Kansas City's Upbeat Tempo

By David Biederman

Traffic World

June 5, 2006

Logistics sites in the United States don't get much more inland than Kansas City. That's why the city's new push for logistics trade is something of a surprise, turning Kansas City's usual role in distribution patterns on its side as the Missouri city seeks to become the next North American gateway for Asian imports by becoming the logistics linchpin of the developing NAFTA Corridor.

A series of new projects are aimed at bringing Kansas City not only the east-west traffic that made the city a key transit point going back to the 19th century but more north-south business, envisioning the city not just at the heart of the United States but at the heart of the broader North American trading region.

Among the new projects are a sea-rail link that connects Kansas City with Asia through Mexico and a Mexican customs office for clearing southbound freight. In addition, BNSF Railway is planning a logistics park and intermodal hub across the Missouri River near Gardner, Kan.

A second intermodal site is also under development at the Richards-Gebaur Memorial Airport in Kansas City, a former U.S. Air Force base built in 1941.

"Kansas City has grown to the point where we need to be on the front end of the growth curve," said Fred Malesa, vice president of international marketing for BNSF.

How large that growth curve becomes, however, remains very much in the air. Many projects will have to fall into place and, perhaps more importantly, shippers and their logistics providers will have to be willing to rethink increasingly regional distribution networks.

Kansas City also will have to beat cities such as Dallas, Houston, St. Louis, Memphis, Tenn., and even Indianapolis to the punch to become more than a stop on the way to Chicago - still the Midwest's mega-hub.

Although home to a Class I railroad, Kansas City Southern, and the nation's largest LTL trucking company, YRC Worldwide, the Greater Kansas City area has long been designated a second- or even third-tier transportation hub. Now it hopes a pair of intermodal projects and some home-grown trade initiatives can help it recapture some glory and become a bigger logistics player.

In a few years, organizers say, the area's new intermodal infrastructure will be ready to handle millions of imported containers a year.

"Five years ago, Chicago was the only Midwest City benefiting from Asian imports, but Kansas City is starting to feel the effects," said Mark Sonnenberg, senior vice president and director of industrial sales and leasing for Colliers Turley Martin Tucker, a commercial real estate firm.

The Kansas City region and Missouri as a whole have been hurt by the offshoring of manufacturing jobs, and the state's recovery after the 2001 recession lagged other parts of the nation. The state shook off that lethargy in 2005, gaining jobs in manufacturing and other sectors, but global competition keeps pressure on that growth.

State officials believe the flow of goods back into the United States presents opportunities.

As a logistics hub, the region is in a stronger position than at any time in the past 30 years. Within the past 24 months, there have been close to a dozen deals for distribution facilities of 200,000 square feet or more, and at least half-dozen facilities of 500,000 square feet or more are under construction. Before that, there were around two such deals per year in the regional market.

All in all, industrial real estate investment transactions totaled $206 million in 2005, a record for the Kansas City region. 

The success of the intermodal projects would ensure Kansas City's status as a solid second-tier market for years to come and help the region compete with strong second-tier markets like St. Louis, Indianapolis, Memphis, Nashville, Tenn., and Cincinnati.

"We have always been a step behind those markets but with the intermodal parks we could potentially surpass them," said Sonnenberg.

Kansas City is staking a new claim in the global market with the opening of the first-ever foreign customs office on U.S. soil. The Mexican Customs office would allow for the full clearance of U.S. exports trucked to Mexico.

Kansas City Smartport, a nonprofit economic development organization that promotes the region as an international shipping hub, led a delegation of local business leaders to Mexico to promote the new office.

SmartPort also is at the center of efforts to allow the direct importing of Asian containers into Kansas City through the Port of Lazaro Cardenas, on the Pacific coast in the Mexican state of Michoacan. The key to the project is the Lazaro Cardenas-Kansas City Corridor, a 1,300-mile rail link operated by KCS.

In March 2005, officials from Kansas City and Michoacan signed an agreement to promote the corridor and to develop and deploy security systems. The agreement includes significant reductions in Mexican through-bond charges for U.S.-bound container shipments.

The plan would allow shippers to bypass California's ports. "We are ready. The port is ready," said Hector Carranza, business director for the port at Lazaro Cardenas in Mexico. "The infrastructure is ready for anything shipping companies need."

Outside the port, however, KCS has to upgrade miles of track in Mexico. The railroad has run intermodal trains from Lazaro Cardenas to Laredo, Texas, but the service is still in its preliminary stages.

And Lazaro Cardenas only handled around 200,000 TEUs last year. The goal is 2.5 million annual TEUs, SmartPort President Chris Gutierrez said.

Meanwhile, BNSF Railway is strengthening Kansas City's link to Southern California.

BNSF's studies for a proposed logistics park and intermodal hub landed near Gardner, Kan., outside Kansas City. It would be the third such project for BNSF in the country.

Bob Marcusse, president and CEO of the Kansas City Area Development Council, said late last month that BNSF had told local officials the railroad would move forward with the plan.

"This project will solidify our metro area as a major distribution hub and an important link in the international logistics chain," Marcusse wrote in a letter to local businesses. He said the next step is for BNSF to complete some access and utility plans and to select a third-party developer.

BNSF Chairman, President and CEO Matthew K. Rose had told local business leaders, "A potential new Logistics Park facility and BNSF Intermodal Hub Center would represent significant investments in BNSF's future in the Kansas City region and would strongly enhance the area's role in international trade if we can resolve the remaining key issues."

With more than 400 freight trains passing through the city each day -- many hauling Asian containers along the railroad's Los Angeles-to-Chicago transcontinental route -- BNSF has outgrown its 45-acre intermodal hub in Kansas City. In 2005 the facility handled more than 325,000 lifts compared with 250,000 in 2001.

The intermodal facility would comprise 250 acres within the proposed logistics park and would be surrounded by 1,300 acres of warehouses and distribution centers. 

"This development would put the Kansas City region squarely on the world's logistics map and greatly enhance its role in international trade," said BNSF spokesman Steve Forsberg.

The railroad's international intermodal business has grown at a compounded annual rate of 13 percent since 2000. Although not growing as fast as hubs like Memphis or Chicago, Kansas City is seen as a strong growth candidate because the city is a focal point for rail, trucking and agricultural exports, A second intermodal site is also under development at the Kansas City's Richards-Gebaur Memorial Airport. The Port Authority of Kansas City signed an agreement with Chicago-based CenterPoint Properties to develop an intermodal facility there with surrounding distribution, warehousing and light manufacturing facilities. 

KCS's International Freight Gateway at the site is also being redeveloped. The facility handles more than 70,000 cars per year for Mazda North America.

The intermodal parks are "critically important" to the Kansas City region, said Marcusse. "When you watch trains go by you are watching dollars go by," Marcusse said.

The region is already one of the nation's largest land-based shipping hubs. The Pacific Northwest Corridor, a rail line operated by BNSF, links Kansas City with Asian markets via on-dock rail facilities at the ports of Seattle and Tacoma.

Around 38 percent of all goods imported into Los Angeles-Long Beach are transported along the BNSF transcontinental route, which passes through Kansas City.

The growth in intermodal is contributing to modest growth in the sales, leasing and development of distribution properties, said David Hinchman, first vice president, CB Richard Ellis, a global real estate services provider.

The region has about 225 million square feet of industrial space with an availability rate of around 9 percent.

"The potential for increased international freight in the region is one of many elements that are driving interest in the area at all levels," Hinchman said.

Kansas City has historically been a stable, somewhat flat market for distribution, without large peaks and valleys in land prices and development activity. Since 1976, when CBRE opened its first Kansas City office, the region lost out to other markets as the site of choice for distribution centers as population growth shifted to the South and the Southwest and shippers move to consolidate goods in regional distribution centers. 

Although Kansas City has added about 16 million square feet of space in the past decade, comparable regions have fared much better; Memphis, for example, added 42 million square feet of space.

That trend is changing, said Hinchman; in 2005 Kansas City "came of age" as a solid second-tier market with growing institutional demand for investment properties. CBRE brokered close to $50 million in industrial real estate deals so far in 2006. Seven national investors, some new to the region, recently bid on an 800,000-square-foot property. 

"Kansas City is now on the radar screen not only of institutional investors but also large distribution centers for retailers and manufacturing companies," Hinchman said. "We are seeing a constant increase in interest." 

"This project is indicative of the predictions our team has been making about Kansas City becoming a national/regional big box distribution center for manufacturing and retail companies," said Hinchman.