Industrial | AREA Real Estate Advisors - Part 2

By Brent Peterson – Vice President, Director of Industrial Brokerage

Kansas City has always been a center for commerce and in recent years, has established itself as a leading distribution center within the United States.

According to the Kansas City Area Development Council, “Kansas City is experiencing one of the largest industrial booms in its history and is a center of choice for warehousing, manufacturing, and distribution.  Business has prospered in large part due to the region’s abundant multi-modal transportation network.”  In 2017, the metro saw growth in distribution facilities from 100,000 to 1.2 million square feet, which included eCommerce companies like Amazon, HyVee Aisles, Dollar Tree, Spectrum Brands, and Horizon Global.

So, what makes Kansas City so attractive to large distribution centers?

1. Rail. Currently, the metro receives more tonnage by rail than any other city in the United States in large part thanks to Kansas City’s efficient rail lines that come into the city and leave with little incumbrances.  The multiple rail yards are the perfect spots for finished and raw goods, including grain, vehicles, and coal.
2. Location.  Companies can reach 90% of the continental U.S. and nearly 99% of their customers within a two day drive time.  Its central location makes it a natural crossroads for transcontinental rail, interstate, and waterway.
3. Interstate. Distribution Centers can piggyback on the large interstate system running all directions, including I-70, I-35, I-29, the 435 loop, and I-49. This allows companies to move goods more efficiently without congestion.
4. Labor Cost.  The cost to operate in the Kansas City metro is significantly less than some other major metros such as Chicago, Dallas or Los Angeles.
5. Community. Kansas City is mainly comprised of the non-transient workforce who come to the region and choose to stay in the area.  A low cost of living, big-city amenities and small-town feel, along with jobs and schools all contribute to why potential employees stay.

By Brent Peterson – Vice President, Director of Industrial Brokerage

According to a recent USA Today article, “Trucking companies nationwide are about 60,000 drivers short; a gap that is expected to grow in the coming years and could threaten U.S. supply chains.”

The American Trucking Association warns driver shortages could reach six-figures by 2024.  As over the road, truckers continue to age and head into retirement, the question becomes who will continue to fill the need and what does the future of this vital industry look like?

There is a constant need to keep recruiting drivers given the shortage of drivers currently facing the truck industry.  While hiring, training and retaining drivers over the long-term is crucial and has its challenges, it all begins with the recruitment of the right candidates and giving them a reason to stay.  To this end, benefits for truck drivers have become more crucial than ever because all motor carriers are facing the driver shortage.  Above industry-standard benefits, could mean the difference between a fleet of drivers that stick around and one that leaves looking for better perks.

Consider these five benefits that could help the driver retention:

1. Find ways to attract more drivers through incentives, including becoming their owner-operators, owning their rig and equipment and more workforce training.
2. Make improvements in efficiency and comfort in big rig trucks.  Truck drivers spend a considerable amount of time in these vehicles. We need to ensure they are safe and comfortable.
3. Consider having more distribution centers, smaller in size in more cities so truck drivers have fewer nights away from home, making their personal lives and lifestyle less disruptive.
4. Have more teams of two people driving together to relieve each other and make the job less lonely. Isolation is a huge reason for the turnover in the trucking industry.  Setting up a team environment could ease the burden of individual drivers.
5. Start paying more money with more competitive retirement packages and health benefits.

By Brent Peterson – Vice President, Director of Industrial Brokerage

In the past three years, developers have started 24 projects across the United States to convert former retail space into industrial warehousing, according to a recent analysis by CBRE.

The result will be the conversion of 7.9 million square feet of retail space into approximately 10.9 million square feet of new industrial space. The second figure is higher because often a developer will tear down some or all of the existing structures and build a more significant building on that dirt.

The trend of retail to warehouse shows no sign of slowing down, and makes sense for a handful of reasons, here are a few:

1. More retail sales are happening on the internet. This means that retailers and third-party logistics providers like Amazon, UPS, and FedEx are finding they need more space to facilitate online orders. With that, more brick and mortar store closures are taking place, and as they say, timing is everything.
2. The industry has opened itself up to the change. These types of conversions have gone from once unthinkable to highly attractive. In Kansas City, we have seen shuttered Big Box stores turn into everything from athletic facilities to distribution centers.
3. Big Box retail space is far more available than distribution space. While the overall retail market is healthy, several well-known individual retailers have closed hundreds of stores. Those big boxes can be challenging to backfill with new tenants. In contrast, the industrial market, which includes warehouses as well as manufacturing space, is at a historic low.
4. The location is naturally ideal. Old retail space is often found along major streets or highways, providing easy truck access. While many stores are left because their surrounding neighborhoods deteriorated, those locations are within an ideal distance of large populations for same-day or next-day delivery, which make them perfect last-mile distribution centers.
5. Structurally, it makes sense.  Standalone Big Box stores and malls can be a great fit for e-commerce distribution because they offer wide-open spaces; dock-high doors for loading and unloading; and reasonable ingress and egress for trucks.

Kansas City will continue to see this trend continue, in large part due to its existing infrastructure. From a logistics standpoint, the metro has a multitude of interstate miles coupled with reasonable traffic patterns for a city of our population size. We can expect to see blighted big box stores put to use in new ways across the city.

If you are interested in learning more or hearing about former big-box real estate options that could work for industrial purposes, I’d love to talk to you about it.

By Brent Peterson – Vice President, Director of Industrial Brokerage

As a former public accountant with one of the big six accounting firms, I’ve been paying close attention to the 2016 Financial Accounting Standards Board (FASB) Accounting Standards Update that will ultimately change the way all leases are accounted for.

If you’re thinking, “We just have a small office lease, it won’t be a big deal to us,” you could be in for a bit of a surprise.

The FASB issued new lease standards will impact every business that rents space and operational equipment. Public companies were affected for fiscal years beginning after December 15, 2018, and privately held companies will be affected for fiscal years beginning after December 15, 2019.

Heather Winiarski, shareholder at Mayer Hoffman McCann P.C., who specializes in lease accounting, recently told me; “The most significant change in FASB’s new leasing standard is the requirement of operating leases to have a lease liability recorded on the balance sheet at the present value of future lease payments. These potentially substantial assets and liabilities, once only disclosed in the footnotes, will now be placed directly on the balance sheet.”

Ok, why is this important, and what do you need to know?

• Start Early. Many publicly held companies have learned the hard way that the process can be tedious and time-consuming.
• All leasing arrangements will need to be recognized on the balance sheet as a lease asset and a lease liability. It’s especially important for businesses to understand how these changes will affect other agreements and bank covenants.
• Business owners need to have a good grasp on what their population of leases is, which will now include previously unidentified leases such as copiers, computers and the like. Under the new regulations, if you don’t identify leases, you will now be missing a liability from the balance sheet.
• Once you’ve identified your total organizational and operational lease population, you have to track it. Excel might not cut it, especially in year one. Your companies’ paperwork tracking leases may multiply exponentially, in fact, some companies may need to keep multiple sets of books.  Lease tracking tools are popping up online, but when in doubt, it’s best to discuss with an accountant.

What does this mean for the future? Some of the clients I have talked with have indicated that the change in accounting for leases might have some impact on the tax benefits of leasing versus buying; however, most at this time are not planning to make any changes in company real estate strategy.