This article appeared in the May issue of Heartland Real Estate Business. You can view the whole issue here: May 2018 – Heartland RE Business
The industrial sector remains the prime beneficiary of the numerous technological shifts occurring throughout the economy. E-commerce continues to fuel demand for distribution and warehouse space in the national industrial sector. The Wichita market remains focused on the aerospace cluster, advanced manufacturing and the growing advanced materials sector to sustain and grow the industrial segment.
The current supply pipeline is to remain about the same as it has over the past couple of years with over 726,000 square feet under construction at the end of the first quarter and many new large developments announced. Absorption of space by tenants is expected to occur at a steady pace, resulting in lower vacancies around 6 to 7 percent. Average asking rental rates grew to $4.38 per square foot for general industrial space and $10.26 per square foot for flex space as of the end of the first quarter. This growth will accelerate further as the market continues to tighten through 2018. The growth in employment has not been reflective of renewed vigor in the industrial sector, highlighting the contribution of technological trends as they drive the industry forward.
The industrial sector’s outlook is bright since increased emphasis on aerospace production and advance manufacturing show no sign of abating.
Of more importance is the availability of buildings that meet the requirements of today’s users. The overall vacancy rate is just 6.6 percent for both owner-occupied and for-lease properties, creating demand for high-quality buildings.
Tenant-only occupied spaces are 12 percent vacant, a rate that has historically been influenced by less desirable and functionally obsolete property in several submarket areas.
Options are limited for companies requiring more modern facilities that support today’s user requirements of higher ceilings, more efficient lighting and mechanical systems, and more accommodating dock configurations, truck court depths and turning radiuses.
Obstacles to spec activity
Speculative development is facing headwinds because construction costs are still somewhat disproportionate to achievable rents. Even though rental rates have been trending upward, they remain below a level that supports any substantial new construction.
Historically, owners have been reluctant to push rents, and it has taken a while for tenants to accept triple net rental rates of over $5 per square foot. The City of Wichita’s Spec Industrial Building Program allows for users and/or developers to use a combination of industrial revenue bonds, sales tax exemptions on construction materials and property tax abatement for up to 10 years.
Recent speculative development supported by this program has been substantially absorbed, demonstrating both the market’s growing demand and an increased willingness to pay higher rent for quality facilities. Developers Ivan Crossland and Steve Barrett completed the construction of a 256,000-square-foot warehouse complex near 29th Street North, which is fully leased.
Crossland and Barrett recently announced two speculative warehouse developments totaling 368,480 square feet, a testimony to the demand for high-quality, well-located industrial real estate that should not wane anytime soon.
Tenants are reluctant to wait for build-to-suits, so having inventory ready to lease is vital for the market. A lack of quality space options presents a challenge for companies seeking to expand their supply chains. Overall, the for-sale or lease inventory will remain low as companies are expanding and new business creation is on the upswing. New construction will be driven by owner-occupied properties. The areas of industrial market influence remain north along I-135 in Park City, along the K-96 corridor and in the Bel Aire and Maize industrial parks with an effort to shift supply to south Wichita through speculative development.
Even though speculative development has historically proven to be a challenge, new construction and expansion of owner-occupied buildings during the last three years has been 2.5 times the average of the previous five years. Below are some examples.
- Kyodo Yushi Manufacturing, in a joint venture with Lubrication Engineers, began construction of 80,000 square feet in the Maize Industrial Park, while Cox Machine added 52,284 square feet to its operations on 21st Street
- B G Products began construction of a 30,000-square-foot addition to its headquarters and will be adding 120,000 square feet to its El Dorado distribution center. Meanwhile, Dold (Hormel) is investing $50 million in a 153,000-square-foot addition to its Wichita facility on 31st Street
- Towanda-based Empire Wall Systems Inc. is relocating near 53rd Street and Webb Road in Sunflower Commerce Park. The 31,600-square-foot building is slated for completion in the second quarter of this year. The facility will house manufacturing, warehouse space and administrative offices. Epic Sports, an online sports and apparel company, finished construction of a 180,000-square-foot warehouse and office building in the complex.
- Lou Robelli is completing a 500,000-square-foot warehouse for Coleman Co. at 71st Street North and I-135.
- Globe Engineering is building a $3.8 million, 79,868-square-foot building north of K-42 and west of Maize Road. Over the next five years, Globe Engineering is expected to invest $10 million in new machinery and equipment.
- Developer Jeff Lange has completed the first of 10 potential spec buildings at Ironhorse Manufacturing The first 103,500-square-foot building has been leased to Hyper Pet.
- Raptor Manufacturing expanded to South Hoover Road with the construction of a 33,580-square-foot manufacturing building using over $3.5 million of industrial revenue bonds. Raptor has also invested $900,000 in equipment and machinery.
Overall, Wichita’s industrial market continues to be sustained by an emphasis on aerospace and advanced manufacturing. As a result of increasing production rates and rising demand for commercial aircraft and parts, opportunity remains constant.
In December 2017, Spirit AeroSystems announced plans for a $1 billion expansion that will bring 1,000 new jobs to its aircraft manufacturing plant in Wichita over the next five years. The company recently unveiled its Five-Axis Center of Excellence, with $30 million invested in the center to use the latest high-speed technology in the fabrication of large complex parts. Spirit AeroSystem’s ongoing capital investment is a testament to the strong presence the aerospace sector has in Wichita and to the city’s economic growth.