The industrial market has changed in the past 18 months. Space requirements are different. Interest rates have risen, making it more difficult for developers to get financing. There’s also been a shift from speculative product to build to suit.

“We’re starting to see things in our market that are a little bit different,” said Justin Duff, VP of development, VanTrust Real Estate.

Duff joined panelists Greg Dean, director of sales, Miller Stauch Construction; Brett Lauritsen, VP, Olsson; and Joe Orscheln, SVP, CBRE, last week at Shadow Glen Golf Club for MetroWire Media’s 2023 KC Industrial Summit. Erin Merrill, owner, Eskie + Associates, LLC, moderated.

“We’re seeing a real challenge in what can you bring to market and hit that sweet spot. With the size of tenants and those buildings that were brought on in 2023, that’s where that complexity is because we were building and underwriting to a different deal over the last 18 months,” Duff said.

According to Dean, from a construction standpoint, work on industrial projects has slowed down. Dean said he’s seeing less demand for distribution facilities, but work on the manufacturing side remains steady.

Orscheln said Kansas City’s market remains strong because it was not overbuilt.

“We recently did a study of the top 25 industrial markets throughout the U.S., and we’re ranked number six or seven lowest market vacancy rate-wise. We always hover around 3 percent and that just shows that we weren’t overbuilt. Everything’s just fine in Kansas City,” said Orscheln.

According to Orscheln, there is plenty of activity from the user side, and even though development has slowed because of rising interest rates, lease rates continue to climb.

Citing a recent report issued by CBRE, Merrill said speculative construction starts are down 70 percent in 2023, compared to 2022.

“Obviously what’s influencing it right now is where interest rates are. You can’t really get developers to pencil spec development at the moment, although lease rates are continuing to rise. But, with that demand I just mentioned, we’re going to need another wave of spec to really hit the market. We do have some new starts. They’re kicking off here in Kansas City, but as a whole, we just need rates to come back down really to drive that spec development,” said Orscheln.

Duff said tenants seeking industrial space want less space than they were seeking 18 months ago. Developers with larger buildings must get creative on how to demise the space.

“That’s really happening now where you’re starting to see the 900 to 1 million square footers start to compete for the 200,000 SF users. And, that’s a little atypical for the market… I feel like when you’re competing against all these deals for smaller users, everybody will get creative. Our crystal ball is still a little foggy on what you should build next,” said Duff.

Dean said his firm is seeing a shift from speculative to build-to-suit projects, and he predicts that the market will continue to see more design-build projects.

During COVID and post-COVID when the market was experiencing supply chain disruption and breakdown, users were taking larger spaces “just in case,” said Orscheln.

“We’re really just stabilizing back to really the norm of Kansas City. We didn’t land a whole lot of “[big] bombers” pre-COVID like we did right past COVID, but we’re really in a stabilizing stage where we’re going back to the norm . . . and we’re actually better off in today’s norm than the pre-COVID norm. So I call it more stabilizing, which is not a bad place to be,” he said.

Although the spikes in costs of construction materials have eased, labor costs still are driving construction costs up, according to Dean.

“Labor has risen about 5 percent over the past 12 months. That’s where you’re really seeing those construction costs still rising. We don’t think there’s going to be a decrease in the labor,” Dean said.

Duff said developers are finding it more difficult to get deals financed in the current market with the uncertainty of the Federal Reserve threatening to raise interest rates again.

“I think that if the Feds were to say interest is 8 percent, you can plan on it and keep going forward, I think deals get done… I think that when they say that and you can gauge against that, it’s less about really what the number is and more about how you plan against the number and the uncertainty surrounding the rate,” said Duff.

The panelists discussed why companies are coming to or expanding in Kansas City.

Dean said the cost of living and strong schools are big drivers.

“I’ve heard the simplicity of how we operate here. We’re not Chicago. This isn’t Dallas. It’s just little Kansas City,” Lauritsen said.

Orscheln cited Kansas City’s central location and interstate system as well as rail access now and in the future.

“I think the Canadian Pacific Railway acquisition of Kansas City Southern is going to drive a lot more rail freight to Kansas City, and I think we are all going to be shocked about how much product we’re going to actually see land here via rail. That’s going to drive a lot more industrial product,” Orscheln said.

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