Kansas City Multifamily Market Report 2Q/22

Affordable Submarkets with Short Commutes to Reopening Downtown Offices at the Forefront

CBD revival and growing suburbs foster metro-wide gains. Kansas City ended last year with all 11 major submarkets reporting positive net absorption and vacancies below 5.0 percent, coinciding with the second-fastest year of rent gains since at least 2000. Rents in the CBD grew by 8.9 percent last year, after falling 1.8 percent amid the pandemic shock in 2020, evidence that the recovery is underway. The area registered a five-year vacancy low in the first quarter, falling 340 basis points year-over-year to 4.8 percent, marking a rapid but still-progressing resurgence. At the same time, suburban rents grew by 11.3 percent in 2021, as renter preferences for larger units and more spacious communities helped drop vacancy in the suburbs to 3.2 percent entering this year.

Downtown-adjacent submarkets gain traction. Most completions are expected to come online this year in the suburban areas. Even amid inventory growth, South Kansas-Grandview will see vacancy shrink below 3.0 percent and Independence will also retain low availability. Both submarkets have easy access to downtown, offering renters the space and reduced cost of suburban living, with a manageable commute to urban offices as companies return to in-person work. Additionally, this proximity is appealing to the age 20-34 cohort, which comprises approximately 20 percent of the metro’s population, as millennials move away from the core but continue to utilize its amenities.

Multifamily 2022 Outlook

1Q 2022 – 12-Month Period

• CONSTRUCTION: 4089 units completed
  • Completions during the past year ended in March grew stock by 2.4 percent, with over 800 units coming online in the first quarter.
  • Throughout 2021, over 1,000 units were delivered in Central Kansas City, increasing the metro’s urban inventory by nearly 4.0 percent following an 8.9 percent rise in 2020.

• VACANCY: 230 basis point decrease in vacancy Y-O-Y
  • Renters absorbed nearly 8,000 units over the past 12 months, shrinking vacancy to 2.9 percent. Over half of the metro’s submarkets recorded drops of more than 200 basis points since April 2021.
  • Despite construction above the pre-pandemic benchmark, Class A vacancy continued to compress to 2.9 percent in 2021’s fourth quarter.

• RENT: 13.5% increase in the average effective rent Y-O-Y
  • Tight vacancy helped lift the average effective rent to $1,152 per month as positive rent growth was recorded in each of the last five quarters.
  • Rent growth was the strongest in South Overland Park, with an annual gain of 17.1 percent pushing the monthly payment up to $1,339 — the second-highest submarket outside of Central Kansas City.

Investment Highlights

• The past year featured an elevated number of trades in Outlying Johnson County, over half of which consisted of Class A and B properties. The submarket’s suburban location has attracted renters and enabled locales, such as Olathe-Gardner and South Overland Park, to see sharp drops in vacancy on the Kansas side of the metro.
• Kansas City’s sub-3 percent availability will contribute to rent gains as net absorption remains elevated. Consequently, deal flow may accelerate in the near term, as buyers rush to lock in financing ahead of anticipated increases in interest rates. Higher borrowing costs may soften price gains longer term, even with above-normal rent growth.
• Despite a nearly 8 percent increase last year, an average sale price lower than many other major metros was sustained. While cap rates dipped 20 basis points to the mid-6-percent range, they remain meaningfully higher than the national average as well. Lower pricing enables a larger pool of potential buyers to be active, while high cap rates attract capital from metros with smaller yields, drawing out-of-market investors to Kansas City.

Original Report by Marcus and Millichap: https://www.marcusmillichap.com/research/market-report/kansas-city/kansas-city-2q22-multifamily-market-report