Development pace has slowed, but market shows promise.
The Kansas City apartment market continues to hold its own despite economic challenges and uncertainties. While occupancy and rental rates have remained steady, development has been tempered by a tight lending environment.
The pace of planned construction has slowed dramatically as a result of market fundamentals. The first half of 2009 showed the lowest level of permits, a mere 78, in the past 20 years. The lack of liquidity and tougher underwriting standards are halting development. The uncertainty in asset values plays a part in this as well as lenders underwriting deals more conservatively. As a result, banks are requiring developers to contribute a greater amount of equity, thus decreasing project risk for both parties
Market fundamentals have remained steady. Rents are averaging $0.79 per square foot, unchanged from the start of the year. Rates vary widely from $1.14 per square foot at the Country Club Plaza, which has 95 percent occupancy, to as low as $0.64 per square foot for Class C apartments in the Northland submarket.
These rates, though, are offset by concessions. At the end of June, nearly three-fourths of the area’s multifamily properties offered concessions, up noticeably from the 56 percent that used concessions to attract renters at the start of the year. This trend will no doubt continue until the economy stabilizes and shows signs of strength.
Occupancy remains relatively strong at 91 percent, unchanged since the start of 2009. In contrast, other markets throughout the United States have seen substantial declines in occupancy. This is attributable to the fact that many college graduates are moving home rather than relocating for new jobs, current renters are consolidating with additional roommates, and the shadow supply of single-family homes has increased rental competition.
Still, some developers are forging ahead. The Morgan Group is building Market Station Apartments, a 323-unit luxury apartment complex on 5.3 acres just north of the downtown loop. One of the largest multifamily developments in the downtown area in some time, rental rates are projected at $1.30 per square foot. As such, Market Station will test the top end of the spectrum in a submarket that already has a number of condominiums that have moved to the rental arena. Briarcliff Development Company also announced plans for The Briarcliff. The 263-unit luxury midrise apartment complex should break ground before year’s end in the 600-acre master planned community. This will be the first luxury rental housing of its kind in the Northland submarket.
Developers still remain focused on the suburbs, preferring these areas for the concentration of employers and growth, favorable demographics and readily available land. Stockbridge, Georgia-based Davis Development followed this pattern when it entered the Kansas City multifamily market a couple of years ago. The company has since built three garden-style apartment projects, bringing more than 800 Class A units online in the suburbs.
These garden-style apartments appeal to young professionals — single and married — as well as older adults preferring the convenience of maintenance-free apartment living. Additionally, developers are building complexes that offer options in floor plans to accommodate the differing needs of renters. Newer projects also come with amenities such as resort-style pools, upscale interior finishes, business centers and modern fitness facilities in the hopes of continuing to attract new renters.
The current economic cycle remains a challenge for the multifamily market. Job losses are expected to continue throughout the balance of the year, but at a slower pace. On the positive side, the inventory of existing homes is down 13 percent from June 2008 to June 2009, and the inventory of new single-family homes has decreased by a third in the same timeframe. Coupled with this, economic forecasts suggest that Kansas City may recover from the economic downturn sooner than other areas in the nation.
While we anticipate that the multifamily sector will remain stable throughout the rest of the year, we expect that conditions will improve during the first half of 2010.
— Kyle Henning, Pete Stadler and Brandon Sifers are part of the Apartment Advisory Group in Colliers Turley