Without a doubt, 2016 was a year to remember for the Kansas City apartment market. Employers, builders, operators and investors all had an eye on the flourishing metropolitan area and contributed to its ongoing strength, leading to a 20-year high for apartment occupancy.
But in order to assess if 2017 will be as fruitful, a review of how each of these groups fared in 2016 and an analysis of the current economic climate should be taken into account.
Laurel Wallerstedt, Berkadia
Employers
A healthy economy underscored by an active employment market generates a cyclical effect whereby employers seek talent, talent seeks housing, and developers seek residents.
According to Moody’s Analytics, total nonfarm payroll employment in the Kansas City metropolitan area in 2016 expanded by 1.5 percent following a 1.3 percent increase in 2015.
Virgin Mobile USA, to name one active area employer, relocated its corporate headquarters from Warren, N.J., to downtown Kansas City as part of the company’s re-launch of its new brand under Sprint. The long-term location for the new headquarters is undetermined, but temporarily at least 50 new employees now work out of the One Kansas City Place building at 12th and Main streets.
By year-end 2017, Berkadia Research projects total nonfarm employment to expand by 1.7 percent. Part of this growth will come from online retailer Amazon.
The company is adding two fulfillment centers that will employ more than 1,000 positions at each location. One center, due to open in late 2017, is an 856,000-square-foot industrial building to be built near Interstate 70 and the Turner Diagonal. The other is an 822,104-square-foot facility in Edgerton. An exact opening date has not yet been established.
Builders
Looking to attract renters seeking the ideal work-life balance, apartment builders concentrated development in the metropolitan core in 2016. Earlier in the year, the largest downtown development, the 252-unit Summit on Quality Hill, came on line, courtesy of developer Indianapolis-based Cityscape Residential.
Home to the central business district, nearly one out of every four metrowide deliveries was in downtown Kansas City during the last four quarters. This trend is expected to continue in 2017 with more than 40 percent of all new inventory slated for the downtown area.
Interestingly, while Kansas City’s overall apartment inventory expanded by 2,920 units in 2016, completions were down from the 3,310 additions in 2015, according to Axiometrics, However, 2016’s deliveries were 89.8 percent higher than the preceding five-year average.
Even with this strong increase in apartment product, occupancy in the downtown area was 96.8 percent, a 50-basis-point annual rise, and developers remain bullish that demand in the coming year will remain sufficient to absorb the additional units in the pipeline.
In fact, construction is already underway on eight multifamily communities downtown, with 1,230 apartments scheduled to come on line by the end of 2017.
Operators
The metrowide occupancy rate was projected to finish 2016 at 95.7 percent, up 40 basis points year-over-year. During the same period, operators succeeded in increasing asking rents 3.1 percent on average to reach $956 per month, while slightly raising concessions 30 basis points to 1.2 percent.
Operators can thank more than just job and population growth for 2016’s increased occupancy and higher rents. The psychology accompanying a generally improving economy may have contributed to the occupancy-bolstering fact that household formation outpaced population growth.
While enjoying this byproduct of economic optimism, operators of both existing and newly developed Kansas City-area assets remained cognizant of the large influx of new units, and strategized by tempering their higher asking rents with slightly increased concessions.
This marketing device is employed to forestall possible occupancy loss, or in the case of newly constructed assets, to fill the units more quickly.
Looking forward, Berkadia Research projects that with payrolls increasing amid robust rental demand, operators are expected to advance average asking rent 2.8 percent to $983 per month by December 2017. At the same time, effective rent will increase 3.2 percent to $975 per month, trimming concessions to an average of 0.8 percent of asking rent.
Investors
In 2016, multifamily investment activity remained elevated in the Kansas City metropolitan area. Investors purchased 63 market-rate properties. The majority of sales were in Kansas City, Missouri, proper. Sales in the metro area were down from 79 transactions in 2015, although 8.6 percent higher than the preceding five-year average.
Investors would be wise to remain attentive in the year ahead as apartment fundamentals continue to improve. With accelerated hiring expected to continue, leasing activity is sure to follow suit.
Renters gravitating toward communities near employment hubs, as well as redeveloped areas like the Power and Light District, will be met with ample prospects for housing. Developers are currently set to add a total of 2,850 apartments across greater Kansas City by the end of 2017, making the metro area one to watch.
-By Laurel Wallerstedt, Director, Investment Sales, Berkadia. This article first appeared in the January 2017 issue of Heartland Real Estate Business magazine.