Q&A . . . With Ed Elder

PUBLISHED NOVEMBER 2023

Q: We’ve seen some indicators of things tapering off with activity in the industrial space; what’s your take on where the sector is headed?
A: It has (tapered) and for three, maybe four reasons. Interest rates being one; I think the lenders have been a lot more cautious over the last year as a result of rates rising. Construction costs being No. 2, although costs have stabilized a bit over the past few months—at least that’s what we’re hearing. And a lot of users occupying these have redone their networks, for example, done expansions or bought their buildings over the past three or four years, and as a result, there’s just not as much activity in the latter part of 2023 as we head into 2024. I think the consensus is that, while the phone is still ringing and people tell you they’re busy, they’re just not as busy. The general sentiment is that things are slowing down a tad and will continue into 2024.  

Q: And yet there’s plenty of movement on the construction side, correct?
A: Yes. There’s probably 11 to 12 million square feet under construction right now in the metro. Construction costs have stabilized somewhat, but it’s still an issue. What we will probably experience is as things ramp back up from an activity standpoint there could be a shortage of Class A, large blocks of space as we go throughout this next cycle.

Q: How are things from the big-building perspective?
A: There are four vacant buildings of approximately a million square feet in the metro, three on the Kansas side and one in Missouri, with limited activity for one tenant to take the whole building. When you build a one-million footprint, typically we think one, no more than two tenants. What we’re seeing now in the market, in terms of size and trends, has regressed a bit to the mean of 150,000 to 350,000 square-foot range. That’s happened in the last two to three or four months. For these larger buildings, it’s quiet out there.

Q: Is that mega-warehouse niche filled, then?
A: Partially. Personally, I’ve never felt we’re a big million-square-foot market anyway. We’ve made a few large deals  of 750,000 to a million square feet in the past three or four years, but it’s not the norm. I tend to think today that where we are is that 300,000-500,000 range.

Q: Is the nature of the clients changing?
A: I think over the past 5-10 years, what’s really encouraging is the majority of that activity has come from outside of the city, meaning new companies coming to KC. That’s big—it’s not like moving from one side of town to other, or one submarket to another. So the industrial market here really has elevated its stature, its presence.

Q: Is that stature being enhanced relative to peer markets?
A: The short answer is yes, we’ve moved up. But the cities Kansas City competes against vary. The second-tier cities, Indianapolis, mid-Ohio, Memphis, those cities typically are comparable to Kansas City in some ways in terms of size. What’s interesting is that Kansas City has some of the largest and most active developers, on a national basis, based here, with NorthPoint, VanTrust.

Q: When you stratify industrial—by square footage, function, amenities, etc.—do any stand out as poised for the strongest growth here, or is the potential out there spread evenly across all property classes?
A: I think a lot of time, we’ll sit with a client, develop the concept, ask what the right footprint is, whether for multi-tenant or for smaller tenants, or whether we need to build a bigger footprint. With the larger, the safe play and more activity is 500,000 to 600,000 square foot range. This is getting into the weeds here, but it allows the owner, the landlord and the developer to make a deal for the whole building, or revise it down to 150,000 to 200,000 to start with. On the opposite end, particularly in Johnson County, the smaller footprints of 200,000 or less, were revising down to 20,000 to 40,000 square feet.

Q: What’s driving that?
A: It’s much more expensive to build today with interest rates, costs, labor, all of that is going into the master blender with true costs, but if you’re going to be in a submarket like Lenexa, that product type is the safest play. Lenexa isn’t a big-building market. But we are seeing different submarkets where the larger buildings have had more success.

Q: Has the office-market pullback since the pandemic bled over into industrial in any way?
A: That’s a good question. The industrial market has elevated and picked up, as did our investment and capital markets. With low rates up until the last year or so, there was a lot of energy in the market to buy and sell industrial and multi-family. That has changed. Very few industrial investment deals the past year or so. The pandemic was a 100-year type event. That story still hasn’t played out. We’re seeing what’s happening in 2023 and will happen as some companies require workers to come back, and when they do, and a lease doesn’t expire until’ 25 or ‘26, what will the right square footage be on a going-forward basis? Is it 40,000? 50,000? The landlords and lenders are all paying attention to trends on space reduction. It has really affected the value of many office assets flight to quality.

Q: Any other impacts?
A: What we’re seeing is people giving back space, 15 percent to as much as 30 percent as they figure out what the right number is. Interestingly, I think here in Kansas City, most companies, I think, by now have found what works for them, in-person or hybrid model, and many have come back with some sort of new program. We’ve tweaked ours a bit, but we’re a sales organization. You have to be in the office, you have to communicate, talk to people. Some companies, though, don’t need you to be present every day. 

Q: How has that dynamic affected onboarding for younger workers?
A: It’s an issue; young hires need to be in the office around veterans, learning how to ask questions, how to carry yourself around people more experienced than you. That benefit, or dividend, is paid as you age and mature. If you’re working from a basement at your house, that’s not happening.

Q: Back to activity for a moment. Are there certain submarkets in Kansas City that just haven’t jumped in the game with the industrial expansion?
A: Not that I’m hearing. You look around what’s occurred the past 10 years, even the last year. We’re seeing developers like Hunt Midwest take a big position adjacent to KCI with that big deal they made up there recently. And we know that VanTrust is also doing something in Platte City,  further north. There’s been a lot of activity in Liberty, a lot in south Kansas City, Belton and Raymore. On the Kansas side, a lot of activity in Olathe, Gardner and Edgerton. And obviously, we all know what’s going on with Panasonic in De Soto.

Q: There’s something to be said about that kind of geographic balance, isn’t there?
A: Part of the formula is that nobody is gong to build unless they have the right entitlements that allow them to be competitive. Buried in that word is “incentives.” Port KC has been active in aligning with developments on the Missouri side, which has allowed Missouri to flourish in the past six to nine years with new buildings. Kansas has done it differently, with smaller communities like Shawnee, Lenexa and Olathe, along with their own county commission that decides what they are going to allow from tax abatements, what they are comfortable with. The Border War is gone, and that has changed the conversation with regard to people locally considering a move across the state line to play the game.  

Q: Among the other fundamentals in the equation is labor. How are we doing there as a market?
A: Availability of labor is the biggest question and first one asked by most developers. Incentives are table stakes, and most everybody has some package, but the availability of labor—this isn’t new information—is right at the top of the list of what companies are looking for or at. Costs of real estate are materially important, but labor is always a determinant.

Q: Do we have a challenge with labor accessibility across the market?
A: That depends on whether someone’s putting widgets in a box or actually doing skilled labor. If you’re further out in smaller communities with bigger buildings, you’re going to find more depth in certain skill sets to do basic things. People can be trained, and that’s why job training credit, vo-tech schools and onboarding programs are out there for companies looking at how to become way more efficient with robotics, material handling—it’s all out there. You see these steps taken over some period of time. Someone used to have x-number of people inside the building, but now it’s something less because companies have invested more inside the building with automation, and they don’t need that many bodies out there doing what they used to do. Amazon has changed the way companies do business, the way things are done inside warehouses, that influence efficiency and effectiveness.