Kansas City Multifamily: Durable Performance Creates an Attractive Investment Market

We no longer have to “sell” investors and developers on the region’s fundamentals as these factors are finally pushing the market toward the top of national rankings. In fact, among the top 30 markets tracked by Yardi, five Midwest markets are in the top ten, including Kansas City at #4. Yardi promotes Kansas City’s 3.4% year-over-year rent growth, leading renewal growth (9.5%), and retention (71.2%), along with being the most affordable of the top 30 markets (25.7% rent-to-income) within these rankings. In 2024, Kansas City is positioned to see increased appetite from outside investors seeking operational stability, predictable growth, and durable performance across the eleven submarkets.

Transactions & Asset Valuations

In 2023, there were 31 sale transactions, down from 59 in the prior year, of which four were acquired by local sponsors and only three were new(er) construction. Notably, private capital was the equity source in all of these transactions, and a record 87% of the trades were acquired by out-of-state sponsors. The volume of trades in new(er) construction was down by 75% year-over-year, primarily due to the large swings in the bond markets and the need for buyers to underwrite wide rate sensitivity which has diluted pricing. We believe the holding pattern for merchant developers will disband in 2024 as construction loans reach maturity and as new projects in the pipeline require recycling of capital.

Cap rates on most transactions are in the 5’s, and we expect more of the same this year. That said, 89% of sponsors in our meetings at the National Multifamily Housing Conference stated they will be net buyers for 2024, with some not selling any assets in Kansas City. Without a reduction in Treasury yields to improve asset values and increase sale motivations, these intentions are likely to keep inventory low and drive competition for well-located assets.

We believe sponsors with fee-driven business models will return to the market in 2024 and yield requirements will compress as the capital markets stabilize. The majority of active bidders today are searching for neutral leverage going in, but those with high conviction around long-term locations, and willingness to underwrite negative leverage in the near-term, will be the winning bidders.

While top-line revenue growth is notable and evident, expense-side pressures from rising insurance and competition for property-level talent are continuing to persist. Combined with volatile Treasury yields, it’s easy to see why sellers are mulling or foregoing sales unless a capital deadline requires a sale, especially developers who have secured a loan extension and have time to season their lease-up. These forces are not unique to Kansas City; they are impacting business plans throughout the country.

Consistent Development Pipeline

While many markets are recording a surge in new development, the pace of construction in Kansas City is consistent with prior years and in line with economic growth patterns. We are forecasting about 5,100 units to deliver in 2024, which is a 2.3% increase to existing inventory.

Looking ahead, construction starts will slow but will not stall completely, as developers continue navigating tight credit markets and increased yield requirements from equity providers. In the face of these capital challenges, there are currently 32 projects under construction in the market, with 53% led by local developers. The majority of those projects are funded with private LP equity, though institutional partners are present in a number of developments and there is a glimmer of common equity in the market today.

One development segment we remain bullish on is build-to-rent ("BTR"). Nationally, Northmarq is advising developers in the capitalization, sale, and refinancing of BTR communities, and while there are only a total of about 1,700 homes in Kansas City’s BTR pipeline, we expect at least one national builder and several national developers to announce new projects within the next 24 months. Aside from townhomes, we believe the horizontal/cottage product type presents one of the most compelling opportunities within BTR as it serves a transitional step from traditional apartment living.

More Volume, Minimal Distress

As the stability spotlight on Kansas City inevitably shifts, we anticipate the market’s fundamentals to continue attracting new investment. As for bridge/CLO debt, don’t expect many note sales or foreclosures as there are fewer than ten Kansas City assets in these loan pools and the majority are performing. Aside from any macroeconomic shifts, near-term loan maturities and equity fatigue from previously stalled sales should drive transaction volume in Kansas City.

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