Rents Up, Steady Kansas City s apartment market closed 2014 with a significant increase in rents compared to the prior year. The average per-square-foot rent was $0.88. At the end of 2013 it had been $0.85. This was a healthy increase of 3.5% for the year. Apartment Market Trends All Classes Concession Frequency Permitting 2014 The rate of construction is accelerating in 2014-2015 but the pace may slow in 2016. Downtown rents should continue to increase as new construction comes on line. The Mid-America Regional Council projected increased job growth for 2015 and 2016. 2600 Grand, Suite 1000 Kansas City, Missouri 64108 tel: +1 816 221 2200 fax: +1 816 842 2798 www.dtz.com 39% 3,854 Units $0.88 In 2014 there was also a moderate drop in concession offerings. At the end of 2013 concessions were offered by 46% of properties. In the most recent survey 39% of properties were offering a concession. However, of properties offering concessions, only 10% gave a full month of rent or equivalent amount. Typical specials included a reduced security deposit, waived application fee, or reduced rent equivalent to less than one full month. Apartment construction accelerated in 2013 and 2014. The Home Builders Association compiles data from municipalities and counties across the metro area. It reported 2,879 apartment units permitted in 2013. This was the total for new construction only, and does not include conversions. Many of these units were completed in 2014 and are now in lease-up. During 2014 the number of permits increased to 3,854. Through the changes in rents, concessions and construction, occupancy held steady at. Lease-up of new properties has proceeded at a brisk pace. To date, most members of the Millennial generation have been willing to pay the cost of new, amenity-laden construction, but have been uninterested in committing to home ownership. Kansas City Apartment Market RENT CONTINUED TO IMPROVE WHILE OCCUPANCY HELD STEADY. $0.85 $0.75 $0.65 Rate
Forecast Rents have increased for all classes, but the rate of gain has been greatest for Class A. After a dip in 2008, they increased by 22% over the next six years. New construction will continue to drive Class A rents upward. To date, the use of concessions has fallen. However, it may increase a bit as new projects come on line. Many apartment projects are planned, and the pace of transition from plan to construction is accelerating. However, demand continues to be strong and should keep pace at least through 2015. The Mid-America Regional Council s Forecast report for the metro area anticipated greater job growth in 2015 and 2016. Experiencing the Life of a Yo-Yo Apartment markets are subject to seasonal variation. In a period of overall growth, market indicators such as rents and occupancy may improve in the spring and summer, but fall back a bit toward the end of the year. This would seem to be rational behavior on the part of renters, who prefer to move in the spring and summer and stay put during the holidays and winter Rent by Submarket months. DTZ s Kansas City apartment market survey is conducted twice a year, in the late spring and the late fall. The yo-yo pattern is displayed in the accompanying chart. The mid-year peaks for rent and occupancy are highlighted in red. It appears this pattern will continue, but the overall trend is one of growth. This report compares data yearend to year-end to avoid the seasonal distortions. Rent and Concessions During 2014 the per-squarefoot rents increased in every submarket except the dominant one, Johnson County. Its size and the fact that, at $0.89 per square foot, its rents were already a bit above the metro-wide average may have hindered improvement. Submarket 2011 2012 2013 2014 Plaza $1.12 $1.23 $1.22 $1.33 Downtown $1.07 $1.06 $1.15 $1.17 Johnson County $0.87 $0.88 $0.89 $0.89 Wyandotte County $0.74 $0.79 $0.79 $0.89 Jackson County $0.79 $0.78 $0.86 Northland $0.75 $0.76 $0.84 Overall $0.82 $0.83 $0.85 $0.88 The Plaza produced the greatest change, with an increase of $0.11, from $1.22 to $1.33. This was also the highest rent in the metro area. On a percentage basis, the area that improved most was Wyandotte County. average increased Rent Per Square Foot by Class RENTS CONTINUE TO IMPROVE FOR ALL CLASSES. $1.10 $1.00 $0.60 Historical Rent and SEASONAL VARIATIONS SHOW MID-AR HIGHS. $0.85 $0.75 $0.65 Its rent from $0.79 to $0.89, for a growth rate of 12.7%. This was partly driven by the addition of two Class A properties, '09 something Wyandotte County did not previously have. However, the average rents went up for its Class B and Class C properties as well. The overall average increased from $0.85 per square foot to $0.88 during the year. The average for Class A properties climbed from $1.02 at the end of 2013 to $1.05 at the end of 2014. For Class B the average increased from $0.85 to $0.88, while the increase for Class C was from $0.72 to $0.74. Class A Class B Class C At the end of the year concessions were offered by 39% of properties. This was down from 46% at the end of 2013. The use of concessions actually increased on the Plaza. They were offered by 20% of its Rate www.dtz.com 2
by Submarket Submarket 2011 2012 2013 2014 Plaza 97% 95% Downtown 95% Johnson County 95% 95% 95% Wyandotte County 91% 89% 91% 91% Jackson County Northland 93% Overall 93% 93% Class A properties and 25% of the Class C, but were not available at any of the Plaza s Class B properties. The availability of concessions was down in all other submarkets. Next year pressure from new construction may prompt more concession offerings. The Class A properties will probably be affected first, but the effect is likely to migrate down to other classes. In terms of occupancy, Downtown led the market. Its year-end occupancy was, while both the Plaza and Johnson County were at 95%. The metro-wide average was. The average Class A occupancy was. This was down slightly from 95% one year earlier. However, Class B was unchanged at 95% and Class C was up slightly; it increased from to 93% during the year. While some may have hoped for a more dynamic outcome, steady as she goes is not bad when the resulting occupancy is in the mid-90 s and this occurs during a period of active construction. Construction Based on data from the Home Builders Association Greater of Kansas City, there were 3,854 apartment units permitted in 2014. This exceeded the pre-recession 2006 total of 2,605. However, the 2014 amount is not an all-time high. From 1998 through 2001 each year produced between 4,200 and 5,600 multi-family permits (the total of apartments and condos). Additional properties are in planning. As permitted properties reach completion, growth of Kansas City s apartment market is likely to accelerate in 2015-2016. And now the debate is on. When will people of the Millennial generation switch from renting apartments to buying homes? Until now, Millennials have not wanted to own. It has been said they enjoy the luxuries and amenities of both the apartment complex and the neighborhood, while avoiding debt, redecorating, repairs, and mowing the lawn. Many have been hindered by a burden of student debt, and they have tended to marry later than those from previous generations. However, the times they are a-changing. Early in 2015 Bloomberg reported that Millennials are beginning to enter the home-buying market. A combination of job growth, improved consumer confidence and an expectation of future wage growth have made home ownership more attractive. Last December Zillow predicted that in 2015 Millennials would surpass Generation X as the largest group of homebuyers. This may be happening in the Kansas City area. The Kansas City Regional Association of Realtors reported there were 32,104 closed home sales in 2014. In the pre-recession year of 2007 the total was 31,058. It appears home buying is back. Concessions by Class 100% 80% 60% 40% 20% 0% Will apartment occupancy fall in 2015? During the recession people moved in with CONCESSIONS HAVE FALLEN STEADILY SINCE 2009. Apartment Unit Permits Class A Class B Class C 2014 APARTMENT PERMITTING WAS THE GREATEST OF THE LAST NINE ARS. 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500-2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: Home Builders Association of Greater Kansas City www.dtz.com 3
parents, siblings, or roommates. This created several years of pent-up demand for both apartments and single-family homes. Recent demand has supported both. Moreover, about half of the Millennial generation is college-age or younger. Baby Boomers, some of whom are becoming renters by choice, are reaching retirement. These demographic trends suggest demand for apartments will continue to grow for several years. Downtown Living DTZ defines Downtown to include zip code areas 64101, 64102, 64105, 64106 and 64108. This covers approximately the area from the Missouri River on the north to 31st Street on the south, and from the state line on the west to Paseo Boulevard on the east. For market-rate apartments, Downtown s year-end occupancy of was the highest in the metro area. Although this was down from the mid-year bump of 98%, it was unchanged from the end of 2013. The average per-square-foot rent of $1.17 was higher than any submarket except the Plaza. It increased by $0.02 or 1.7% during the year. The Class A average rent was $1.35 per square foot. This was topped by the Plaza, where Class A units Class Units in Survey Downtown Apartments Change From Year End 2013 averaged $1.41 per square foot, but the metro-wide average was $1.05. Downtown s average unit rent of $1,197 topped all others, including the Plaza, where the average was $1,041. The metro-wide average was $801. At the end of 2014 no concessions were offered in the Downtown market. Developers continue to identify buildings that are prospects for conversion to apartments. Work began in the fall on the art deco Power & Light Building. It will have 293 units, including some new units wrapped around a parking garage. It will include standard luxury items such as granite counter tops, stainless steel appliances and hardwood flooring. However, developers are upping the ante on luxury. Power & Light will have a clubroom and lounge on the 31st floor. Housekeeping and spa services will be available. Other conversions are taking place. Lucas Per Square Foot Rent Properties Offering Concessions A 1,139 95% $1.35 0% B 1,171 97% $1.01 0% C 60 98% $0.78 0% Total 2,370 $1.17 0% Place recently added 130 units to the Downtown market. Projects in process include Commerce Tower (265 units), Roaster s Block (151 units), Employment, 000 s Pershing Building (55 units), Historical Concessions - Downtown and Metro-Wide DOWNTOWN PROPERTIES OFFERED NO CONCESSIONS. 100% 80% 60% 40% 20% 0% 2010 2011 2012 2013 2014 and Pickwick Building (251 units). New construction is also altering the street scape and the skyline. The most prominent new structure is One Light Tower. This 25-story building will add 315 luxury units to Downtown during 2015. In December it was reported that 22 of the 24 penthouse units had been reserved. At the Founders at Union Hill, on the south side of Downtown, Phase II will add 181 units. In Quality Hill on Downtown s west side two projects will add 386 units. In the River Market area north of the Downtown loop multiple projects will add more than 500 units. Downtown Metro Employment vs. Apartment EMPLOYMENT IS STEADILY IMPROVING. 1,020 1,000 980 960 940 '09 Employment Source: Bureau of Labor Statistics and DTZ www.dtz.com 4
Over the next two years projects will double the number of market-rate units Downtown. The degree of interest suggests` this is neither too much nor too soon. Many from the Millennial and Baby Boom generations are making Downtown living their first choice. If lease-up moves as quickly as expected, there will be additional projects moving forward at this time next year. Employment is Gaining Ground New jobs are a strong driver for apartment occupancy. From November of 2009 through November of 2014 the metropolitan area added 51,400 jobs. The gain was 5.3% spread over five years. The pace of growth has been steady, though not impressive. The Mid-America Regional Council (MARC) produces a forecast each year for the Kansas City economy. The forecast from September of 2014 described job growth since the Great Recession as sluggish. However, it cited anticipated growth in the Gross Regional Product, and projected the area would add 19,300 jobs in 2015 and 17,500 in 2016. This would be fuel for growing apartment occupancy Definitions: Properties included in the survey had these characteristics: Sixty or more units, no rent subsidies or income restrictions, an age/ quality ranking of Class C or better and stabilized occupancy in newly-constructed properties. Class Units in Survey Johnson County Change in From Year-End 2013 Per Square Foot Rent Properties Offering Concessions 2014 MF Rental Permits A 16,372 $1.00 52% 1,460 B 15,786 $0.89 32% C 7,737 95% $0.77 33% Total 39,895 95% $0.89 38% 1,460 Jackson County A 5,013 95% $1.09 22% 986 B 5,178 93% $0.91 41% C 12,148 $0.69 52% Total 22,339 $0.86 41% 986 Plaza A 1,013 95% $1.41 20% B 452 98% $1.23 0% C 712 93% $1.20 25% Total 2,177 95% $1.33 15% 0 Northland A 4,072 $1.02 46% 1,096 B 5,592 95% $0.82 43% C 8,563 34% Total 18,227 $0.84 39% 1,096 Wyandotte County A 534 $1.09 100% 312 B 686 97% $0.96 0% C 3,570 91% $0.81 47% Total 4,790 91% $0.89 45% 312 Outlying Parts of Metro KC 0 Grand Total A 27,004 $1.05 41% 3,854 B 27,694 95% $0.88 33% C 32,730 93% $0.74 40% Total 87,428 $0.88 39% 3,854 The information contained in this report was provided by sources deemed to be reliable. However, no guarantee is made as to its accuracy or reliability. www.dtz.com 5