The Kansas City multifamily market has proved it is more than resilient in the face of adversity. Throughout 2020, the market ranked consistently in the top 10 of 30 markets tracked by Yardi, logging higher occupancies and rent growth – all while welcoming a record level of new supply. That stellar performance is likely to attract even more capital to the market in 2021.
The story dominating the Kansas City market in recent years has been its booming development pipeline. Despite shutdowns and delays caused by the pandemic, developers delivered nearly 5,900 new units in 2020. That volume represents a record high growth rate of 4.1 percent added to Kansas City’s market-rate inventory as compared to an annual average rate of 2-3 percent throughout the past decade.
Looking ahead, that supply wave has crested and the pipeline is shifting to the suburbs. NorthMarq forecasts completions over the next two years to average closer to 4,000 units with 70-75 percent of these to be opening across the suburban submarkets. In recent years, between 40-50 percent of total deliveries were concentrated in the urban core, so while this data supports the speculative “exodus” of urban areas, the lengthy lead time required for planning new developments indicates this trend was well underway prior to COVID-19. Kansas City’s urban core remains well positioned with plenty of demand drivers to support continued growth and attraction of business and residents alike.
Although new construction is coming off peak levels, developers are continuing to find both opportunities and capital for new projects. Local and regional banks have a healthy appetite for financing well-located developments with leverage at 70-75 percent loan-to-cost, 5- to 7-year terms with three years interest-only, and rates averaging 3-3.5 percent. Another popular financing tool is HUD’s d4 Multifamily Loan Program offering a more aggressive 85-90 percent loan-to-cost for a 40-year term at rates around 3 percent. The HUD 221(d)4 loans require a more extensive submission process, but it is an attractive option for borrowers who can engage early and whose capital is patient.
Renter demand remains strong
The robust development pipeline is a byproduct of the economic growth occurring in Kansas City. The Midwest in general is garnering more attention from companies and individuals for its affordability and quality of life. The coronavirus pandemic has spurred more interest with data that shows positive net in-migration, and Kansas City is benefitting from that trend. Although Kansas City did experience some economic contraction during the pandemic, job losses were less severe than other areas of the country. The latest BLS unemployment data for November shows that unemployment for the metro had rebounded to 4.6 percent.
Another sign of the strength of the Kansas City market is the strong absorption of new supply. Although some submarkets have experienced a softening, the market’s overall occupancy improved by 50 basis points in 2020 from 94.5 percent to 95 percent, while rents grew by 2.4 percent year-over-year. These strong fundamentals coupled with a cresting development wave should ease any concerns about potential overbuilding over the next 12-24 months. In-migration and steady demand across the rental spectrum, those renting “by choice” or “by necessity”, bodes well for continued absorption and is supported by rapidly rising home prices in all submarkets.
Pent-up demand drives sales
Investors that hit the pause button on sales in the spring and early summer of 2020 following government shutdowns returned in the second half of the year with pent-up demand for acquisitions. Last year, NorthMarq’s investment sales and debt/equity teams in Kansas City closed on the sale of 11 apartment communities and financed a total of 23 across the region. A record 70 percent of those sales were closed in the 4th quarter and represent a season of price discovery and investor willingness to bet on the market’s quick recovery. Kansas City’s economic resilience coupled with the higher yields investors can find in the metro relative to coastal markets will support a highly-competitive sales market in 2021.
According to NorthMarq’s most recent research report, sales were averaging $74,400 per unit with average cap rates at 5.3 percent at the end of third quarter 2020. Record capital flow from buyers, along with the historically low-interest-rate environment, is continuing to drive pressure on pricing and cap rates. For example, NorthMarq facilitated the December sale of a 1970’s vintage portfolio in Liberty. The two properties, Skyline and Westowne, included 237 units with nearly half of those renovated and continuing to achieve organic rent growth on new leases. The properties sold for a cap rate of 4.85 percent, which was a record high in the submarket for that vintage.
Low-interest rates have contributed to cap rate compression (higher sale prices) as buyers can acquire assets at a lower cap rate and generate the same yield due to the lower financing cost. This favorable financing climate is likely to continue in the near term. Fannie Mae and Freddie Mac have provided guidance for slightly smaller allocations in 2021, although both have expressed an appetite for deals across the vintage spectrum.
One national trend to watch for in Kansas City is the expansion of build-to-rent product (BTR). These are subdivisions of single-family rentals developed in a professionally-managed, highly-amenitized community. The product offers a solution to residents who don’t have the down payment for a home but desire the space and privacy of a neighborhood setting. BTR product has found favor in other secondary markets and is likely to land in Kansas City as developers continue adapting to renter preferences.