By Max Taves
It is easy to underestimate the size of the Kansas City, Mo.,
industrial real-estate market. That's because a big chunk of it is
hidden from sight--underground.
Occupying more than 21.8 million square feet, Kansas City's
industrial underground space--80 to 150 feet deep, in former
limestone mines--is the largest in the U.S., comprising more than
7% of the metropolitan area's total industrial area.
And demand for the space is growing, buoyed by resurgent
manufacturing and expanding distribution centers seeking low-cost
real estate requiring less energy to operate.
Next week, FoodServiceWarehouse.com, a restaurant-equipment
supply company, will be moving into 475,000 square feet of space
that sits more than 100 feet below the surface in a facility called
SubTropolis, the largest underground industrial space in the U.S.
Signed in May, FoodServiceWarehouse's lease was the largest by
square feet--above or below ground--in all of Kansas City last
quarter and the second-largest this year, according to real-estate
data firm CoStar Group Inc.
"It's kind of what we call an underground city," says Ora
Reynolds, president of SubTropolis owner Hunt Midwest Real Estate
Development. SubTropolis has 8.2 miles of paved roads, 2.1 miles of
railroad tracks, more than 500 truck docks, 1,600 parking spaces
and 50 million square feet of space below ground. Its 6 million
square feet of leasable space is fully occupied by 55 companies and
their 1,600 employees.
Kansas City's conversion of old mines in the 1960s into usable
industrial space represents the commercial-real-estate version of
turning lemons into lemonade. Mining companies in the earlier part
of the 20th century dug under layers of soil and shale for its
abundant, 270-million-year-old deposits of limestone, leaving
behind about 80 million square feet of space.
While the area experiences as much as 100-degree fluctuations
between summer and winter, the underground offers a near-constant
65 degrees all year, according to broker Cassidy Turley's Whitney
Kerr. The government was among the first and largest tenants, with
those cool, dry conditions helping keep food from rotting and paper
records from being damaged.
Constant temperatures means little need for heating and air
conditioning. Those factors and lower tax rates have meant lower
operating costs and lower rents. That has offered Kansas City's
considerable industrial base, which includes large agricultural
companies and two automobile factories--operated by General Motors
Co. and Ford Motor Co.--an alternative, low-cost storage space,
according to Mr. Kerr.
While the cost of leasing underground space has long been lower
than aboveground space, the gap is narrowing. According to CoStar,
the cost of aboveground industrial space in metropolitan Kansas
City fell 1.7%, to an average of $3.99 a square foot in the
12-month period that ended in September. Underground space,
meanwhile, rose 5% to $3.43. CoStar notes that underground vacancy
rates have fallen three times faster than aboveground during the
same time SHYperiod.
"You'd think it was a kind of primitive operation down
underground, but it's proven quite resilient and adaptable to
changing times," says Mr. Kerr of Cassidy Turley. According to Ms.
Kerr, owners of underground space have begun upgrading their
properties with more lights, modern ventilation and, increasingly,
amenities geared toward luring technology-focused companies in need
of computer storage and distribution space.
Longtime tenants such as government agencies and agricultural
and pharmaceutical firms have found the cool, constant temperatures
help provide useful places to store files, surplus crops and
vaccines. But underground tenants increasingly include light
manufacturers and e-commerce companies.
Demand has been so strong that both SubTropolis and competitor
Meritex Enterprises Inc. are building additional space. After
adding 1 million square feet of new space in the past year,
SubTropolis plans to build another 750,000 square feet in the
coming year. Meritex plans to add 80,000 square feet of speculative
space by early next year. The company already has 2.4 million
square feet of underground space.
Among Meritex's underground tenants is Priority Envelope, which
employs 35 workers who print and manufacture envelopes. The
company, which moved there in 2006, has no plans to move above the
surface anytime soon. "We'll expand next year," says that company's
president, Ryan Wenning. "It's just a matter of pouring concrete
and building a wall. They paint the exposed rock white. It's a very
fast process."
Write to us at DWEEK@WSJ.com
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