It’s little surprise that higher interest rates have slowed the number of multifamily sales in the Kansas City, Missouri, market. What these higher rates haven’t done, though, is slow the demand from renters for apartment space in this region.
As E.F. “Chip” Walsh, a real estate entrepreneur in the Kansas City market says, demand for apartment space is still outpacing the supply in the city and its suburban communities. And that isn’t changing anytime soon.
And Walsh has a good perspective. He is the founder and principal of Kansas City’s Mercier Street, a commercial real estate development consulting firm. He is also the co-founder and principal of Sustainable Development Partners, LLC, a partnership of Kansas City-based real estate professionals.
It’s safe to say, then, that Walsh knows the multifamily market in Kansas City. Here’s some of what he told us about the resilience of this sector, the demand for new apartment developments here and what might happen to all those nearly vacant office towers in the region.
Let’s start with the obvious question: Have higher interest rates slowed sales activity in the multifamily sector in the Kansas City area?
E.F. “Chip” Walsh: I am more involved in the leasing side of the market. I have a multifamily project in the construction process and two others in the early stages of development. I don’t pretend to have my pulse on the sales side of the multifamily sector. But from what I am hearing, unlike on the coasts, Kansas City seems to be doing well overall, despite the economic challenges.
That is a reflection on this market. In Kansas City, we are still seeing rent growth in the multifamily sector. We still see a strong labor market here. We have added something like 16,000 jobs in the first seven months of the year and our unemployment rate is very low. Those metrics are helping the multifamily sector.
But do I think sales volume in this sector is down year-over-year? Yes. By how much? I’m not the best person to ask about that.
How about leasing activity? Is there still strong demand from renters for apartment space in the Kansas City region?
Walsh: Yes. Leasing demand is strong. Look at the affordability gap as one key metric. What would someone pay for the average rent in an area or for the average home mortgage. Because of where interest rates are at today, many markets still favor renting. Renting is still more affordable in many markets, including ours. At the same time, we have a shortage of units overall in the Kansas City metropolitan area. This shortage is most acute in what would be called the affordable or workforce housing areas. We are doing just fine with luxury, but we need more workforce multifamily.
Those higher mortgage interest rates and our lack of enough supply are both positives for rent growth. They are also positives for leasing activity. Is our multifamily vacancy rate up? Yes, slightly. But overall, this market is performing well.
Are you seeing developers bringing new apartment units to the Kansas City area, helping to lessen that supply shortage?
Walsh: We’re looking at a bi-state area here, Missouri and Kansas. This market includes two states, five counties and a lot of municipalities. Overall, I’d say there is good demand for new apartment units throughout the region and there is new product in the pipeline. If you look at the market on a year-over-year basis, though, it would not surprise me if the volume of new supply was down a bit.
The activity in Kansas City, Missouri, proper is a little more exciting. In the CBD we had a project for a new office tower near our T-Mobile Center. Earlier this summer, the developers repositioned it for multifamily. I do expect to see more of that as office space continues to go unused.
Do you expect to see more office space converted into multifamily?
Walsh: Right now, our CBD has a vacancy rate of about 25% in the office sector. And market wide, the most recent data for larger office buildings also showed a high vacancy rate in the second quarter. The owners of some of these office properties are going to have to find ways to do conversions. Maybe they can use historic tax credits or some other type of financial incentive. Many of these conversions will require some sort of financial incentive.
These conversions can be expensive, though. Are there some buildings where converting from office to multifamily won’t make financial sense?
Walsh: That depends on so many factors. I had a deal five years ago where the office floorplates worked out well. How the office property was laid out made sense for a conversion. You do have to look at the key factors: How much of an open floor plan do you have once you take out the dividing walls? Where is the central core? When was the office building originally built? But there are some good opportunities in this market to convert office buildings to apartments. That’s why you have seen strong demand for this type of conversion in multiple markets.
Now that the pandemic seems mostly behind us, are you seeing people returning to downtown Kansas City? Do people still want to live in the city’s urban core?
Walsh: Our urban core is still a desirable location for a renter. We are seeing that submarket come back. The office market in our urban core, though, is still lagging. We are seeing a lot of companies moving from existing space to a smaller office footprint. That is adding pressure to the upward vacancy rate we are seeing in the office sector downtown.
I think going forward, though, you will continue to see people wanting to live in downtown Kansas City. The Cordish Companies recently opened its Three Light Luxury Apartments in our Power & Light District. This comes on the heels of the company’s One Light and Two Light apartment developments. To me, that is another sign that our urban core is still desirable for renters.
There is also some talk that one of our professional sports teams, the Kansas City Royals, might relocate. One possible landing spot would be the central business district. They are proposing a village concept with a mixed-use development adjacent to the new stadium, one that might include office and residential. That would be another boost to our urban core. When it comes to amenities, what are renters looking for in new properties?
Walsh: There is an escalation war with amenities. If a property has something new, the next property has to match it and the next property has to go above and beyond. The days of having just a pool and community room are over. The amenities are not just for the people living in the buildings, either. They are for their pets. It’s important today to have properties that are dog-friendly. You see amenities such as cat- and dog-washing stations and on-site dog parks. Some properties offer dog-walking services. It really is a big change from what it used to be.