Kansas City is experiencing the biggest building boom in apartments
since 2001, with bankers eager to lend money on what's seen as a safe bet in a
still sluggish commercial real estate market.
From the outer suburbs to the urban core, apartment projects are a hot trend. Permits for more than 1,700 units were issued through the first six months of the year, up 229.2 percent from last year and the largest number since 2001, according to the Home Builders Association of Greater Kansas City.
"It's like a tsunami," said Nathaniel Hagedorn of NorthPoint Development, the firm behind the 298-unit Village at Burlington Creek project in the Northland and 306-unit Village West project in western Wyandotte County. "It's an asset category everybody feels safe to lend on."
Drawn by an emerging trend of people who prefer renting over owning, low vacancies, increasing rents and the fact most other commercial real estate construction activity, except industrial buildings, remains in the doldrums, bankers are hungry for a place to invest.
Clay Sublett, a senior vice president at KeyBank in Kansas City, said more than half the commercial loans made nationally by KeyBank are for apartment projects.
"Banks are much more inclined to lend on apartments," he said. "It's been the strongest sector of commercial real estate the last few years. Banks began gravitating toward rental after the downturn of the single-family housing market. The basic fundamentals are strong."
A recent report by Moody's Investors Service based on the supply and demand of real estate categories scored the multi-family market in Kansas City at 72, a solid "green" rating in a system that uses traffic signal colors. The only other green signal was given to industrial properties, which scored a 73.
On the other end of the scale, the Kansas City downtown office market was signaling red at 23, and the other categories, suburban office, retail and hotels, were all yellows.
Ken Block of Block Real Estate Services said if he asked a banker for a loan on a speculative office building project here without a signed anchor tenant, "they'd think you were out of your mind."
But when it comes to an apartment project -- a speculative venture by nature -- bankers are tripping over one another to lend money. Block just arranged financing for a $37.9 million, 306-unit apartment project in Lenexa called WaterCrest at City Center and described the bank response as "very aggressive."
"We went to 15 lenders that we thought were big enough, and we got eight solid, strong proposals," he said.
Block said his firm also has an aggressive plan to buy or develop apartment projects around the country over the next few years, expecting to invest $160 million annually. The goal is to increase its apartment portfolio to 10,000 units by buying 1,000 units per year and developing another 500 annually.
Dave Harrison, president of VanTrust Real Estate, described apartments as the "product du jour," adding the rental demographic has broadened in recent years.
His firm is developing both inside and outside the city. Its 176-unit 51 Main development in the South Plaza area of Kansas City is expected to open next year, and other projects include the 212-unit Village at Mission Farms in Overland Park and 177-unit Park Place Residences in Leawood.
"There's a strong demand, and there's been a huge shift from owners to renters because of the last economic cycle," Harrison said. "We're seeing a whole demographic who are renting by choice, and I don't think it will change anytime soon, if at all."
Cydney Gurgens, senior vice president of Wells Fargo Commercial Real Estate in Kansas City, said many of the new projects are luxury developments intended to appeal to those who prefer to rent rather than buy.
"The new projects are very lifestyle-oriented with a high level of amenities," she said. "They appeal to young professionals and empty-nesters."
The amenities being offered at Briarcliff Riverfront Apartments, a $43 million project recently announced in the Northland, are typical of the luxury flourishes now included in some developments. In addition to a clubhouse and fitness center, amenities at the 340-unit project include a saltwater pool, hot tub, library and game room.
The addition of more upscale apartments has helped drive up rents.
The average asking rent of a Kansas City area apartment was $744.36 a month in the second quarter of this year, up 7.1 percent from the same period in 2008, according to Reis, a national commercial real estate analysis firm. The national average was $1,109.73, up 6.1 percent from 2008.
Reis reports the vacancy rate had improved in Kansas City to 4.4 percent during the second quarter, down from 7 percent during the same quarter in 2008. The national vacancy rate was 4.3 percent.
"The metrics for multi-family housing in Kansas City are still strong," said Ty Garver, senior vice president at BMO Harris Bank. "Vacancies are decreasing, rents are increasing and absorption of new apartments is still positive.
"A lot of it has to do with the quality of developers in Kansas City. They know the market and a lot are working on infill locations."
Price Development Group recently completed a 71-unit apartment project at 39th Street and State Line Road in the city and currently is building a 170-unit luxury apartment project, 46 Penn, near the Country Club Plaza.
"In general, we've seen more credit available for multi-family projects," said Monte Wendler of Price. "It's seen as relatively safe vs. retail or office, which is a bit more challenging environment now.
"Also, for banks to generate income they have to lend money, and it's one of the few real estate sectors where there's a request for capital."
Banks also like lending to apartment developers because they have a familiar partner to hand off their deals on the other end, KeyBank's Sublett noted.
"There's been financing available for multi-family because Fannie Mae and Freddie Mac are very active," he said, referring to the giant federally sponsored agencies that purchase loans from banks.
"When a bank is looking at a construction loan, they're looking at demand and asking, 'What's my take out?' Fannie and Freddie are providing permanent financing for apartments. They have helped that sector stay liquid."
Hispanic #1 Breaking News for Entrepreneurs, Professionals and Small Business Owners - HispanicBusiness.com
OCTOBER 30, 2014
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