Capital Continues to Flow to the City of Fountains
Private capital delivered several new investors to Kansas City in 2019 and the new year will undoubtedly see plenty of competitive bidding and elevated pricing.
Overall, the investment market continues to be supported by Kansas City’s diversified economy, with job growth weighted on the Kansas side at 2.7 percent over Missouri’s 1.1 percent (as of August 2019).
Kansas City’s low cost of living, educated workforce and business-friendly environment attracted several coastal employers to the Heartland. This trend will likely continue in 2020. The U.S. Department of Agriculture announced the relocation of two research agencies from Washington, D.C., representing a landmark win with 525 total jobs.
Other wins in 2019 included Honeywell’s centralization of its operational offices from Seattle to Kansas City; Niagara Bottling moving 50 jobs from California; Hostess Brands relocating a distribution center from Illinois; and CarMax announcing 300 jobs for its Customer Experience Center after completing a nationwide search.
Annual employment growth (as of August 2019) delivered nearly 20,000 jobs with additions in healthcare, biotech and business services, substantiating the selling point of a diversified economy capable of weathering future storms.
Employers have found their fit, but more importantly, their talent is seeing reasons they can and should move to Kansas City. Google’s 2012 decision to select Kansas City as the first global location for Google Fiber drew the attention of tech companies and entrepreneurs seeking homes and talent.
Soon afterward, the city launched the RideKC Streetcar with a 2.2-mile starter line through the urban core and is underway with plans for an extension beyond the Country Club Plaza. Running in tandem with the streetcar’s course is the Smart City Corridor, a $15 million public-private partnership that has helped to cement Kansas City as a global leader in smart city technology and innovation.
Add in the 2019 groundbreaking of a new $1.5 billion single-terminal airport and an 800-room convention hotel opening downtown in spring 2020, and it’s clear that Kansas City has decided it will compete in the war for talent.
The metro area’s apartment inventory grew by 1.4 percent in 2019, in line with the historical five-year annual average of 3,500 units. While nearly half of these units have piled into the urban core each year, young professionals (50 percent of the urban demographic) are quickly absorbing the stock. This is demonstrated by the population of downtown Kansas City, which quadrupled over the past decade, reaching 30,000 for the first time in history.
Positive development and economic trends aren’t limited to just one or two submarkets, which points to health of the greater metro area. Nearly all 11 submarkets are reporting 2 percent+ rent growth and metro-wide vacancy has steadily declined over the course of the year, reaching 4.1 percent by the end of 2019.
Kansas City multifamily sales volume rose 30 percent in 2019, ending the year closer to $1 billion and setting a new watermark average price per unit above $100,000. The bulk of activity involved trades of Class B and C assets, as investors focused on narrowing the rent gap between older, vintage properties and new construction. Such cases are proven in the submarkets of Lee’s Summit and Independence, reporting record rent growth of 5.6 and 3.8 percent, respectively.
While rents continue to rise and interest rates have settled, investors are continuing disciplined underwriting at lower return thresholds. In-place cap rates averaging in the 5.5 percent range are relatively unchanged and everyone continues digging for the future upside, the “value-add,” on each deal.
Oftentimes sellers are found rushing to launch a sale, yet the NorthMarq platform is adept at delivering value through a different way than most advisors, leveraging analytics to prove asset trends and opportunities, and allowing those results to drive the sale timing and deployment process. Engaging an advisor who will devote this kind of energy and effort is key for sellers to maximize pricing as investors remain diligent in their underwriting.
Kansas City’s primary investors in 2019 were private equity funds and syndications searching for yield in secondary and tertiary markets. Overall, new participants are entering the market from both coasts, with several based in Los Angeles, San Francisco and New York.
The agencies (Fannie Mae and Freddie Mac) view Kansas City as a stable Midwestern market justifying plenty of room for new acquisitions with the most aggressive terms for mission-driven lending. As a seemingly endless amount of equity targets Midwest markets, the new year points to transactions filled with competitive bidding environments and elevated pricing.
Setting aside global and political risk, Kansas City’s greatest New Year’s challenges are in development and attracting talent. Similar to markets across the country, municipalities here are competing with how they will creatively structure deals to both serve their stakeholders and attract infill construction where density can complement walkable environments.
As for jobs and talent, Kansas City must continue proving it is the Midwest business and lifestyle location of choice. These employers and their talent are what’s driving future sustainable growth of the multifamily market.
— By Gabe Tovar, Kyle Tucker and John Duvall, NorthMarq. This article originally appeared in the January 2020 issue of Heartland Real Estate Business magazine.