Industrial Surges Outside the Hubs

“The big theme around here right now is spec, spec, spec,” says CBRE’s Joseph Orschein.

KANSAS CITY—The news about strength in industrial/logistics hubs such as the Inland Empire, Chicago and Atlanta is old news by now. However, a recent survey among SIOR’s industrial professionals reveals that there’s plenty of absorption as well as new construction going on outside of these core markets.

The SIOR Report checked in with industrial professionals across primary, secondary and tertiary markets in North America. Their consensus: “2016 will be a continuation of healthy construction trend lines established in the past few years.”

Take Kansas City, for instance. In the SIOR article, CBRE VP Joseph Orschein, SIOR says the market is “on fire right now.” Orschein tells GlobeSt.com that his city “has actually been on distribution companies’ radar for a while, due to our centrality and our logistical infrastructure. The problem was that we never had product to put them in. So if we were ever in a multi-market competition for a company to potentially land in Kansas City—if we were up against an Indianapolis, Memphis or Dallas—Kansas City would often get skipped over because we didn’t have any available product for these prospects to occupy.”

Developers have taken taken notice, especially since the US economy emerged from the Great Recession, “and we have actually put up a lot of spec product here in Kansas City,” says Orschein. “So now that we have that product, we’re getting a lot of good looks.”

He reiterates that “the big theme around here right now is spec, spec, spec. It’s seven million square feet, so if you’re talking to Dallas, Atlanta or West Coast brokers, that may not sound like a whole lot compared to these larger markets. But for a secondary market, that’s a lot.”

It doesn’t exactly hurt that it’s new product, built to satisfy modern requirements. “Everything that’s going up is state of the art, 32-foot clear heights,” says Orschein. “A lot of it is larger products, so we’re seeing a lot of 300,000-square-foot-plus buildings going up, a lot of cross-dock bulk buildings. A couple of developers will be coming on line with 200,000-square-foot single-loaded buildings to satisfy the demand from the smaller users as well.”

Geographically, Omaha is “literally at the center of the country,” says Kerrigan.

Farther west is Omaha, which at 68 million square feet represents the smallest industrial market in the SIOR survey. Yet Tim Kerrigan, CCIM, SIOR, a VP with Investors Realty Inc. in Nebraska’s largest city, points out that it meets the fundamental requirements of real estate success, namely location, location, location. “We sit at the intersections of Interstates 80 and 29; that’s a huge advantage,” he tells GlobeSt.com. “Geographically, it’s literally at the center of the country. It puts us within a one-day delivery time of a huge part of the US market.”

Although Kerrigan says there’s no evidence yet of Amazon establishing its presence in the area, he thinks it’s fair to assume that there will be, sooner or later.“There’s a lot of territory in the Plains states; if we’re truly going to do same-day deliveries to in business-to-business and consumer-to-consumer, somebody’s going to have to build facilities in Omaha and the surrounding area.”

While Omaha may be best known as the home of Warren Buffet’s Berkshire Hathaway empire, Kerrigan notes that the market is “fast on its way to becoming a hotbed for data centers. You don’t see more than a handful of these huge, $200-million enterprise centers in any given year, but Omaha has had two in the past three years, and we have more in the pipeline.”

Although Chicago isn’t all that far from Milwaukee, the seven-county region of southeast Wisconsin has become a key industrial market in its own right. “What we’ve seen in the past seven years of recovery is remarkable strength, and I think you’re seeing it across the US,” Jeff Hoffman, SIOR, CCIM, a principal with Cushman & Wakefield/The Boerke Co. in Milwaukee, tells GlobeSt.com. “We have a stock of 275 million square feet, and our vacancy rate is down to 4.1%.”

Cushman & Wakefield’s Jeff Hoffman cites the “remarkable strength” of the industrial recovery.

It’s even lower in some of the region’s submarkets, such as Mitchell Airport with vacancies of just 2.2%.  “You can’t remember a time when markets have been compressed that low,” Hoffman says.

One challenge has been the manufacturing sector, which has been hard-pressed recently. “The state of Wisconsin jockeys back and forth with Indiana as the state with the highest dependence on manufacturing for private-sector employment,” says Hoffman. “A lot of our large manufacturers since last August or September have been in flat-out recessionary enviromnents. We supply a lot to the oil and gas industry, so your local machine shops have been hit hard.”

That being said, absorption locally continues to outpace new deliveries, Hoffman says. The gap has been filled by and large with warehouse-fulfillment, on both the business-to-business and business-to-consumer sides.

Another fundamental of commercial real estate, asking rents, has seen year-over-year increases nationwide. However, Kerrigan says, “We’re seeing rental rates rise across the market, but still not keeping pace with the cost of construction. I would presume that construction costs have increased at an increasing rate everywhere, certainly in our market. So people are trying to understand the disconnect between rental rates and construction costs.”