There is almost a perfect storm gathering in the multifamily markets in Kansas City. Rents are rising, vacancy is decreasing, cap rates have compressed and valuations are up for sellers.
Debt capital is cheap for buyers, and there’s plenty of pent-up demand for multifamily investment.
Meanwhile, developers are coming out of hiding, and some great new projects are either under construction or on the drawing board.
The fundamentals of the Kansas City multifamily market continued to show strength through the first quarter of 2012. At the end of 2011, the average rent was $727 and is forecast by credible sources to grow in excess of 4 percent in 2012. Kansas City’s vacancy has decreased by 50 basis points. Overall vacancy in the marketplace stood at 5.6 percent at the end of the first quarter, according to New York-based real estate research firm Reis.
Net absorption totaled about 2,800 units in 2011, the highest annual absorption since 2000, according to Reis. Net absorption in the Kansas City apartment market was 592 units in the first quarter of 2012.
At the end of the 2011, Class A apartments were selling at or above $100,000 per unit at cap rates consistently below 6 percent. Briarcliff City Apartments reportedly sold for nearly $170,000 per door, the highest price per unit ever in the history of Kansas City multifamily investment sales.
We have seen a substantial increase in sales velocity and valuations since 2010, and we are confident that trend will continue. As of mid-May, there were no less than seven Class A multifamily assets either on the selling block or about to enter the market. We anticipate stabilized cap rates, or perhaps some additional compression, during the remainder of 2012.
Construction Activity
There are at least eight apartment projects under construction with more than 20 proposed construction projects in the Kansas City metro area. The activity is dispersed throughout the market, specifically Johnson County and Wyandotte County, Kansas; Kansas City, Missouri and the Northland. Here’s a partial list of activity.
Johnson County, Kansas
• The Village of Mission Farms: 212 units, Leawood, Kansas, at I-435 and Mission Road;
• Kelly Park: 330 units, Overland Park, Kansas, at U.S. 69 Highway and 135th Street;
• Prairie Creek: 350 units, Lenexa, Kansas, 95th Street and Renner Road;
• Woodside Village: 330 units, Westwood, Kansas, a redevelopment of Woodside Racquet Club;
• Horizon Trails: 512 units, Gardner, Kansas, at 30125 W. 187th St.
Wyandotte County, Kansas
• Heights of Delaware Ridge: 228 units, Wyandotte County, at 130th Street at Delaware Parkway;
• Prairie Heights at The Legends: 332 units, Wyandotte County, at 122nd Street at State Ave.;
• Huron Hills: 375 units, Wyandotte County West of I-435, south of Turner Diagonal.
Kansas City, Missouri
• Price Brothers Development: 177 units, KCMO at 46th Street and Pennsylvania;
• Land Development Strategies: 204 units, KCMO at 51st and Main Street.
Northland
• The Village at Burlington Creek: 330 units, North Kansas City at NW 63rd St. and North Cosby Avenue.
Employment Trends
Kansas City’s unemployment rate has dropped 2 percentage points since 2010, and now stands at 5.5 percent in Johnson County, Kansas, one of three investment-grade submarkets. The Bureau of Labor Statistics indicates the unemployment rate in metro Kansas City was 7.6 percent as of March 31, below the national average.
The Mid-America Regional Council projected job growth in the range of 5,000 to 19,000 positions this year. Several local companies continue to expand, including Cerner Corp., Children’s Mercy Hospital and Clinics, Burns & McDonnell, UMB Financial Corp., and Waddell & Reed Financial.
Ford Motor Co. plans to invest $1.1 billion in upgrades to its Kansas City-area Claycomo assembly plant. After the upgrades are complete, Ford could see the number of workers increase from 1,600 to 5,400, creating a positive impact on the tenant base in the Northland submarket.
Cerner has a fully occupied office park in North Kansas City as well as South Kansas City with more than 6,500 employees. Cerner is developing another 660,000-square-foot office property in two, nine-story towers on a 58-acre site in Wyandotte County that will add at least 4,000 jobs with an average annual salary of $54,000. The project is expected to be complete by 2016.
Premium Water plans to embark on a $36 million expansion to Riverside. Missouri Gov. Jay Nixon (D) recently remarked, “From autos to bottled water, manufacturing continues to power our state’s economic momentum.”
Investment Darling
Across the submarkets in the Kansas City metro area, the apartment sector is the darling of the commercial real estate industry. Investors desiring to escape cap rates that are under 5 percent in major markets along the East and West coasts are increasing their focus on Midwestern markets, where cap rates and returns are more favorable.
However, we should note that with the availability of cheap debt in favorable markets, investor interest in acquiring Class A assets is getting quite strong. Such high demand is driving the property values into the “expensive” category.
Value-add deals in the Class B and C category are beginning to gain momentum, and now is the time to make those deals.
— G. Reid Teaney is senior vice president of ARA Central States Inc. in Kansas City, and is active in Missouri, Kansas, Iowa and Nebraska.