Kansas City Just Keeps on Truckin’

When the last lines of Kansas City’s logistics history are written, it’s likely that a pivotal chapter will focus on the year 2013.

Bulk distribution facilities like the massive TVH Parts facility in Olathe have become standard fare in this market.

In March of that year, an upstart commercial realty firm founded just months earlier, NorthPoint Development, secured approval from the Edgerton City Commission to take the lead on a stalled-out logistics park being built just east of that hamlet in southwest Johnson County. It was envisioned as a companion to a new intermodal facility that BNSF Railway was about to bring on-line.

Just a month later, the new Logistics Park Kansas City saw ground broken for its first tenant, DeLong Grain Co., which was planning a 25,000-square-foot grain distribution facility there. The company saw a huge opportunity to reduce costs of shipping by taking containers that had just been off-loaded and emptied next door at the BNSF site, filling them with grain, and sending them back out on their first leg of a global export journey.

Fitting, perhaps, that the park started with a grain concern. What has taken root and blossomed on that 443-acre site has literally transformed the face of logistics, warehousing and distribution in Kansas City. Today, LPKC has more than 8 million square feet of distribution space available in buildings across a site that has grown to 1,500 developable acres.

National and international shippers have moved into facilities as large as nearly 1 million square feet—vast spaces almost unheard of in this market a decade ago—and the demonstrated power of KC as a locus for logistical excellence has inspired speculative construction of additional monster facilities, from Topeka to St. Joseph to Warrensburg.

“In 35 years in this line of work, I’ve never seen anything like it,” says Jim Didion, from the St. Louis offices of developer Trammel Crow. “But the demand just keeps coming, and developers are putting product up as fast as they can, and it continues to get absorbed.”

The Kansas City market, he said, is the perfect example of what drives growth in that sector. “Industrial has always been driven by three things: cheap land, available labor and economic incentives,” Didion said. “I think that’s still a true statement today.”

A Gambler’s Mentality

The LPKS-BNSF chapter may indeed be a key plot line in the region’s logistics development story, but you have to turn the pages back a bit, to 2006-2008, to see the foreshadowing of growth to come.

That was when Dan Jensen, who oversees industrial brokerage and development for Kessinger/Hunter & Co., assumed his Riverboat Gambler persona. He had assembled land, secured a financial backer in Sun Life, and assessed that the odds were in his favor, thanks to Olathe’s foresight to extend industrial-grade infrastructure near 167th and Loan Elm Road.

He was willing to see the market here, where a 250,000-square-foot building was generally as big as things got, and raise it by 350,000 more. He and his team produced that initial 602,000-square-footer in Olathe on a speculative basis—with no tenant commitment going in.

In poker terms, Jensen drew a royal flush. That building quickly picked up two tenants who filled it. The longstanding complaint in brokerage circles—“we can’t attract companies because we don’t have the product”—was about to become a thing of the past. In the years that followed, buildings of 700,000, then 800,000, then more than 900,000 square feet were in the works. And as soon as they were finished, they were filling up.

“Our philosophy then was, trite as it sounds, that if you build it, they will come,” says Jensen. “We weren’t making near our share of the big deals, the 300-500-700,000 square foot and million-square-foot deals. We were arguing all along it was because if you had a 500,000-square-foot requirement in the Midwest, you could look in half a dozen places like Chicago and Dallas, make your pick and get going. But if you came to Kansas City, you had to build it first.”

For decades, that delay—for siting, permitting and construction—was a self-fulfilling deal-breaker when it came to Kansas City. The Lone Elm facility became the template for big deals to come.

“Over the past 10 years, what’s happened has just been incredible,” Jensen marvels. “The amount of development that has occurred—in the last five or six years alone, 30 million square feet of state-of-the-art, big bulk distribution space has been added to the Kansas City market, and to our credit, absorbed. And there’s still a lot of spec going on.”

The Back Story

None of this is possible, of course, without the vision of some folks who have been dead for 150 years—the men who came to this part of a growing nation and built a way station that would help connect east and west.

That Kansas City, just 240 miles across the state from St. Louis, is able to leverage more out of its logistical capabilities today is a direct consequence, says Trammel Crow’s Didion, of the rail barons’ decision to build intercontinental lines that turn northeast to Chicago after reaching this part of the state from southern California. St. Louis may have terrific highway and river access, but Kansas City has that, as well—plus the largest rail center in the nation, measured by tonnage.

Thanks to additional north-south rails that run from the Great Lakes to the Gulf of Mexico, we’re also second only to Chicago in rail-car volume. The equivalent of a million tons of freight moves through the area every business day of the year, topping 264 million tons in 2014, but surely growing since then.

Our advantages, however, aren’t limited to steel rails. This region is tied to four major interstate highways (I-35, I-70, I-29 and I-49), and Kansas City International Airport moves more air cargo each year than any air center in  a six-state region. Kansas City boasts more Foreign Trade Zone space than any other U.S. city—all told, more than 10,000 acres of it. Water transit? We sit on the western end of the nation’s largest navigable inland waterway, the Missouri/Mississippi River system.

Bottom line: If it’s here, it can get where it needs to go faster, cheaper and more efficiently than from most any other location.

The Plot Thickens

All of those assets, of course, were in place well before the summer of 1994, when the first electronic payments were made for products ordered over something called the Internet. The eCommerce monster would have far-reaching consequences for Kansas City.

Why? It starts with centrality. We’re nearly as close to New York as to Los Angeles, the two largest populations bases in the U.S. If you want to get somewhere quickly across America’s vast distances, your best starting point will generally fall near the midpoint of a line. 

“There’s also been that change in philosophy: People are trying to figure ways to drive cost out of their supply chain,” says Jensen. “Surprisingly enough, they have found that if you put a centralized distribution center in Kansas City, a 500,000 square-foot site can run with 70 to 90 people and be more cost-effective than three facilities across the country, with 50 people each at 120,000 square feet. And everyone is looking to drive pennies out of the process.”

That’s because they’re trying to accommodate the new economy of on-line commerce. Today’s shoppers—increasingly Millennial in their composition—are more inclined than any other generation to research, study, buy on-line. But they also are far more likely to return items they don’t like, effectively doubling the logistical challenges of a consumer purchase.

“On a macro level and specific to Kansas City because of our unique fundamentals, I would tell you that industrial is poised for ongoing momentum,” says John Hassler of NG Zimmer. “A lot has to do with the prevalence of e-Commerce. That is a sign of the times. The way people shop today and the way distribution and logistics networks are put together, even in the face of an economic downturn, I don’t expect those to reverse. I expect to continue to see ongoing growth.”

A recent development that augurs well for Kansas City is the Supreme Court’s decision in the Wayfair case, which held that consumers can be assessed sales tax for on-line transactions, even if the retailer they are buying from has no physical presence in their state.

“The day after that decision came down,” Hassler said, a number of large national retailers “immediately began national site-selection searches for their next center, because they were no longer tethered to having a main distribution center in a location with existing brick-and-mortar presence. It put the entire map in play.”

And in the dead center of that map: Kansas City. As a result, he says, “my sense is that we’ll see a number of additional e-Commerce users simply say, ‘What’s the best place for distribution of goods?’ And when they do, I think Kansas City will look very favorable.”

The Case for Kansas City

Because we have lots of land here available for development and expansion, real-estate costs are lower than you’ll find in metro areas abutting the coasts or mountains. And here’s one more advantage that’s not tied to infrastructure or geography: On average, residents of the Kansas City region are better-educated than the rest of America, and that means work-force attributes that are in demand from employers.

There are metrics to assess the impact of all this. Here are a few:

  • In Kansas City, the transportation industry currently employs about 53,000 workers—about 4.1 percent of the region’s total work force. That’s about 17 percent more robust than the makeup of the work force nationally.
  • According to market analysis from Cushman & Wakefield, asking rents in the second quarter of 2018 were, on average, $4.29 in Kansas City and $6.11 nationally, a whopping 29.7 percent discount that works in this region’s favor. That also makes Kansas City more economical than large intermountain cities like Denver ($7.92), Houston ($6.13), Dallas ($5.50) and Chicago ($5.29), as well as peer cities like Austin ($9.94), Minneapolis ($4.90) and St Louis ($4.86).
  • The high demand for bulk distribution space has driven vacancy rates down, dipping to 6.8 percent this year from 7.5 percent last year. This, despite 6 million square feet of additional space hitting the market since last year. And Kansas City led the nation in year-over-year growth rate for industrial transaction volume, according to Integra Realty Resources.

Happy Endings

How long can this expansion go on? Time—and technology—will tell. Driverless trucks, for example, have the potential to completely rewrite the transportation calculus, which has as one controlling variable the number of hours a human being can spend behind the wheel in a day. Will a central location then become irrelevant in an era of trucks that can run 24/7?

Other factors loom that are also outside this region’s control—presidential tariff talk dampening foreign trade, a major selloff on Wall Street, a general economic decline or sudden end to a record-long economic expansion.

“There has been a bit of a slowdown recently, but research we stay on top of shows that we’ve still got more industrial parks under way, with another 36 million square feet planned that could break ground any day or in the near future,” says Joe Orscheln of CBRE. “If you look at the last three years, we’re a market with 270 million square feet of industrial, and in 2016, one of the top five across the nation for new construction starts in industrial. In 2017, we were top 10, with just over 7 million, and in 2018, we’re projecting being in the top 20, with 6.5 million more being added.”

Dan Bayer, president of BMS Logistics in St. Joseph, was part of that growth arc when the third-party logistics provider added operations at a 432,000 square-foot warehouse in the KCI Intermodal BusinessCentre last year. From his perspective, there’s more to come.

“The market is growing immensely—it’s a premium location in the continental U.S., and we see it as an opportunity to grow the business in the future,” Bayer said. “That particular location was both the space we needed and was available when we needed it.”

With spec buildings still going in, half of the chicken-and-egg riddle has been solved: Those facilities came first, which attracted major logistics operations. But at this point, the presence of large logistics operations themselves is in turn fueling the drive for more spec.

“We didn’t say that we wanted to be four times bigger just because of the market here,” Bayer said. “We see the future of Kansas City as being a significant hub for business operating there. Therefore, we see an opportunity for our own growth.”