Laurel Wallerstedt, vice president, Berkadia
Today’s Kansas City apartment fundamentals resemble the height of the 2007 market as jobs, deliveries, building permits, occupancy and rents are up. The availability of financing for developers and investors, along with the temperate economic recovery, portends further operational strength and investment activity in the near term.
Job growth in the metro area this year has been positive. The end of the first quarter saw a full rebound of the job losses that occurred in late 2013. Through the first half of 2014, total payroll employment expanded by 5,200 jobs, an increase of 0.5 percent compared with the end of 2013.
The local unemployment rate at the end of the second quarter of 2014 was 6.3 percent. Some 4,200 additional new jobs are projected for the second half of 2014, which would bring the area nonfarm job count to only 1,800 under its 2007 high of 1,018,300.
Supply and Demand
Apartment developers are expected to deliver new product in time to meet the demand created by the new jobs. By year’s end, construction is scheduled to be completed on 3,750 new apartments for multifamily properties of 100 or more units.
New construction has been ramping up since the first quarter of last year. While 930 new units were added in 2013, developers completed 1,160 new units in the first half of 2014. An additional 2,130 units are slated to come on line in the second half of this year.
Some 46 percent of the year’s deliveries, or 1,730 units, are expected to be occupied by year’s end. That pales in comparison to 2007 when 79 percent of that year’s deliveries, or 2,400 units, were occupied by the end of that year. Overall, 140,950 units are projected to be occupied in the metro area this year, compared with 132,110 in 2007.
The jobs data suggests that the strong pipeline of future product — based on multifamily building permit issuance and what’s under construction — is warranted. Multifamily building permit issuance has ramped up in the past two years. Through July, building permit issuance totaled 2,120 units, up from 1,630 units during the same period a year ago. In 2007, building permit issuance reached 2,100 units.
Low Vacancies Persist
With the influx of new inventory, the area’s vacancy rate ticked up 20 basis points to 6 percent in the second quarter. Though slightly higher than the first quarter, vacancy was nevertheless 110 basis points lower than the five-year average of 7.1 percent reported between 2008 and 2013.
The area’s vacancy rate at the end of the second quarter of 2007 was 6.9 percent, down from 7.3 percent the previous quarter. It bottomed out the following quarter at 6.5 percent before rising steadily to its peak of 10.4 percent in the first quarter of 2010.
As further evidence of the strength of the local apartment market in 2014, operators were able to boost effective rents 2.1 percent from March to June to reach $876 per month. Rents have increased 3.1 percent since mid-2013. The biggest increase occurred in the desirable University/Plaza submarket, where rents have risen 10.9 percent since mid-2013 to $1,343 per month.
In the second quarter of 2007, rents increased 2.5 percent from the previous quarter. Rent increases then continued until the first quarter of 2008 when the pace started to slow, then flatten and ultimately decrease 0.3 percent in the first quarter of 2010.
Sales velocity in the first half of 2014 tells a story of fervent activity in larger and newer properties, with buyers paying a greater premium as shown by a decrease of 80 basis points in the average cap rate (see table).
It’s unclear whether the KC apartment sector is at the top of the market, as it was in 2007. But for at least the rest of this year, all signs point to a continuation of positive fundamentals and high investment sales activity.
— By Laurel Wallerstedt, vice president, Berkadia. This article first appeared in the October 2014 issue of Heartland Real Estate Business magazine.