As Class A Apartment Sales Abate, Class B and C Sales Pick Up

In what might be the twilight of the Fannie Mae and Freddie Mac years, investors in Kansas City’s apartment market have fully capitalized on the continued availability of cheap debt and a slowly improving economy. As reminders of the 2008–2010 economic downturn, bank-owned properties are still being sold, but the bulk of REO sales have already occurred.

Additionally, local job creation surged in the past three months, buoying investors’ confidence. As a result, sales of Class B and C properties will continue to rise and approach historic levels. The sales velocity of top-quality apartment product is also normalizing, albeit on a downward trajectory.
All Classes Normalizing
So far this year, transaction volume and average sales price per unit have both been strong. Nevertheless, the data suggests the market is stabilizing below the levels of 2011 and 2012, which represented after the pent-up demand from 2008 through 2010.
Annualizing the year-to-date sales data from Hendricks-Berkadia suggests there will be 36 transactions of Class A, B and C properties with 40 or more units this year. An end-of-year boost in sales is expected, but we still anticipate fewer than the 55 and 54 transactions completed in 2011 and 2012, respectively.
Total sales volume has declined from $483 million in 2011 and $460 million in 2012 to our annualized projection of $377 million in 2013. The decline is due to the reduction in high-dollar, Class A transactions this year following the stellar peak of top-tier asset sales in the previous two years.
src="data:image/svg+xml,%3Csvg%20xmlns=''%20viewBox='0%200%201%201'%3E%3C/svg%3E"Class A deal flow is predicted to fall 20 percent this year compared to average annual velocity in this segment over the prior 24 months. Despite the recent lull in sales of best-in-class apartment properties, this year’s projected pace is above the typical five to seven Class A sales per year.
The sales price per unit has increased significantly in 2013. Even excluding the low-priced and distress deals of 2009 and 2010, the year-to-date average price soared 26.2 percent over prices between 2007 and 2012. The average sales price during those years was $51,081 per unit, whereas the average sales price year-to-date is $64,475 per unit.
The rise in prices despite a dip in Class A sales is the result of normalized pricing in Class C product and the willingness of buyers to pay a premium for Class B product, now that much of the Class A inventory has freshly turned over.
The breakout of sales across middle- and lower-tier assets exemplifies the slowing Class A purchase frenzy and a return to the heavy predominance of Class C sales. Hendricks-Berkadia anticipates that year-end Class C velocity will outstrip the historic average of 12 transactions by roughly 50 percent.
Employment Gains
The stabilization of the investment sales market has occurred ahead of a full-fledged recovery in the local job market. Nevertheless, investors will remain bullish on the Kansas City apartment product, and the recent surge in hiring will allay fears and attract more buyers going forward.
The second quarter of 2013 saw local payrolls expand by 9,700 positions. This marks a substantial 1 percent increase. Consider that in 2012, the full-year gain was 1.1 percent with 11,200 new hires.
Aside from a spike in employment in early 2010 because of federal stimulus and the hiring of temporary workers by the U.S. Census Bureau, the job expansion from April through June of this year was the largest quarterly gain in 16 years. Employment in the Kansas City metro area now stands at just over 1 million workers.
In contrast, in the six-month span ending in March of this year, layoffs in a handful of industries caused overall employment levels to recede. Cuts were greatest in the government and trade, transportation and utilities sectors during that stretch.
While more than 500 public sector jobs were shed in the second quarter of 2013, the cuts were mild compared with layoffs during the first quarter. Moreover, hiring surged in the professional and business services and leisure and hospitality industries, contributing a combined 9,700 workers to top-line employment.
Job creation will likely persist in the quarters ahead, albeit at a more sustainable pace. For example, Cerner Corp. plans to add 4,000 workers with an average annual salary of $54,000 in the next two years. The staff will occupy Cerner’s new $150 million campus in the Village West retail/entertainment district in Kansas City, Kansas.
Signs of the economic recovery are spreading beyond the apartment sector, lifting the single-family residential market as well. Although the pricing trends for single-family homes have been erratic, values have risen. What’s more, the number of home sales in the 12-month period ending in June was up 32 percent over the previous 12 months, though the velocity was still well below historic levels.
Such broad-based residential recovery, combined with job creation, will further buoy investor confidence and deal flow in Kansas City.
— Laurel Wallerstedt, vice president, Hendricks-Berkadia | Apartment Real Estate Advisors
Get more news delivered to your inbox. Subscribe to France Media's e-newsletters. Click here.

Related News

Webinars on Demand


Read the Digital Editions

Heartland Recent Issue

Northeast Recent Issue

Southeast Recent Issue

Texas Recent Issue

Western Recent Issue

Shopping Center Business

California Centers

Ancillary Retail

Student Housing Business

Seniors Housing Business

Featured Properties