Industrial market flying smoothly through 2020 turbulence

Despite the economic turbulence COVID-19 has unleashed on 2020, the industrial real estate market seems to have buckled in for a relatively smooth ride, according to a recent CCIM KC panel.

Brent Miles, chief marketing officer and founding partner of NorthPoint Development and Joe Orscheim, SIOR, CCIM, senior vice president of CBRE, joined moderator Ben Boyd, CCIM Kansas City director of programs and vice president of Colliers International, for a webinar discussion last Friday about the state of the industrial market.

Both Miles and Orschein agreed that e-commerce is the major driver strengthening the industrial market as online shopping has exploded during the pandemic. Miles noted that increased demand for industrial space for companies like Amazon and Chewy is COVID-related, but he thinks the expansion represents a permanent change. 

“They are the infrastructure and the plumbing of how we’re getting goods,” Miles said.

According to Miles, NorthPoint Development, which owns approximately 75 million square feet of industrial properties across the United States, saw only about 5 percent of its clients request and receive rent relief.  

Orschein said he anticipated more requests from tenants for rent abatement than actually were made. Landlords, he said, used the requests as an opportunity to obtain updated financials, and in some instances, to extend the lease term by the number of months they abated rent. 

“It was good for both parties. It’s always good for a landlord to show that they’re looking out for their customer and obviously they want them to be financially strong so the project remains successful,” Orschein said.

Miles said that availability of labor remains a concern in the industrial market, with uncertainty about how future stimulus or bailout legislation will affect unemployment and labor. 

Orschein noted that there is a challenge to find “really good tracts that are ready to go” in the Kansas City area in order to satisfy demand. “We’re getting weekly calls from out of town developers and capital sources that are looking to land here in Kansas City, and we just need more land. We’ve got to figure it out. There’s strong demand, and we’re not seeing any kind of a slowdown so we’re encouraging everyone to just keep putting them up and we’ll all fill them,” said Orschein. 

Orschein also noted that rental rates in the Kansas City industrial market are “pretty steady and level” and that he is seeing lower cap rates. He anticipates that the local industrial market will see one or two big institutional players enter by the end of the year. 

“Everybody is taking note of Kansas City,” Orschein said.   

According to Orschein, there is strong demand for industrial space for the food industry; however, the challenge is to figure out food requirements and freezer cooler needs. 

“It’s obviously very expensive and highly specialized, but the need is there. We’ve just got to figure it out in Kansas City. In the industrial world, it seems like after the first couple of weeks of COVID hitting, it’s like everybody just got on the same page and said let’s all get back to work and keep the train moving,” Orschein said.

Kessinger Hunter sees explosive post-pandemic opportunities for industrial marketplace

Before diving into detail regarding the state of the market “post COVID-19,” it is important to share that Kessinger Hunter employees and brokers are working remotely and doing their very best to stay active and engaged in business while taking care of their families, communities and clients first.

Many industry experts have been discussing what the commercial real estate world will look like once the virus passes and all the stay-at-home orders are lifted. Many of the national brokerage houses have held calls pontificating about the difficult times ahead for commercial real estate once the pandemic has passed. However, leaders and their discussions around the industrial space are concurring, and Kessinger Hunter agrees, that the bulk industrial marketplace will be stronger than ever.

Market conditions suggest three things are going to drive industrial real estate. All will put upwards pressure on space demand and rents.

• E-commerce – companies lacking online capabilities or an online presence are missing sales during the stay-at-home orders and are going to be proactive in establishing online capabilities for customers and clients moving forward. Exponential growth is expected in the space these companies lease. Real estate economists project for each $1 billion of new e- commerce business that is created, it drives an estimated need for 1.25 million SF of new industrial space. This growth alone is expected to create another 900 million SF of demand.

• Just-in-time warehouses – these warehouses typically only maintain enough inventory on hand to be able to deliver “just-in-time” to the end users. It is anticipated that these operators will add about 5% to their inventory on hand in the future. This is projected to create new demand for 1.2 billion SF of additional warehouse space.

• Near shoring – this group of businesses has been hurt by having manufacturing outside of North America. These companies are predicted to bring more manufacturing to the US which will give them greater control over their logistics. This will especially affect the Midwest area of the U.S. where the north-south supply chains go from Mexico to Canada.

It is for these main reasons that Kansas City, and the entire country at large, will see explosive growth once the world returns to “the new normal.” While industrial brokers and developers ride out this difficult time and prioritize taking care of family, the community, and clients, they must also be prepared to keep up with the new industrial norm.

________________________________________

Daniel B. Jensen, SIOR is a principal for Kessinger/Hunter & Company, LC. Dan specializes in industrial brokerage and development on both a local and national level.

Dan is an inductee of the Midwest Real Estate News magazine 2016 Commercial Real Estate Hall of Fame, a member of the Society of Industrial and Office Realtors (SIOR), a member of the KC Area Development Council (KCADC), a board member of the Olathe Economic Development Corporation (EDC) and a member of the Council of Supply Chain Management Professionals (CSCMP). Dan has been active in commercial real estate since 1985.

If you are interested in submitting a guest column for the MWM Newsletter publication, please send to lisa@metrowiremedia.com for consideration.

KC leads the nation in lowest vacancy rate for 2019 industrial construction

Kansas City leads the nation with the lowest vacancy rate for 2019 industrial construction completions, according to a recent report from CBRE.

Developers completed construction of 289 million SF of industrial and logistics real estate in the U.S. last year, but any concerns of oversupply are tempered, as only 39 percent of space in new construction was available.

Deliveries outpaced the 255 million SF of new absorption, but with robust leasing from occupiers, especially e-commerce and retail firms that often require modern building design and amenities, supply and demand dynamics remain healthy.

“With national vacancy at 4.4 percent, it was becoming difficult for occupiers to find modern space,” said James Breeze, CBRE Global Head of Industrial & Logistics Research.

Another major factor contributing to the strong absorption of new construction is the increase in built-to-suit development—the construction of space for a specific space user. This segment made up 28.1 percent of new construction activity, as companies increasingly need unique requirements to meet their specific demands.

“This new supply is needed and will keep transaction activity strong, especially for larger deals. The robust activity in newly constructed product also warrants the large amount of groundbreakings we continue to see," Breeze said.

In markets with over 4 million SF of new development, Kansas City finished 2019 with the lowest overall vacancy rate for 2019 construction completions at 7.3 percent, followed by Miami, Baltimore, and Greenville, SC, which all had vacancy rates for newly constructed product under 20 percent. Dallas-Fort Worth was the strongest core market, with nearly 75 percent of the 25 million SF completed in 2019 taken.

“The statistics tell the story, there is still very strong demand in Kansas City from a wide variety of industrial users,” said Joe Orscheln, a senior vice president in CBRE’s Kansas City office. “The majority of the space delivered in 2019 was speculative, which speaks even further to market demand.”

According to the report, supply fundamentals should remain stable this year, as already 33 percent of the 309 million SF under construction nationwide is already accounted for. A pre-leasing rate of 25 percent for under-construction product typically are indicative of a solid leasing environment.

“With pre-leasing robust for under construction projects, the overall vacancy rate is expected to remain in check in the foreseeable future,” said Breeze.

Read full CBRE Report here.