Roads, Rails and Regional Growth

They might seem unrelated developments, coming as they did at different times, in different business sectors, in different countries—even on different continents. But if you think of each of these developments as a piece on a chessboard, you start to see how the Kansas City region has positioned itself as a grandmaster of logistics over the past 20 years:

• In the mid-1990s, Mexico’s president declares that an underperforming system of nationalized railroads will be privatized.
• At the same time, manufacturing continues to move from U.S. soil to foreign countries with lower labor costs.
• Meanwhile, the Internet gives rise to e-commerce Web sites that will drain market share from American retailers and challenge the supremacy of the big-box store concept.
• Squeezed by the Web and by the increasingly competitive reach of Wal-mart over those two decades, retailers get supply-chain religion in a big way, seeking to wring costs out of their distribution lines.

The result of all that is playing out right now throughout the Kansas City region, with the advent of the mega distribution centers built on a speculative basis, and developers finding immediate success in placing tenants into that space. If it continues—and there are no signs now that it won’t—Kansas City will build on a grow-ing influence in transportation, distribution and international business, say those who work to deliver the goods that the retail sector and manufacturers are demanding.

“What’s going on globally is taking place here regionally,” says Dan Jensen, principal with Kessinger/Hunter & Co. “That is, Kansas City has always been a huge distribution marketplace; the largest amount of traffic of anywhere in country comes through it. We have five major rail lines, major interstates north, south, east and west, so all sorts of things are coming through us, but not a lot stay.”

That’s because a lot of what reaches us is destined for somewhere else in a grand ballet on the stage of just-in-time delivery. Inventory eats dollars, and American companies are leading the way in reclaiming the costs involved by reducing their footprint at the point of production or point of sale.

“It used to be,” Jensen said, “that manufacturing looked at their distribution and warehousing as embarrassments. It’s a testimonial to the fact that they couldn’t predict what the customer wanted and had to guess, and then stick it in a warehouse until it sold.”

That old school of thought is dying, supplanted by a realization that the supply chain, rather than an embarrassment, is a huge asset—and, done right, a huge cost-saver. “More and more guys are beginning to understand the value in doing supply chain correctly,” Jensen said.

Mark Long, vice president and principal for Zimmer Real Estate Services, notes that the change is unfolding in the classroom as well as the boardroom. “A few years ago, they didn’t have supply-chain management degrees available from universities; now they do,” he said. “The supply-chain manager used to be a glorified warehouse manager, and now it’s one of the top executive positions at many companies.”

All of it is a fascinating series of developments that confirm we’re living in a global economy in the early 21st century. Which makes it all the more remarkable that so much of that change is being driven by a technology nearly 175 years old—the railroad.

 Iron Superhighway

“I have been in the industrial real estate business for almost 20 years,” Long marvels, “and I will tell you that until the last four or five years, we didn’t talk much about rail, we didn’t talk much about transportation. Now, that’s what is keeping these American companies competitive.”

That competitive drive has added a new luster to a market that already made sense as a regional hub for companies seeking space in the office, service, warehouse or distribution areas. But with distribution use in particular, Long said, “we’re seeing the mega users now with a certain regularity” because of the rail access.

So what changed? A lot, but for Kansas City’s interests, two things in particular. About the time Mexico was giving up on a rail system that was poorly managed and maintained, officials at Kansas City Southern were seeing the potential implications from something called the North American Free Trade Act.

They purchased huge blocks of rail assets throughout Mexico, creating a north-south rail corridor that could reach from the southern reaches of Central America, with access to both the Gulf of Mexico and the Pacific, and all the way to Canada and ports on the Great Lakes.

“We had some corporate players with a lot of foresight, particularly Kansas City Southern,” says Chris Kuehl, co-founder Armada Corporate Intelligence, which provides analytics for executives in multiple business sectors. “Their investment in Mexico at that time was seen as a boondoggle; everyone was thinking, ‘How are these guys going to make the Mexican rail system work?’ But they came back and said, ‘it’s rails—whoever runs is going to run it; we bought the infrastructure, not the management.’”

That, Kuehl said, made the new Kansas City Southern de Mexico a conduit for the Mexican manufacturing sector—with a reliable, accessible pipeline into the heart of the American economy. “All the development in Mexico is literally along KC Southern’s lines,” Kuehl said, “and that’s feeding into the U.S., and eventually Kansas City.”

But he cites another development with American rail as being just as important for what’s happening today.

“That was a separate matter of foresight within the rail industry, when they upgraded their technology to be able to do this,” Kuehl said. “Even 10 years ago, people were reluctant to use long-distance rail, because they would lose track of stuff.”

Today, he said, shippers want to know where their product is on every second of its journey. “Rail adopted the trucking technology, and now we’ve got the same track-and-trace with rail that we had with truck, and that took down big barrier,” Kuehl said. “Rail is also able to point to a more climate-friendly approach, more environmentally sound technology, given what it can haul with the power used.”

There’s one more aspect of rail that bodes well for Kansas City, those closest to the sector say: a competing market’s weakness. Although Kansas City moves more tons of cargo by rail every year, Chicago has long been the leader in numbers of cars moving through. Which has a downside: The goal of making Chicago the central rail distribution point for the U.S. was achieved more than a century ago, but a considerable amount of additional development in and around that city has badly degraded its rail efficiency.

Congestion in Chicago is so bad that some railroads have chosen to unload freight as it reaches one side of the city, drive it on trucks across town, then reload it on freight cars for the next leg of rail shipment.

And for those shipping from the west, Jensen said a freight forwarder had told him that material shipped to Kansas City is often unloaded and trucked to Chicago, because it can reach its delivery point there faster than it could by entering the Chicago rail hub. “Because of congestion there, I think we’ll see Kansas City as a beneficiary of those sorts of issues,” Jensen said.

 Forward Thinking

At a local level, industrial realty experts credit forward thinking by civic leaders, particularly in southern Johnson County, for placing the infrastructure that would allow a company like BNSF Railroad to envision a mammoth logistics park there. That took a certain amount of courage and good faith, because when it was done, there was no guarantee that the current development would actually occur.

It also involved walking a planning tight-rope, considering that demand for land to be developed is often driven by residential construction, something that doesn’t mesh easily with industrial uses nearby.

“Olathe has done a good job of planning in their south area,” said Tom Riederer, president of the Southwest John-son County Economic Development Corp. “Even now, with the new interchange on I-35, that area is going to be more industrial, so they’re building it in a way that people understand this is going to be that industrial neighborhood.”

It worked in Lenexa 25 years ago, he said, and that city today is a model of blending two disparate forms of zoned land into a comprehensive, balanced tax base. “If it’s done correctly and planned correctly, you can have uses that most people might not think can work together,” Riederer said.

Ron Achelpohl, assistant director of transportation for the Mid-America Regional Council, said efforts like those started to become widespread shortly after that experience.

“We did the first regional strategic plan for freight in the mid-1990s,” he said, followed by work on international trade in 2000 and an updated regional plan in 2009. “Our first intent was to elevate the awareness of the region, especially elected officials and decision-makers, on the role freight played in the regional economy, and the need to look at it strategically. That clearly pointed out this was something important to the region, and that we had opportunities to pursue as a region.”

 Changing Realty Scene

Some of those opportunities are playing out right now, most dramatically with industrial real estate construction.

Last fall, Kessinger/Hunter completed construction on Building B at the I-35 Logistics Park in southwest Olathe. As soon as that 821,000 square-foot building, built on a spec basis, is fully leased, work will start on the second of what’s envisioned as a three-building project with a combined distribution space of nearly 3 million square feet.

The sheer size of the buildings involved dwarfs what had been the standard of 75,000-square-foot buildings as recently as a decade ago, Jensen said. But more than just square footage, these buildings offer considerably higher clearances—32 feet and up—cross-dock loading and unloading from both sides of a truck trailer, WiFi connections to help track deliveries, and powerful fire-suppression systems that, as Jensen says in jest, “create a bigger threat of drowning than of smoke-inhalation.”

More important, Jensen said, Building B “validated what we thought all along: That this is a big-box corridor, and that parcel delivery and distribution would be well-served here.”

The big-structure move took off in recent years with large-scale distribution operations like the J.C. Penney warehouse in Lenexa, the Coleman Co. warehouse in Olathe and the Musician’s Friend warehouse North of the river in Kansas City. All are well over 500,000 square feet, and once considered aberrations for their size. These days, they are the new standard, and their successes have spawned interest from other large national retailers.

Elsewhere in the area, BNSF has completed a 500,000-square-foot building at Logistics Park Kansas City and is already talking about another 550,000 square feet, the first steps in a series of structures that could grow to 15 million square feet over the next two decades. In Riverside, a 350,000-square-foot building is going up on spec, a 300,000-square-foot building is going up at the KC Southern-Centerpoint intermodal site managed by Zimmer, and yet another 350,000-square-foot building is going in at the KCI Intermodal BusinessCentre.

Kansas City’s appeal to businesses relocating or expanding here has always been a value proposition grounded both in its geographic centrality and its quality of life. But it takes more than that to become a national force in distribution, Long said.

“As a community, you have to look at what you’re good at and what you have to offer, and it has to be more than a good quality of life before companies invest big dollars in operations in your community,” he said. “What we have is incredible rail and highway infrastructure, and the ability to service the central part of the U.S.”

 Barriers to Progress

Of course, intermodal implies another mode of transportation interfacing with those distribution centers along the rail lines. And that’s where experts see the biggest potential threat to regional progress on the logistics front: We can build monuments to logistics expertise alongside the railroad tracks, but if the highways that connect those centers to their end users can’t handle the truck traffic, the regional appeal breaks down.

In Missouri, for example, lawmakers are now being urged to approve a statewide sales tax to generate funding for highway programs. The state’s spending on road and bridge repairs has been cut in half over the past five years, to the point where it can’t even complete simple maintenance, let alone new construction.

“If you look at the planning going on with major distribution centers, now it’s a chicken-and-egg deal,” said Kuehl. “We have the infrastructure that can support more distribution, but down the road, it hinges on how well we’ve upgraded the public infrastructure. My concern is that not enough is taking place on those corridors, and we have to fix that before we see more private activity.”

Transportation officials are already saying that their large investments here could be at risk if a link like I-70 isn’t maintained, but the good news there, Keuhl said, is that every other state is feeling the same pinch.

One state that is in a position to leverage its transportation assets is Nebraska, which has the vital I-80 line running through it, a KC Southern line and ample short-line rail access. “They’ve also got growth, they’ve got employment, and if these guys aren’t paying
attention locally …” Keuhl said, his thought trailing off.

 How Big Can It Get?

The potential upside of all this, insiders say, is enormous.

“We’re big believers that BNSF is going to change the complexion of our marketplace,” Jensen said. “Kansas City has 250 million square feet of industrial space, and we think with what’s going on with BNSF, in the next 10 years realistically, another 15 to 20 million feet of box distribution space is going to be built.”

Keuhl cites KC Southern’s links not just to the manufacturing in Mexico, but to energy markets in Texas as key growth drivers for transportation in this region. That’s particularly true if environmentalists’ opposition keeps projects like the Keystone pipeline in limbo. Not only is rail the only other reasonable alternative, it’s one that doesn’t have the disadvantage of being in a fixed location like pipeline.

Transportation today, he said, remains a solid business, but one dependent on myriad factors. “Nothing happens if other things aren’t happening,” he said. “Nobody hires a truck or train to haul if there isn’t a product to ship. But one thing that could be very beneficial is that the U.S. has the cheapest energy in the world now, and that’s attracting businesses that are energy intensive.

“For the first time in a long time, we’re getting more steelmakers, aluminum smelters, and the like. That’s good for transportation, and much of that would be into the Midwest. I don’t think Kansas City is right on top of that, but we will be close to it.”

For Jensen, what’s happening locally reflects an inherent advantage for American businesses.

“Everybody talked about how horrible it was when companies were offshoring manufacturing to China or India and leaving the U.S., but that created a vacuum, and when you create a vacuum, we usually fill it in America. We’ve created a supply-chain industry that is second to none the world. Nobody is more efficient at getting something from a remote village in China or a manufacturing facility there to port, securely, to the States and delivered to Carthage, Missouri, for example, or on a doorstep or on a dock.

“That’s a huge industry that’s been created,” Jensen said, “and we’re very bullish on it.”