KC's industrial, transportation, logistics shine through stormy 2020

During what has been a stormy 2020, even hurricane-like for some, Kansas City's economy continues to shine brightly, beaming light of even more sunny days ahead.

“From a transportation, supply chain, logistics, industrial, whatever word you want to use, Kansas City is on fire,” said Chris Gutierrez, president of KC SmartPort and moderator of a webinar panel discussion organized by the Mid-America Region of the Design-Build Institute of America (DBIA-MAR) and hosted by McCownGordon Construction on October 14, 2020.

Gutierrez’ remarks preceded his introduction of the panelists: Eric Goodman, regional manager economic development at BNSF Railway, Andy Kyser, marketing manager at UPS, David Long, deputy director of Aviation - Properties & Commercial Development at Kansas City Aviation Department and Jon Stephens, president and CEO at Port KC. 

The panelists discussed the activities of their respective organizations and the implications for Kansas City, the effect of COVID on each organization and outlooks for the future.

Goodman said the big focus for BNSF in Kansas City is its development at Logistics Park Kansas City (LPKC) where BNSF’s facility opened in 2013. 

“Since then, we’ve had 17 million SF of development pop up around there. That’s going to be our anchor, our footprint here for intermodal for the next 50 years,” Goodman said. 

“The part of our business that’s doing really well for us right now is our intermodal business, both domestic and international.  We had a dip in that volume back in March, into April and into a little bit of May, but that volume has been going absolutely gangbusters ever since that date,” said Goodman. 

Goodman said he recently read a statistic that every single stored intermodal car that BNSF had in its network was back in service.  At one point, BNSF had parked approximately 2,000 locomotives.  

“Business is definitely back. We’re definitely seeing that there’s a lot of interest in intermodal growth coming off the west coast ports and domestic volume coming into Kansas City,” he said.

According to Kyser, UPS views the Kansas City region as an integral part of its overall strategy. 

“Our mission is to be better not bigger and to really do that by being customer first, people led and innovation driven. That’s where Kansas City fits in, both on the people led and the innovation driven standpoint,” said Kyser.

Kyser noted that UPS has made significant investments in its facilities at the airport and in Lenexa, Kan. UPS recently expanded its facility in Lenexa from 226,000 SF to 430,000 SF. 

“During our peak day, we used to be able to process about 1 million pieces throughout a day; that’s going to ramp up to be almost 2 million based on the infrastructure we’ve built here at the Lenexa facility. There’s miles and miles of conveyor throughout the facility. The crazy thing is that it only takes about 20 seconds from a package to get unloaded until it’s getting loaded on the outbound,” said Kyser.

Kyser said UPS is investing nearly $21 million to expand its facility at KCI. 

“We’re adding about 370,000 SF- for a total of 534,000 SF- which gives us five additional parking spots as well as remodeling the facility that we have there to take the flow per hour, the capacity from 1500 pieces an hour up to 5000,” Kyser said.

Kyser said that the pandemic has not slowed UPS’ business. UPS hired 50,000 employees during the second quarter as permanent hires, just to handle the 55% increase in business fueled by the burgeoning e-commerce market. 

“We’ve had to staff up and get our operations in a position to be prepared not only to handle what we view as a permanent shift, an acceleration of e-commerce activity of almost 5 to 6 years, but also our peak season, so we’re hiring 100,000 temporaries across our network during peak to be able to handle all that volume,” Kyser said.

Although growth at KCI was down this past year between 50-60% from 2019 numbers, Long said he’s seeing a steady rebound.

“In fact, Monday [October 12] was the most folks that had gone through our security screening checkpoints since the middle of March, and that is a better percentage than the country overall,” Long said.

The pandemic hasn’t slowed the construction of the new KCI terminal, and the airlines remain committed to the 39-gate overall facility, Long said.

“We are on time and on budget for this project. About 85% of the $1.5 billion is actually 100% procured so when I say on time, on budget, we know that’s exactly what it’s going to cost us. On time means March 3, 2023,” said Long.

Although Aviation Department officials were worried that there would be delays in the supply chain during the pandemic, “everything has been coming exactly the way that it needed to come,” Long said.

Long said that COVID-related measures were enacted to keep workers on the construction site safe, including adding additional bathrooms, staggering start and stop times, adding wash stations and providing hard hats with sensors that blink and make an audible sound when workers are within six feet of each other. Although there have been as many as 1000 employees on the work site, only seven have tested positive for the virus. 

Long noted that the project has employed 100 minority and women owned businesses which accounted for a little more than $170 million. 

“Having that kind of income into the minority community on that business is just a big shot of adrenaline into the arm, and those are all local folks that will be better skilled, better able to handle the many jobs that will happen in the future,” said Long.

Stephens describes Port KC as “a redevelopment entity and a reclamation entity that really focuses on under-utilized, under positioned places and brings them back to life with private sector partners and sometimes with public sectors.”

In 2015, Port KC brought back to life the Woodswether Terminal in the West Bottoms, which Stephens described as one of the most unnoticed small bulk goods terminal ports in the area.

“We’ve put about $22 million into that facility and we’ve doubled the tonnage every year since 2015. In 2019, we went over 100,000 tons transferred through that facility,” said Stephens.

Stephens also highlighted the redevelopment of the Berkley Riverfront where Port Kansas City continues to see growth in reclaiming the area. 

Stephens noted Port KC has seen “incredible growth” at the site of the former Richards-Gebaur Air Force Base. Port KC recently rebranded the approximately 2600 total acres as 49 Crossing.

“We’re seeing significant job growth down there. That’s one of our goals,” said Stephens. 

And, Port KC recently won a MARAD grant of nearly $10 million from the U.S. Department of Transportation’s Maritime Administration to create the Missouri River Terminal at the former site of AK Steel in the Blue River corridor near Sugar Creek and Independence, Mo.

“We will be working to bring 420 acres back to life with all the Class 1 rail coming through that site. We’re excited to have the MRT facility with will become North America’s first comprehensive transloading facility that combines rail, trucking and water borne commerce,” said Stephens.

Stephens said that a lot of economic development and reclamation is related to hotels and retail, and Kansas City has seen approximately a 75% drop in those sectors during the pandemic.

“On the positive side, multifamily rental units are up 50% year over year, in projects, in total units and total volume for us, 2020 over 2019,” Stephens said.

 “We’ve seen a one-third growth in 2020 thus far as of October 1 in logistics and distribution and ecommerce. We may even go higher than that. In total dollars, jobs and acreage, we’re at about a 65% increase in 2020 so far,” said Stephens.

Gutierrez said he projects that in 2020, build to suit for clients or spec development will exceed 15 million sf.

“That’s a record for this market. And everything I’m hearing is that 2021 is going to be even greater,” said Gutierrez.

“It’s an exciting time to be in the industrial, transportation, supply chain space, especially in Kansas City. We are the center of everything that’s happening with supply chain and transportation growth and we’re going to hit records on industrial development and industrial construction this year and forecast an even better year next year,” said Gutierrez.

CCIM economist navigates road to recovery

K.C. Conway, chief economist of the CCIM Institute and director of research for Alabama Center for Real Estate, delivered an economic update webinar to commercial real estate professionals last week.

As a whole, Conway believes the economy, which spiraled downward with the COVID-19 lockdowns, is far from recovery, a perspective reinforced by recent comments from Jerome Powell, chair of the Federal Reserve. 

“If we were recovering and creating 2.5 million jobs a month, do you think the Fed would make the statement that it was not even thinking about making interest rate hikes until 2022? Not even 2021? This tells you how fragile the economy is; how much intervention the Fed is going to have to do,” Conway said.

Conway predicts that there will be a massive oversupply of oil as supply cut production agreements expire at the end of June. 

“I think energy is going to remain very, very volatile. That’s good for the consumer and for transportation, but it’s not a good indicator that things are really recovering from the economy. I don’t think energy is saying we’re there yet either,” Conway said.

The housing market also does not reflect a recovery. With eight percent of mortgages subject to forbearance agreements which won’t expire for six to 12 months, Conway said we’re not going to fully understand the impact of housing until next spring. 

“When you also look at what’s rising in terms of mortgage delinquencies, we’re essentially at 15% of all homeowners delinquent in their mortgages or in forbearance, and that’s record numbers even compared to 2009,” noted Conway.

According to Conway, there are four metrics which are most predictive in determining when we’ve arrived at recovery. The first is the Transportation Security Administration (TSA) daily passenger count, which is currently in the 200,000 to 300,000 range.

“If we don’t see this climb back toward 1.5 million this fall, we are in serious trouble," Conway said. 

The second metric upon which he relies is the number of loans transferred to special servicers. He noted that these loan transfers are reaching record numbers.

The third predictive metric is transaction activity. Conway said that activity currently is locked up because the 500 largest pension and institutional funds are not investing in commercial real estate until they get past their mark to market accounting at the end of June and determine how to reallocate capital. However, Conway is optimistic. 

“Capital is coming back this fall to commercial real estate,” he said.

The fourth and final predictive metric is corporate earnings. He encouraged his audience to follow the earnings of companies that drive their local economies, including those companies that are the major tenants of local retail centers and office buildings.

Conway also predicts major changes to logistics. 

“What we’re going to see is the rest of the world awaken to the fact that it’s a really bad idea to put all of your manufacturing dependence in one place in the world.” 

Consequently, he said some of the manufacturing currently done in China or other parts of Asia will move back to Europe and the United States, but much will go to Mexico, increasing the importance of Kansas City, local intermodal installations and Kansas City rail as trade moves more north and south, rather than from the west coast to the east coast.

Conway noted that casualties of the pandemic will include the failure of one in four businesses and the closure of 40 percent of restaurants nationally. Consequently, a lot of inventory and equipment that was ordered pre-pandemic but not shipped during the shutdown will arrive at businesses that have closed.  

“That’s about 50 million SF of additional warehouse space that we’re going to have to have to store orders that have finally come in. This will provide adaptive reuse opportunities for properties like closed big box retailers and department stores in enclosed malls,” Conway said.

Conway predicts leisure and travel properties will change substantially as well, shifting hotels in the future to be smaller with exterior room entry and contactless features. 

In addition, Conway sees every ratio to which the commercial real estate industry is accustomed, to change.

“Density ratios in office, density ratios in restaurants, expense ratios, occupancy cost ratios . . . parking ratios because we’re going to do more ‘click it and pick up,’ rather than ‘park and drive in,’ which will add a whole new dimension to future site selection,” Conway said. 

“What I think is going to make the difference is what’s called immunity passports,” which currently are being utilized in Europe. 

Immunity passports in the United States will rely upon technology that is already available, although HIPAA laws will need to be amended. 

Conway predicts that within two years, we are going to have mouth swab kits to test for antibodies.

Developers say e-commerce, amenities will drive successful future

An ABC Heart of America webinar recap

This week Associated Builders & Contractors (ABC) Heart of America held an online developers panel moderated by Eric Mann with Emery Sapp & Sons.

Panelists included Andy Ashwal, VP, senior asset manager of GFI Management, Mike Bell, senior vice president of Hunt Midwest and Oscar Healy, regional vice president of Opus Design Build.

The discussion focused on the challenges as well as the opportunities surrounding future development resulting from the COVID-19 pandemic.

One of the trends the panelists are seeing skyrocket is e-commerce and the need for additional storage space as the U.S. supply chain has relied on ‘just in time’ delivery for many consumer products that are imported and shipped overseas.

“You’re going to see a change from ‘just in time’ deliveries to having a 5% safety stock being held in distribution facilities. Based upon different national brokers, you’ll hear numbers ranging from 500 million to 750 million SF of additional industrial space needed just to supply distribution centers that 5% safety stock,” said Bell. 

“It will bring manufacturing back to the US. I think ‘Made in America’ will mean something more than it has in the past, said Healy.

The panelists also predict a surge of data centers to help fuel e-commerce.

“Kansas City is seeing the first wave of data centers. We’ve always been seen as a lower-level tertiary market, said Bell. 

Panelists agreed other side-markets to the e-commerce industry include an increase in the need for robotics and higher, stacked building spaces.

The importance of the ‘live, work, play, stay’ concept of living is not going away anytime soon. Having amenities for offices and apartments will become of even greater value to millennials who might be staying in lofts and apartments longer than they expected.

“I think the trend of millennials staying in multifamily or maybe moving up to larger multifamily spaces is going to continue (as) they’re going to start to have children. They’re going to need services for their children there and play spaces. That has not existed in the Kansas City market, said Ashwal.

The need for additional on-site package delivery storage was also discussed.

“The ripple-effect of what’s going to happen on the office and multifamily side is there will be a need for larger package rooms to accept trackable deliveries. Refrigerated storage in office buildings will be a new trend to accommodate employees that want packages delivered to their office to bring home,” said Ashwal. 

Some of the obstacles the panelists are seeing now and going forward are cost of construction and shortage of labor.

“Material increases and labor shortages have caused issues on our side from a development perspective, said Bell.

The panelists agreed that municipalities that are “developer-friendly” will be more attractive to developers going forward more than ever before.

“If you don’t have a tax incentive or tax abatement in some of our various cities or counties, you’re at a competitive disadvantage,” said Healy.

The discussion ended with hope that the pandemic is creating opportunities, especially for industrial development because of Kansas City’s well-built infrastructure and land availability. Also, KC offers 90% of the U.S. within a two-day shipping window.

Associated Builders & Contractors Heart of America is a commercial construction trade association serving contractors and construction related firms across Missouri and Kansas. ABC connects contractors to industry information and safety resources; serve as advocates at the state, local, and federal level; and provide a variety of educational opportunities for those in the industry including our federally registered apprenticeship program in multiple trades.

Sponsors of the event included: Nabholz Construction, Emery Sapp & Sons, Fogel-Anderson Construction, IMA Financial Group, HTH Corporation and Autodesk.

MWM's 2020 Forecast Panel consensus: KC market is booming

MWM panelists Tim Cowden, president and CEO of KCADC; Nick Suarez, SIOR, CCIM, senior managing director and principal at Newmark Grubb Zimmer; Tim Homburg, co-president of NSPJ Architects; David Caffrey, chief lending officer at Country Club Bank; Todd LaSala, partner at Stinson, LLP; and moderator, Chris Vaeth, vice president, business unit leader at McCownGordon all agree — the Kansas City commercial real estate market is booming.

A summary of the panelists’ remarks from last week’s MWM 2020 Market Forecast event follows:

ON BOOMING KANSAS CITY MARKET:

Tim Cowden, KCADC: “I’m really excited about 2020 because we are coming off a really great 2019. There is a lot of momentum in the market. Our pipeline is full. Kansas City is ascending.”

Tim Homburg, NSPJ: “We see Kansas City maturing into a nice, large-sized metro area. We don’t need to rely on any single one thing to keep the wheels churning for Kansas City because there are multiple different locations around the whole metro area that make it exciting.”

Chris Vaeth, McCownGordon: “The reality is that it’s great right now. The market is doing well; the economy is doing well; and Kansas City has been a robust place to work and live the last several years. There’s a lot of growth, a lot of opportunity. However, 2020 can be a pivotal year. You can’t help but follow the news to see what’s going on. You’ve got to ride it while you have it.”

ON MULTIFAMILY MARKET:

Tim Homburg, NSPJ: “People are coming into the metro area so there is going to be a housing need. Housing will drive a lot of the growth in Kansas City, and we’re seeing very positive signs on the multi-family side coming into this next year. A single family home 15 years ago that was $175,000 is now $350,000 and so people are staying in multifamily “for rent” product longer until they build up the wealth to get to that breaking moment in their life when they can afford the down payment on that $350,000 starter home.

We’ve never seen an oversupply [of multifamily product in Kansas City]. We’re pacing with what the demand is.”

ON OFFICE MARKET:

Nick Suarez, Newmark Grubb Zimmer: “Right now the office market is strong. The vacancy rate is right around eight and one-half percent. We do see rental rates increase slightly across the market. The big issue we have is just the lack of big blocks of quality space, but that’s all going to change [with projects like Strata and the Platform Ventures Building downtown].

Not only will our skyline be changing, we’re also going to have property that is going to be able to compete with all of our peer cities. But, it’s not just downtown. All over the city we’re seeing a lot of new projects [like the Edison District in downtown Overland Park and CityPlace at U.S. 69 Highway and College Boulevard]. It’s an exciting tine to be in the business.”

ON TRUCE BETWEEN KANSAS AND MISSOURI:

Todd LaSala, Stinson: “The two states have finally agreed that you will not treat jobs for border counties that are leaving one side [of the state line] and moving to the other as net new jobs. [The truce] really does level the playing field for us and it’s sort of a new day for us in this market.”

Tim Cowden, KCADC: “It’s good for the region because we can focus now on net new from outside the market here. And we need both Kansas and Missouri to be at the top of their game. That’s really important for Kansas City to reach its potential.”

ON GROWTH OPPORTUNITY MARKETS:

Nick Suarez, Newmark Grubb Zimmer: “Kansas City is a very desirable place for investors to park their money. Investors are getting pushed out from markets like Denver, Nashville and Minneapolis because they are too expensive to do business. They look at Kansas City as another alternative. I think we’re going to see that evolve in the next several years.”

Tim Cowden, KCADC: “Kansas City is so well positioned for e-commerce. We’ve been building these spec industrial buildings. Ten or 15 years ago, we didn’t see that in Kansas City.

One area that we really need more activity in is cold storage. Food is a big deal right now. We’re seeing a lot of food production operations.”

David Caffrey, COUNTRY CLUB BANK: “Network operating centers where companies store their towers or the towers are provided to them. It’s a very specialized facility that we’ve been seeing. We’re in the center of the United States, and we have every internet line coming through Kansas City.”

ON KANSAS CITY COMPETING WITH PEER CITIES:

Tim Cowden, KCADC: “I think our opportunities in Kansas City are limitless. I think we are just now getting to the point where we can compete in a legitimate way with these markets we hear all about—Nashville, Austin, Raleigh-Durham. Look at the USDA deal. That came down to Indianapolis, Raleigh-Durham and Kansas City, and they are going to be right down the street here—600 really highly paid jobs. 

There are more opportunities out there, but we have to have the product on the shelf, whether it’s Class A office, office and industrial, and then go get it.”

Tim Homburg, NSPJ: “Another thing I’d like to see for Kansas City as a whole that you see in that next tier level city is a plan on mass transportation.”

Todd LaSala, STINSON: “I think you have to be strategic and thoughtful and not panic.”