Surging rental demand for apartments in metro Kansas City during the first six months of 2015 supported a sharp rise in real estate fundamentals following a lackluster second half of 2014. Renters absorbed 2,510 apartments during the first half of this year, surpassing the 1,810 apartments completed during the same period a year ago.
With leasing activity exceeding deliveries so far this year, the overall vacancy rate fell 60 basis points to 5 percent by the end of June. The decline followed a spike in vacancy and negative absorption in the fourth quarter of 2014. The recent resurgence in leasing resulted in the vacancy rate in June matching the 5 percent rate one year ago.
Supply-side pressure was most noticeable in the Class A apartment segment, which po
sted an increase of 60 basis points in the vacancy rate year-over-year to reach 4.2 percent in June. Even with the increase, the vacancy rate was tightest among top-tier apartments, while Class C vacancy tightened 20 basis points during the same period to settle at 5.3 percent in June.
A Landlord’s Market
As a result of Kansas City’s apartment vacancy rate tightening during the first half of this year, operators were able to boost asking rents while trimming concessions. Monthly asking rents rose 1.3 percent during the first half of 2015, reaching $894. Simultaneously, concessions were trimmed to an average of two days of free rent, the lowest level in more than a decade.
The recent surge in asking rents followed a moderate second half of 2014. Rents advanced 0.3 percent during the last six months of 2014, bringing the 12-month gain to 1.6 percent through June.
While rents have increased across all apartment classes annually since mid-2014, operators were most aggressive among relatively more affordable Class C communities, as asking rents increased 2.5 percent annually to $675 per month.
Development Hot Spot
The overall trends in the Kansas City apartment market were amplified in the Overland Park South submarket in the first half of this year. Developers concentrated their construction activity in this area, with Overland Park South additions accounting for one out of every three deliveries metro-wide. The new apartment product was well received by renters, as approximately one out of every four newly occupied units across the metro area was in the submarket.
The heightened demand in the Overland Park South submarket resulted in vacancy declining 80 basis points during the first half of the year to 5 percent. Operators capitalized on the rising occupancy, lifting asking rents 2.7 percent from the end of 2014 to $1,035 per month by mid-year.
Investor Strategies Vary
In the investment arena, local buyers targeted the improving Class C stock. Among buyers, these smaller deals sold for approximately $20,000 per unit within the city and double that price per door in the suburbs.
Conversely, out-of-state investors continued to account for all the institutional-sized, Class A transactions. In fact, sales of Class A properties in the first half of this year surpassed transaction activity for all of 2014. In the suburbs, newly built product sold for as high as $156,000 per unit.
Renewed operational improvements and escalating investment activity have developers bullish on the long-term viability of the Kansas City apartment market. On an annualized basis, permits for 4,150 multifamily units were issued in the second quarter, nearly double the average issuance for the past five years.
The largest planned development is CityPlace, a mixed-use project on 95 acres at the southwest corner of College Boulevard and U.S. Highway 69 in Overland Park, Kan. Block Real Estate Services LLC has teamed up with The Carlyle Group to develop 344 units in the first phase of development. The proposed phases could bring 1,040 units on line in the Overland Park submarket, though no start date for construction had been announced as of mid-August.
Job Market Dips, Rallies
The most striking trend in the Kansas City apartment market has been the level of pent-up renter and investor demand for apartments despite a temporary setback in nonfarm payroll employment.
During the first two quarters, businesses trimmed headcount by 500 positions, a decline of less than 0.1 percent. The reduction in headcount across the metro area during the first half of 2015 followed a 1.6 percent expansion in employment over the prior six months, resulting in 16,100 new hires.
The elimination of 1,500 government jobs during the first half of this year dealt a blow to the employment market.
Nevertheless, the financial activities sector added 1,900 workers during the same period to lead the metro area in hiring.
Additionally, the education and healthcare services industry generated 1,100 jobs in the first half of 2015. The sector will continue to grow when the Olathe Medical Center expansion is completed in early 2017, adding at least 200 jobs.
While job cuts across the metro area during the first half of this year raised concerns among apartment operators, layoffs were confined to March and April. Since the regression in hiring, Kansas City employers have rallied and hired more than 1,200 workers in each of the subsequent months.
— By Laurel Wallerstedt, Director, Berkadia. This article first appeared in the September 2015 issue of Heartland Real Estate Business magazine.