Solid Start to 2020 Overshadowed by COVID-19 and Uncertainty
A Note Regarding COVID-19
As we publish this report, the U.S. and the world at large are facing a tremendous challenge, the scale of which is unprecedented in recent history. The spread of the novel coronavirus (COVID-19) is significantly altering day-to-day life, impacting society, the economy and, by extension, commercial real estate. The extent, length and severity of this pandemic is unknown and continues to evolve at a rapid pace. The scale of the impact and its timing varies between locations. To better understand trends and emerging adjustments, please subscribe to Colliers’ COVID-19 Knowledge Leader page for resources and recent updates.
Kansas City Industrial Overview
Following a strong beginning to the start of 2020, indicators for Kansas City’s industrial market turned to uncertainty, falling in line with the global economic outlook and many facets of life. The Q1 2020 reported figures were largely unimpacted by the COVID-19 pandemic as the majority of the first quarter absorption and signed leases were complete prior to shutdown orders across the nation. The real impact of COVID-19 generally will trail 2-4 quarters behind the outbreak in the United States, however some effects will still be felt as early as Q2 2020. The overall vacancy rate in Kansas City slightly decreased by 10-basis points to 6.0% by the end of Q1 2020, as net absorption continued to slightly outpace deliveries throughout the first quarter. The vacancy rate has declined by 50-basis points relative to this time one year ago. A total of 1,919,899 SF of net absorption occurred throughout Q1 2020, largely a result of the new Hostess Brands building completion in Edgerton and Niagara Bottling Company in Jackson County. A total of nearly 1.74 million SF was delivered during the first quarter. Stable asking rents and a healthy construction pipeline on BTS and speculative development remain in focus for the Kansas City market.
The Effects of COVID-19 and the Industrial Market
The Kansas City industrial market will begin to feel the effects of a national and global economy that has recently experienced an abrupt halt of normal life. Industrial vacancy rates have historically been tied to the U.S. unemployment rate and GPD figures. As unemployment rates have spiked sharply toward the end of Q1 2020 and into Q2, coupled with a low GDP output, the real impact of the COVID-19 crisis will not be present in the market data until the last half of 2020 and into 2021.
While commercial real estate is undoubtedly feeling a significant impact due to the global COVID-19 pandemic and the resulting economic downturn, several industrial occupier types including e-commerce, food and beverage users, packaging companies and healthcare-related industries aren’t as negatively impacted by the stay-at-home directives and supply chain adjustments of the current situation. Certain users that are quick to respond to the evolving changes in our daily lives and plan for what’s to come, can take advantage of the rapidly changing business climate. Domestic transportation has seen a surge in activity, as demand spikes for inland trucking capacity so grocers and retailers can restock their shelves with critical goods amid the COVID-19 outbreak. The reliance upon online shopping could have long-term implications on both retail stores and delivery systems going forward.
The industrial sector is expected to outperform and recover faster than the other major commercial real estate sectors, as both the Kansas City market and the nation are released from the shutdowns. Bright spots in the recovery for industrial space will be a growing reliance on third-party logistics companies to help customers with increasing supply chain efficiency. E-commerce growth and warehouse leasing are expected to remain strong. The need for national stockpiles for public health supplies and readiness will drive warehouse demand.
Recent Activity Around the Metro
As noted prior to the COVID-19 outbreak across the United States, the Kansas City industrial market was active throughout Q1 2020. Johnson County remained very active in Q1 with the completion of the 765,000 SF building occupied by Hostess Brands. Midwest Gateway Building 2 was purchased by owner/user Dots Pretzels from OakBridge Real Estate. In Lenexa, a pair of tenants announced leases at Lenexa Logistics Center parks. ProPak will occupy 125,000 SF at Lenexa Logistics North, while Novation IQ will lease 83,000 SF at Lenexa Logistics 5. In Olathe, Regal Art & Gift will occupy 118,000 SF at Lone Elm Logistics. In the Northland, FedEx Ground will lease the entire 548,000 SF at Northland Building VI. In Jackson County, Niagara Bottling Company completed their 426,000 SF building within the KCS-CenterPoint Intermodal. In Lee’s Summit, Vertical Tower Partners sold a pair of industrial buildings totaling just over 57,000 SF for $4.75 million.