From St. Louis to Minneapolis and Chicago to Omaha, it doesn’t matter: The industrial sector in every major market in the Midwest continues to boom. And the best news? The brokers working these markets don’t expect a slowdown anytime soon.
We recently spoke with Grant Harrison, senior director of development in the Kansas City, Missouri, office of real estate development company VanTrust, about industrial’s long hot streak, how long it might continue and why the Midwest is so well-positioned to benefit from the rising demand for warehouse and distribution space.
Here is what he had to say.
We all know that the industrial sector is booming today. What are some of the factors driving this explosion in demand?
Grant Harrison: Even before COVID, ecommerce was changing how we all shopped. The need for industrial space is real. Ecommerce requires about three times as much space under one roof as does traditional retail. COVID has been the great accelerator for ecommerce. Our buying habits changed overnight. We can now get an amazing variety of products to our homes and apartments in a couple of hours, if not a couple of days. That has really changed the logistics models and where buildings need to be. The buildings need to be closer to population centers. Ecommerce is certainly not a fad.
In general, though, we are seeing great activity in the industrial sector, whether it’s light manufacturing coming back to the United States, reshoring or companies needing to increase their safety stocks. It’s not just ecommerce behind the strong performance of industrial. All types of occupiers, big and small, need more space today. It’s a fun industry to be in right now.
What else is pushing the demand for industrial real estate?
Harrison: We have seen a lot of light-industrial users, whether tenants or buyers across our markets, getting deals down. We’ve seen some huge announcements, like Intel selecting New Albany, Ohio, near Columbus, for its newest manufacturing facility. We are seeing demand for industrial space from the electric vehicle manufacturers. Demand for cold storage space is up. Everything is active at some level. It’s hard to keep up.
Reshoring is important, too. We need more supply and stock here in the United States. I think we learned our lesson during the early days of the pandemic. I don’t think the need for reshoring will go away. We clearly need to store more product here. More inventory means more space, spread across the country.
This reshoring trend benefits the Midwest markets. We sit in Kansas City. We can get to almost 85% of the U.S. population in two days or less. And those numbers get better in other Midwest markets. We also have great cargo and rail facilities. We have a great interstate system. The connectivity is so strong in the Midwest. We also have strong labor in these markets and a low cost of living. That whole story does well for the Midwest.
How much of a challenge are rising labor and materials costs today?
Harrison: Steel was for a while like toilet paper during the earlier days of COVID. We couldn’t find steel. That has since settled down. Roofing is now a big challenge, both the pricing of it and the procurement of it. Usually, it would take less than 12 months of construction to finish building an industrial property when everything is aligned right. The duration of building an industrial site is longer today. We are trying to get ahead of this like everyone else. We are ordering well ahead of getting our building permits so that we can get in the queue and on the schedules. At the same time, costs have grown incredibly. The situation seems to be changing monthly.
Things have gotten better for some materials. Precast and steel have maybe plateaued in terms of lead time. Roofing is still one of the bigger wildcards right now. Pricing is a challenge, too. We don’t know what roofing will cost until it gets delivered to the site. The day of a guaranteed maximum price before you start construction are over. That’s one more hurdle to overcome.
It can be difficult for tenants to find industrial space today. Do you see this changing anytime soon?
Harrison: It’s not that tight in Kansas City, yet. It is challenging for some tenants, though. Tenants have to act quick if they like a building or location. Fortunately, we have a pretty healthy supply under construction. We have about 12 million square feet of industrial space under construction in the market. I expect that we’ll see a really good absorption of that new space, though. We feel pretty good about Kansas City as a healthy market that will continue to grow.
Space is tighter in some of our submarkets. Southwest Johnson County is one of our strongest industrial markets. Honestly, though, it seems like every corner is active with developments. This is a unique market in that demand for industrial space is strong everywhere. Everyone is looking for sites. It’s not just one submarket that is dominating right now. It is pretty spread out. That is good for the health of the market.
Are you still seeing a lot of spec construction in your market?
Harrison: The majority of our work is spec development. We do have some build-to-suit work, but that is a small percentage of our overall pipeline. The spec space is filling up quickly. When we are lucky, and we are sometimes, this happens before we even finish the building. Buildings are not sitting empty for very long. Knock on wood, but I think that will continue. A lot of these tenants and users don’t have time to have a building built. They need to drop into markets and find a site that is built and ready to go. Speed to market is critical right now.
Do you have any predictions on when we might see the industrial market cool off?
Harrison: We’d love to have that crystal ball. But we feel good about where we are at. We are seeing great demand and leasing activity. We are optimistic that the demand is there. That can stop if we go into a real recession, but consumer demand and purchasing power is very strong still. That need for warehouse space will continue. Data centers, cold storage, a lot of things are hitting that will help alleviate any dip in consumer spending. I am bullish about the next six to 12 months.