The Topeka Real Estate Report

Industrial Real Estate Report

Sales and leasing of existing industrial real estate have been very strong for several years, the current result of which is the lowest vacancy rate and lowest availability of space we have seen in decades. As one might expect, rental rates have steadily risen over the past several years, as have costs of ownership (property taxes, insurance, common area maintenance, construction costs, etc.). In years past, we have discussed the industrial market with reference to geographic segments of the community. Today, the market availability of space is so limited, a community-wide view of types of space is more appropriate.

Ed Eller Industrial Specialist

Small Business Industrial Parks

Small business industrial parks are characterized as typically 1-4 tenant buildings, with a mix of service and distribution tenants and a few light manufacturers. Vacancy is extremely low averaging less than 1% overall. Modified gross rents have increased substantially in the last 3-5 years, along with costs and values. Absorption has been limited, but very strong. Kansas Commercial has been associated with several new construction projects since 2019. One recent project was a 24,000-square-foot speculative building that went from 8% occupancy in the second quarter of 2022 to current occupancy of over 80%.

Medium Industrial Parks and Buildings

Medium industrial parks and buildings consist of freestanding buildings from 20,000 to 60,000 sq. ft. commonly with 1-4 owner/ occupants or tenants. Sales of these buildings were strong in 20192021, with rising prices per square foot depending on location and functionality. Rents have increased significantly, with Class B modified gross rents rising generally $4.00$5.00 per square foot per year to $5.00-$6.00 per square foot per year.

Class A building rents have been $6.00-$7.00 NNN-Roof and Structure with energy efficient, modern, functional structures, with new or newer offices, restrooms, etc. Class C buildings in this category in Topeka are concentrated on the south side of Topeka commonly referred to as the Forbes Area. Occupancy has been slightly lower for Class C buildings, but still very strong, typically above 95% in the last few years with steadily increasing rents and a move from modified gross leases to NNN-Roof and Structure leases.

Large Industrial Parks and Buildings

Large industrial parks and buildings would commonly be from 60,000 to 250,000 square feet with 5-20 tenants, with several important exceptions; namely single tenant regional and national manufacturers and distribution companies, i.e., Wal-Mart, Mars, Target, Home Depot, US Foods, Goodyear, Bimbo. Several strong local manufacturers, ErnestSpencer, Koch & Co., Fairview Mills/J6 Enterprises, Bettis Companies, etc. also occupy this space and have made significant investments in expansion over the last several years.

Very significantly, the Forbes Industrial Park and various individual buildings have seen a marked increase in occupancy and rents in the last five years, where traditionally we have seen 20-30% vacancy and modified gross rents from $1.85-$2.25 per square foot per year now have occupancy above 90% and rents from $1.75- $2.25 NNN-Roof and Structure. Owners have also spent significant money rehabilitating and renovating the existing stock to increase material handling efficiency, lighting and energy efficiency.

Industrial Investment Properties

The market for quality industrial space is also strong with cap rates ranging from 7-8% in the last few years. Rising interest rates may dampen the appetite for existing leased properties by investors as the margin between cap rates and interest rates narrows. However, there is a significant counter current in the industrial investment community who are increasingly focused on the value of these properties relative to replacement cost. Land prices and construction costs, although minimally tested locally, are increasing substantially, which may lend validity to this sentiment.

New Industrial Development

Perhaps the most exciting element of the local market is the prospect of several new industrial developments in the planning stage for 50,000 to 450,000 square feet of buildings under consideration in 2023-2024. Affordable land prices and strong demand for space in a scarce market are helping to generate interest and activity in this arena among local and regional private and institutional developers. Several infill projects ranging in size from 3-15 acres are being considered around the community as well as a few larger projects in the 20–40-acre range.

The limiting factor locally has been the cost of extending municipal utilities to lower priced land versus developing on higher priced land already served by utilities, streets, etc. Projected and future rents are finally approaching a point where future investment in new development may allow for substantial growth of Topeka’s industrial base in manufacturing, distribution and wholesale trade.