After two years of sluggish activity, many commercial real estate sectors are building strong momentum. Nationwide, non-residential construction activity is up 5.6% year-over-year despite some difficult labor and raw material conditions (which forced some projects to be delayed or cancelled recently). Sectors spanning supply chain fulfillment and distribution, light industrial, mixed-use, and multi-family construction are seeing strong improvements nationwide.
Trends
In the Kansas City area, the same trends are prevalent. Some suburban sprawl has helped increase demand for mixed-use projects (blending retail, food and restaurants, housing, and office space in large developments). Other sectors spanning light industrial, warehousing, distribution, and fulfillment, have remained strong throughout the post-pandemic reopening period and continue to build momentum. But some segments that were hit especially hard by the pandemic are starting to emerge including health care, leisure, hospitality, and entertainment. Even office space construction is starting to show some signs of life.
In the latest report on construction activity from the Census Bureau, manufacturing construction was the fastest growing commercial sector with growth of 31.9% year-over-year (YOY) in March.
Other sectors seeing significant increases in YOY activity include the broader commercial category which includes those mixed-use developments mentioned earlier. That sector was up nearly 15%. Office space is seeing a slight growth trend with nearly 4.8% growth YOY. That’s remarkable considering the US still has less than 44% of workers returning to the office vs. pre-pandemic levels.
How Kansas City Benefits
Kansas City is well suited to benefit from several trends that will affect where companies tend to locate their operations (not just based on local sales or support of local business).
A reshoring trend is likely to focus more on the I-35 corridor in the future because of favorable cost of living standards, affordable and stable energy and water supplies, accommodating labor pool, good distribution and logistics infrastructure, and within the next year, an improved airport operation.
Surveys collected over the past two years have suggested sourcing managers plan to begin to reshore a portion of their manufacturing back to the US in the future. Bank of America reported that companies in more than 80% of global sectors suffered disruptions during the pandemic and 3/4 of them are therefore widening the scope of their reshoring plans.
The logistics expertise and competitive advantage developing in the Kansas City area as part of the Kansas City Smartport effort has been a significant lure of new businesses into the region, and it will continue to grow in importance over the next several decades. As conditions in the southern part of the country get more congested, there are significant advantages in getting cargo moving under the USMCA (former NAFTA) to move farther inland before freight has to be sorted and delivered West, East, and North in the country. Kansas City has the largest rail center with five of the largest rail carriers in the country intersecting in the region.
Warehousing Demand
Warehousing construction and competition for warehouse space will continue to play a critical role as a result. Estimates suggest that warehousing construction could grow by an additional 18% this year across the country (after growing by 22% last year) and conditions remain tight. National warehousing rents were 8% higher last year. Some coastal cities saw warehousing rents jump as much as 23%. Prologis estimated that the industry will need 800 million additional square feet of space just to handle ecommerce fulfillment alone.
There are many opportunities in commercial real estate markets across the Kansas City region. The current situation is not without its challenges. Rising interest rates, raw material, and labor shortages, and now some looming recession risk over the next two years, has put some projects on hold. But generally as the pandemic risk fades, every sector that has been dormant will see growth, whether it is new construction or reconfiguring facilities that housed industries that the pandemic permanently changed (like traditional office space).
The experts at MarksNelson can help you navigate your real estate projects, from start to finish, and respond to changes in the market. Reach out to us today.
