A tough year. That’s what everyone participating in the Kansas City Commercial Real Estate Summit agreed 2020 has been. But that’s not to say that the mood during the virtual event held Oct. 20 by REjournals.com and Midwest Real Estate News was a gloomy one. Instead, the biggest names in Kansas City’s real estate community agreed that the future still looks bright for this Missouri city’s CRE market.
The tone of the meeting was set early by keynote speaker Jill McCarthy, senior executive with the Kansas City Area Development Council. McCarthy agreed that 2020 has been a year of challenges what with the COVID-19 pandemic, a growing focus on racial injustice and a particularly negative presidential election campaign.
And, yes, Kansas City hasn’t been immune to the economic struggles brought about by the pandemic and the business shutdowns associated with it. Kansas City business owners are struggling. Restaurants are fighting to keep their doors open. And real estate deals are taking longer to complete.
Still, McCarthy found room for hope: The Kansas City economy was strong before COVID-19 hit. Because of this, McCarthy says, she expects the economy and commercial real estate market here to return to pre-COVID-19 levels once again, even if that might require the historically quick development of a vaccine.
“I have tremendous optimism,” McCarthy said. “When you look at Kansas City and the regional economy, there are reasons for hope. If you had a pie chart showing what the industries are in the United States and you then looked at the major industries in Kansas City, you’d see that we are nearly a mirror image. It’s been that way for many years. The diversity of industry in the Kansas City region is an incredible strength.”
Kansas City also benefits from a talented labor pool and a business-friendly government, McCarthy said. And the people who live here? Many of them harbor entrepreneurial dreams, she said.
“Kansas City has an entrepreneurial spirit,” McCarthy said. “We are explorers, dreamers and, most of all, we are doers.”
McCarthy pointed to the summer announcement from Dot’s Pretzels that it plans to build a $15 million manufacturing facility at Logistics Park Kansas City in Edgerton, Kansas, as evidence that the Kansas City region remains attractive to companies across the United States.
Another bright spot in Kansas City? The multifamily market, which was the subject of the event’s first group panel.
Logan Freeman, commercial and investment sales with Clemons Real Estate in Kansas City and the moderator of the panel, said that of all the commercial asset types, multifamily remains one of the strongest.
“At the beginning of March, we wanted to buy retail shopping centers that were ecommerce-resistant. Then the pandemic happened,” Freeman said. “We backed out of close to $20 million worth of transactions. One thing we didn’t back out of, though, was multifamily.”
Jeff Stingley, executive vice president with the Kansas City office of CBRE, said that 2020 started off strong for the Kansas City-area multifamily market. Then COVID-19 hit. To no one’s surprise, the market has slowed as the year has progressed. But Stingley said the multifamily market is still on pace for a solid year of investment activity, sales and leases. Private capital is still available for multifamily, Stingley said.
“The appetite for multifamily remains extremely high,” Stingley said. “Once the fundamentals stabilize, and if we remain in a low-interest-rate environment, we think 2021 will be a good year for sales.”
The rest of 2020, though, will bring challenges for commercial brokers. As Stingley said, many owners who were considering selling their multifamily assets are putting those moves on hold.
Many owners are also looking to refinance their properties. This means that brokers aren’t just competing for business today from other brokers, but also with owners looking to refinance their apartment buildings because of the lower interest rates of today. These owners, in a different environment, might have been sellers.
E.F. Chip Walsh, founder and principal of CRE development consulting firm Mercier Street LLC, said that 2021 might present its own challenges. Why? He points to the government stimulus package, and the enhanced unemployment benefits that came with it. That helped slow some of the economic fallout from government shutdown and stay-at-home orders.
But those stimulus dollars are gone now, and Congress hasn’t been able to reach a deal on a new financial relief package.
“What happens if the stimulus isn’t renewed? Are we just masking bigger financial problems?” Walsh asked. “Are we just delaying the inevitable financial pain? Because of this, I am a little cautious about 2021. In the early days of the pandemic, it was thought that we’d shut businesses down but then we’d turn the switch back on. People are now realizing that this is a longer-term process. How do people get through 2021? How do you learn to live with this pandemic?”
Craig Scranton, principal with the Kansas City office of BNIM, said that the Kansas City apartment market did see a slowdown after the first quarter of this year. Today, though, the market has again picked up velocity, he said.
“People are trying to make their deals work,” Scranton said. “They are still trying to get there. Deals aren’t getting done as quickly as they once did. But people are still trying to get deals done today. They are trying to get them to work.”
Frank Sciara, vice president in the Kansas City metro office of Grandbridge Real Estate Capital, echoed Scranton’s comments, saying that investment activity was especially strong for the Kansas City multifamily market in the first quarter of the year.
Even during the pandemic, investment in multifamily properties has remained solid, Sciara said. Fannie Mae, Freddie MAC and HUD have all continued to lend during the pandemic, he said, something that played a major role in keeping the apartment market here steady.
There are challenges, though, Sciara said. Fannie, Freddie and HUD have all instituted COVID-19 reserve policies. This means that six to 18 months of debt service reserve is collected at closings.
“That’s easier to handle if you are working with a refinance,” Sciara said. “But on an acquisition, it is not always easy for people to raise that additional capital. That has created a bit of a disconnect between buyers and sellers. That has held back the acquisition activity a bit this year.”
Panelists agreed that Kansas City has held its own, even during the worst days of the pandemic.
“Like other Midwest markets, Kansas City is able to weather economic downturns,” Stingley said. “Kansas City has a diverse economic base. It’s not just one industry that makes up most of our GDP. Healthcare is our top industry, and that is mostly recession-proof. That diverse economic base and our durable industries have helped our market hold up. I’d say that Kansas City is as ‘business-as-usual’ as you’ll find in the country right now.”
Sciara said that apartment owners had plenty of concerns about delinquencies when the pandemic started.
“People wondered what would happen if 25 percent to 50 percent of their tenants weren’t paying their rents,” Sciara said.
Fortunately, most apartment tenants are continuing to pay their monthly rent, Sciara said, with delinquencies extremely low. Yes, some landlords have had to create payment plans for some tenants. But overall, the combination of enhanced unemployment benefits and stimulus funds were enough to keep monthly rent collections strong, Sciara said.
Scranton said that development has not shut down in the Kansas City apartment market, either. And it’s not just high-end, top-of-the-market multifamily product that is coming online, Scranton said. Apartment projects targeted to lower-income renters are opening in the Kansas City area, too, he said. The market for new products targeting renters who are 55 and older is strong, too, Scranton said.
“There is still development activity in this market,” Scranton said.
Walsh said that renters by choice are helping to drive the Kansas City apartment market. These are often young professionals who could qualify for a mortgage but who instead choose to rent an apartment.
Many of these renters by choice want to live in areas such as the Crossroads neighborhood, communities filled with restaurants, retailers, night life and entertainment. They also want to live near public transportation so that they can get around the city without having to rely on a car.
“This has changed the dynamic of location, location, location,” Walsh said. “You don’t have to be in the closest proximity to where you work if you can get there conveniently by public transportation. Or you can take a Lyft or Uber today. Walkability matters. People want vibrant neighborhoods. The concept of live/work/play is appealing to renters.”
There is a popular storyline that has risen out of the COVID-19 pandemic, though, that a growing number of people are fleeing urban centers and seeking the wider-open spaces of the suburbs. After all, living in the heart of a big city isn’t as enjoyable if restaurants, bars and theaters aren’t open.
Are commercial real estate professionals seeing this trend in Kansas City?
Not really, according to the panelists.
“I don’t think that flight to the suburbs is impacting Kansas City as much as it is other big cities,” Walsh said. “The headlines surrounding that tend to be focused on national, big urban centers like New York City and San Francisco.”
Walsh said that during the last decade or more, people have been moving to the central core of Kansas City. That, he said, isn’t a trend that will be reversed by a one-time pandemic.
Scranton called the media’s focus on the suburbs the “flavor of the month.” He said that downtown Kansas City still boasts great potential and is still a favored destination for renters. He said that he expects the Crossroads area to continue to grow.
Stingley agreed that the loss of population is being felt more in the downtowns of bigger cities.
“I talk to our Chicago guy and he says it’s been a mass exodus out of downtown Chicago,” Stingley said. “But I think any move to the suburbs will be short-term. Kansas City is less affected by this.”
Another reason for the steady performance of Kansas City’s real estate market? Sciara pointed to lenders. He said that the lending community had been self-regulating itself even before COVID-19 hit. Lenders had dialed back on leverage, he said, which has been a blessing now that the pandemic has resulted in so many economic challenges.
Most banks today prefer a leverage level of 70 percent to 75 percent when approving financing requests, Sciara said. That results in less risky loans. But it might also slow down new projects.
“Borrowers will need more equity in their projects,” Sciara said.