Will rising interest rates, falling supply put damper on construction industry?

“Basically, we’ve had just a super rosy environment over the last three years.. From a development standpoint, it couldn’t have gotten much better.  When your biggest challenge is the happy trouble of trying to get materials, that’s a pretty good day,”  said Joe Downs, executive vice president and general manager, The Opus Group.

Downs was the featured speaker at last Friday’s monthly breakfast meeting hosted by CCIM Kansas City.

But, Downs said, the rosy environment has quickly changed with the rise of interest rates.

“It’s just a different environment, and it’s hard to reconcile because the supply and demand metrics seem so great.  The third quarter reports that the brokerage shops just issued, they’re phenomenal.  Another 2.5 million SF of warehouse absorption and record construction.  These are all deals that started before the last six months.  Things have changed really fast, really drastically,” he said.

“What we’re sensing and experiencing is that demand is still out there.  It’s hard to tell if that demand is today’s board level decisions or six or nine months ago board level decisions, but it’s still there,” said Downs.

He said that all of Opus’ properties that are unencumbered by leases are still experiencing strong prospect activity.

Downs predicts that the interest rate environment will start to put a damper on new supply.

“I think you’re going to start to see supply slowing down. . . . I think everyone is busy right now, but that pipeline for 6, 12, 18 months is a little less certain,” he said. 

Downs said it is getting harder and harder for developers to get construction loans as interest rates rise. 

“Lead times on materials are drastically different.  We just got a precast quote in Kansas City.  What was a 14 or 15 month lead time is now 6 months, 7 months so you can tell there’s early signs of [a slowdown in] the construction industry,” he said.

Downs said there is a sense that construction costs, which have risen steadily in the past three years, are starting to modulate, but it is too early to be certain.

“We’re sensing that costs are modulating.  Certainly some of the supply chain items are getting worked out.  It’s just going to take time, about 18 months, until we really know,” he said.

Values also have risen greatly in recent years.  Downs said values are approximately 150 percent of what they were just four years ago.  However, he said those values are starting to fall. 

Downs said rent is the only toggle left to pick up the slack created by rising costs and dropping values.

Downs said tenants currently are willing to pay increased rents.

“I would say in the last several months, we’re talking about 10, 15, in some places 20 percent rent growth from what we were quoting in the first quarter.  It’s just necessary to overcome what I was talking about on value and costs.  So things are still moving along, but it’s just a much more variable environment right now,” he said.

Downs said it’s a great time for the unlevered buyer.

Opus, which will celebrate its 70th year in business next year, has been active in the Kansas City market for more than 20 years.  Downs said Opus has built more than 30 buildings in the market.

He discussed some of its recent projects which include Westley on Broadway, a 256-unit mixed-use multifamily apartment building in Westport, which was delivered during COVID and is fully leased.

“It is super rare to get 1.7 acres in an urban environment.  Usually, we’re dealing on half an acre.  To be able to spread out like this and really create an asset of size and scale is significant,” Downs said.

Currently under construction is Briarcliff Apartments, another 256-unit mixed-use apartment project which Downs said will deliver in mid-2023.

Opus also currently is constructing Liberty Heartland Logistics Center, a five-building industrial project located in Liberty near I-35 and Highway 69.  Downs said Hallmark Cards, Inc. will anchor the project and take occupancy of an 850,000 SF build-to-suit distribution facility early next year. 

Downs said deals in the foreseeable future are likely to be more modest and very understandable.

“We’re very focused on understandable deals that are more simple and modest in nature and size to meet the demand and the great locations.  It’s kind of what you do when things are less clear around you,” he said. 

KCADC highlights impressive 2020 scorecard at annual meeting

The Kansas City Area Development Council (KCADC) shined light on some impressive numbers this week during its annual meeting; including attracting 13 manufacturing, eCommerce and professional services companies in the last 12 months that will invest more than $1 billion and create 3,789 jobs in the Kansas City region.

The event was streamed digitally and broadcast on TV with over 2,000 business leaders, civic partners, national site location consultants, corporate executives and individuals across the country who have an affinity to KC.

“KC placed a strategic investment several years ago in our market’s inherent strengths for manufacturing, logistics and e-commerce. This investment led to the creation of KC SmartPort, which elevates KC’s competitive advantage through consistent messaging to companies in these industries, and is paying dividends today,” said Tim Cowden, president and CEO of KCADC.

“With more than 231 million square feet of existing industrial space, ample land for new buildings, a skilled logistics workforce and robust power and fiber infrastructure, Kansas City is primed for additional growth in the industrial sector,” Cowden said.

In 2020, KCADC helped attract prominent companies, including an 880,000-square-foot distribution center for Urban Outfitters, Inc., a 1,200-person e-commerce center for Chewy, Inc., and manufacturing facilities for Dot’s Pretzels and Tuthill Corporation, among others.

“Our priorities in identifying the home for our new omni-channel distribution center focused on people, and it was the quality of the local workforce that convinced us this is the right place to be,” said Dave Ziel, chief development officer of Urban Outfitters, which plans to open its $350 million facility in 2022.

The Kansas City region ranks No. 3 in the U.S. for industrial construction activity in cities with populations between one and four million, outpacing larger markets including Denver and Seattle. KC has seen 14.8 million square feet of industrial construction in 2020.

With a stronghold for financial, shared services and tech operations, KCADC also celebrated national recognition for Kansas City for professionals and future investment, including its ranking by Business Insider as the nation’s best “work from home” city, and its status as a Top Mid-Size City for Future Projects by the Site Selectors Guild.

“With a lower cost of living, free Wi-Fi downtown, access to diverse housing options and an abundance of lifestyle amenities, Kansas City is an ideal spot for remote workers leaving larger urban areas due to the pandemic,” said Jill McCarthy, senior executive of corporate attraction, KCADC.

“And there are plenty of new jobs for skilled professionals that relocate here, McCarthy said.

There are currently 49,000 open jobs in KC, and more than 15,000 jobs are created each year. Tech and highly-skilled jobs are growing faster in KC than in Seattle, Austin, Chicago and NYC, according to the Bureau of Labor Statistics.

“During such an uncertain time, KCADC’s success this year speaks to the highest level of professionalism, customer service and emphasis on regional collaboration that continues to move KC forward,” said Lisa Ginter, CEO of CommunityAmerica Credit Union and senior co-chair of the 2021 KCADC Board of Directors.

“This community has tremendous heart, and I look forward to continuing to make a positive impact on the KC region by supporting and amplifying the ongoing efforts of KCADC,” Ginter said.

In 2021, Lisa Ginter succeeds Dave Hall, executive vice chairman at Hallmark Cards, Inc., as senior-co chair of the KCADC Board of Directors. Brett Gordon, chairman of the board at McCownGordon Construction, will join KCADC’s volunteer leadership team serving as incoming co-chair, and Brian Roberts, chief diversity officer at Lockton Companies, will serve as treasurer.

“I’m looking forward to working alongside Lisa Ginter and Brett Gordon as KCADC actively positions the KC region as a top destination for business and talent in the year ahead,” said Roberts. “I can’t wait to see what 2021 brings for KCADC and the KC region.”

Lanter lifts Hunt Midwest’s 3PL footprint to more than 1 million square feet

Lanter Distributing LLC has expanded and consolidated its regional warehouse and distribution operations into a 126,000-square feet facility in Hunt Midwest SubTropolis. The Madison, Ill.-based refrigerated LTL and trucking company provides freight consolidation, distribution and deliveries to retail and wholesale customers throughout the Midwest and southern half of the U.S.

“Time and again, companies from a wide range of industries - including third party logistics, animal health and automotive upfitters - perform their due diligence and ultimately choose SubTropolis for its location, efficiency, and value proposition,” said Hunt Midwest President and CEO Ora Reynolds.

Lanter’s expansion brings Hunt Midwest’s total logistics footprint to well over one million square feet, with a total of eight 3PL companies operating in either SubTropolis or Hunt Midwest Business Center, according to Mike Bell, Hunt Midwest vice president of commercial development.

“We are seeing a ‘cluster effect’ of 3PL companies in SubTropolis and our surface business park, Hunt Midwest Business Center,” Bell said. “These companies are looking for access to labor and logistics to fuel their growth.”

Additional 3PL tenants include Advanced Logistics Fulfillment (ALF), American Central Transport (ACT), FW Warehousing, Ground Freight Expeditors, Hallmark Cards, Paris Brothers, and Rossi Motor Freight.

“The ability to quickly and easily scale operations is often top-of-mind for growing companies, and we are able to deliver space in SubTropolis in a timely manner because there are no weather delays or lengthy permitting processes,” Bell added.

Lanter initially leased 21,000 square feet in SubTropolis for dry and refrigerated warehouse and distribution space in 2012. According to Lanter Distributing Vice President Ryan Behrmann, SubTropolis is ideally suited to the company’s requirement for dry and refrigerated storage facilities.

“The customized space, combined with the central location, enables Lanter to continue to provide customers with an industry-leading, cost-efficient, multi-temperature logistics solution while offering on-time deliveries and exceptional service,” Behrmann said. “We look forward to continuing our relationship with Hunt Midwest and growing our business within SubTropolis.”