superior. It provides the most direct linkage between the three North American nations, and it runs right through the heart of Kansas City, including Downtown. Next up is I-70, providing a nearly cross-country rout from Washington in the east to I-15 in Utah, the link to interstates heading into both northern and southern California and the ports of San Francisco and Los Angeles. I-29 connects Kansas City directly to the Canadian border; I-49 is the vital link south to the Gulf of Mexico.

The re-emergence of spec buildings has been a huge development, those in the field say, because until recently, this region lacked a reliable supply of ready-to-go structures—those either in place or capable of being built in short order.

The sweeping change in consumer buying is reflected in the retail construction numbers. In 2006, the year before the Great Recession kicked in, 325 million square feet of retail space opened nationwide; by 2013, that figure had fallen by more than 86 percent, to a comparatively paltry 44 million square feet. Contrast that national change with the local dynamic. More than 20 million square feet of industrial space has been added to the Kansas City market just since 2011—and it was snapped up nearly as soon as the concrete pads were dry.

Here’s what’s happening in that space:

• Since 2013, 10.2 million square feet of new industrial development has come on-line. That averages out to 2.26 million square feet a year, up more than 40 percent over historic norms.

• Meanwhile, the region’s absorption rate—net square footage filled after new vacancies are subtracted from new sales and leases—swelled to 4.4 million square feet in 2014, and in the second quarter of 2015 alone, nearly 1 million. Contrast that with a historic average of about 1.9 million square feet a year.

• A historic annual rate of 1.6 million square feet in new development is again on pace to roughly double, with 3 million more under construction at the start of 2015 and 1.9 million was delivered by
the end of the year. Of that, 1.8 million was on a spec basis.

• And even with that new space coming to market, the historic vacancy rate of 7.1 percent fell to 5.4 percent by the end of the first quarter of 2016.

Optimism among industrial brokers is at an all-time high, driven in recent years by this region’s muscle-flexing in vehicle manufacturing. Ford Motor Co. invested more than $1 billion to retool its Claycomo assembly plant since shipping production of the Escape crossover SUV out of KC, then hired thousands of workers to replace that line with the new Transit commercial and passenger vans. And the production of the Ford F-150 here has ensured plenty of work for that side of the plant. General Motors, at the Fairfax Assembly Plant on the Kansas side, has infused hundreds of millions of dollars in plant upgrades that allow workers there to produce the Chevrolet Malibu and Buick LaCrosse models. 

Responding to that demand, components suppliers of seats, headliners and other interior elements have swarmed into the Kansas City region, gobbling up large-scale facilities or construction of their own. But the transformation, while driven by vehicle production, won’t stop there: The consumer-products side is changing the way American companies handle merchandise, and e-commerce is a huge, growing sector of the economy. 

That’s what really sets the KC area apart, because for most products, overnight delivery isn’t absolutely essential—at least, not yet. It’s worth noting, however, that KCI ships more product than any other national or international airport in the nation.

Kansas City, brokers say, is finally in that position where it has industrial-scale product in various sizes, ranging from the new behemoths to mid-market stock in the range of 30,000 to 80,000 square feet. The lone downside for tenants at this point has been an uptick in rents, and not just within the Class A space. 

In a diverse regional economy, growth in the logistics explosion is paying off for more than car makers and e-commerce fulfillment sites: It’s strengthening Kansas City’s position with companies that do business internationally. The Kansas City Foreign Trade Zone is ranked among the top 25 out of nearly 180 such active zones in the nation, and 22nd for importing goods that go into production and are exported. That came to more than $2 billion in goods shipped in and out of the region last year—more than St. Louis, Denver and many of the major areas, and within striking distance of Chicago’s numbers.

With more industrial buildings going up, the question becomes just how big those structures can get. Brokers long accustomed to viewing 500,000 square feet as top-of-scale here now speculate that this region will soon see its first 1-million-square-foot warehouse or fulfillment center.