Look no further than Kansas City for one of the most burgeoning apartment rental hotspots in the Heartland.
Ever since apartment deliveries reached a trough of 233 units in 2011, developers have ramped up construction activity year after year to meet healthy rental demand, though often still trailing robust leasing activity.
This trend continued in the first half of 2016, with 2,170 newly occupied apartments exceeding 1,650 multifamily units added to the metro area inventory.
What’s contributing to this demand? And will rapid market growth and expansion continue?
Job growth, tech boom
Employment gains are a big reason rental market demand continues to outweigh supply. For the last six years, greater Kansas City has experienced annual average employment gains of 1.5 percent to support sustained rental demand.
Laurel Wallerstedt, Berkadia
After steady, though moderate gains in the last half of 2015, employers accelerated hiring with 10,500 additions from January to June, a 1 percent expansion over the previous six months. The six-month hires capped an annual increase of 1.5 percent since mid-2015 with 15,900 new personnel.
To no surprise, the rise in employment has coincided with the rise in renters, as they’ve been attracted to new inventory around employment hubs.
The Downtown/East Kansas City submarket has accounted for nearly half of the net units absorbed across the metro area so far in 2016.
And though it may never be confused with Silicon Valley, Kansas City is becoming a technology hub, leading to extended job growth.
Thanks to the installation of Google Fiber, the Kansas City Startup Village is an appealing location to start a business and currently hosts more than 25 Internet startups.
Millennials welcomed
While Chicago continues to be a hot spot for young renters in the Midwest, millennials are also flocking to downtown Kansas City. From 2010 to 2015, residents aged 18 to 35 increased 20.5 percent. Employment opportunities are a big contributing factor, but so is the revival of downtown social life.
Kansas City’s Downtown Streetcar added to the city’s lure and supports the millennial shift. The $100 million project covers 2.2 miles and connects passengers from River Market to Union Station/Crown Center for free.
Reliable, convenient public transportation is important for renters both travelling to work and looking to take advantage of downtown nightlife.
Investors weigh KC
In recent years, Kansas City’s healthy employment and a strong rental market have combined to attract in- and out-of-state buyers. Out-of-state investors continue to target institutional-sized properties, especially value-add properties trading between $56,500 and $78,600 per unit. But out-of-state investors are also competing with local buyers for smaller, Class C properties, paying an average cap rate of 7.9 percent.
Overall, out-of-state investors are succeeding over local buyers in multifamily acquisitions almost three to one. More than one-third of out-of-state investors hail from California, followed by New York and then New Jersey.
Cap rates have been falling, partially attributable to out-of-state buyers being priced out of their home markets. First-year yields tightened 40 basis points to an average of 7.2 percent as multifamily sales reached a decade high during 2015.
Looking ahead
Developers will continue to struggle to keep up with rental demand, as vacancy tightened 30 basis points to 4.4 percent from the second quarter of last year to the second quarter of this year. The June 2016 rate was 110 basis points lower than the five-year average.
As a result of vacancy rates tightening, rents have steadily increased. At $951 per month in mid-2016, the average asking rent was 2.9 percent higher than one year ago. During the same time period, effective rent advanced 2.8 percent to $943 per month, keeping average concessions at 0.8 percent of asking rent. Asking rents remained highest in the University/Plaza submarket, advancing 3.3 percent year over year to $1,579 per month.
Going forward, apartment development will remain heightened in greater Kansas City as rising payrolls drive multifamily leasing activity. This demand should maintain near equilibrium as 1,180 additional apartment units are scheduled to come on line by year-end while vacancy remains in the high 4 percent range.
Operators will capitalize on low vacancy by elevating average asking rent for the seventh consecutive year, while also advancing effective rents at a higher rate to further trim concessions by December.
— By Laurel Wallerstedt, director, Berkadia. This article first appeared in the September 2016 issue of Heartland Real Estate Business magazine.