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MISSOURI: An Introduction to Real Estate

Missouri: An Introduction to Real Estate 

Authors: Korb W. Maxwell, Curtis J. Petersen, Roxsen E. Koch, M. Kevin Lee, Michael L. Fisher and Ryan P. McNellis

Overview 

It is safe to call the real estate market a “winner” following the initial panic after the COVID-19 pandemic. As we look back on the unprecedented 2021 and the early returns of 2022, all still appears generally positive around the country and especially in the Kansas City metropolitan statistical area (“Kansas City”). At the forefront of this growth is industrial development, which is seeing levels of demand and investment like never before, as well as the multi-family sector, which continues to see steady increases in investment value and positive rent growth.

Industrial Real Estate Analysis 

Over the past two and one half years, the record level growth in e-commerce has caused a shift in commercial real estate supply and demand. This growth uncovered and exposed a general lack of industrial space, specifically distribution, warehousing and the like, across Kansas City and the United States, and the supply in the market paled in comparison to the substantial demand that was brought to the forefront by a worldwide pandemic.

The magnitude of this growth is evidenced by the record breaking 2021 year for industrial development in Kansas City. According to the Colliers Kansas City-Lawrence 2022 Forecast Report, the industrial market in Kansas City shattered prior records with approximately 12.74 million square feet of industrial development under active construction by the end of 2021, with roughly 9.86 million of such construction being speculative development.

Kansas City has absorbed this boom in new construction and remains a target for further industrial development in large part due to: (1) the infrastructure already in place and the near-perfect location in the heartland of the country; (2) robust private developers seeking to answer the call of bringing substantial industrial development to market as quickly as users need space; and (3) highly competitive rates as compared to markets across the country. The infrastructure currently in place, in addition to what is being constructed to supplement such existing improvements, allows Kansas City to serve as a preeminent launch point for industrial users from every industry. With more than six major interstate highway systems running in every direction, a robust rail system that tracks and reaches all parts of the country, and the Missouri River running through its heart, Kansas City offers tenants and users consistent distribution routes to all four corners of the country in all forms of desired transit.

A natural result of such industrial growth, private industrial developers have substantially grown as these developers work to meet market demands by providing pad-ready sites quicker than ever before. As a result, Kansas City has been able to produce a number of small, medium and large size developers answering the call for all sizes of industrial build-to-suit and speculative development. The number one industrial developer in the United States over the past decade, according to Real Capital Analytics, is based in Kansas City and currently has 43 million square feet of industrial space currently under construction. Kansas City’s local industrial development community remains keen on helping grow and expand the area’s industrial footprint, while also expanding to serve states near and far alike, with local private developers accounting for all of the 12.74 million square feet in Kansas City in 2021.

According to CommercialEdge’s National Industrial Report, new leases signed over the past 12 months across the country averaged approximately $7.35 per square foot. This is a stark contrast to the Kansas City market, and one of the catalysts behind the unprecedented growth in the local market, is the average lease rental for industrial property, which averages approximately $4.90 per square foot.

In conclusion, the Kansas City market has kept pace, and quite possibly has exceeded the pace, of the industrial growth boom we have seen over the past decade. Combined with its preeminent location in the middle of the country, with e-commerce continuing its growth with no signs of slowing down (Colliers reports that it expects e-commerce to account for 23% of non-auto sales by 2025), the highly competitive nature of the market rents compared to the national average and the number of growing private developers in its own backyard, Kansas City is poised to continue its growth and become a beacon of industrial development.

Multi-Family Growth 

The multi-family market in Kansas City is able to hold its weight with any other real estate sector, save for the robust industrial area as discussed above. By the end of 2021, the multi-family market showcased its excellent market fundamentals when it reached 96.4% occupancy rates, the highest rate since 2000.  At the beginning of 2021, approximately 175,000 units were available in Kansas City, with an additional 5,000 units completed and brought to market by the end of the year; this number substantially outpaces the 1,835 units that were delivered in 2020 (202% YOY increase). According to the YardiMatrix Kansas City MultiFamily Report, an estimated 7,331 units are under construction and will come online throughout 2022.

In line with what keeps the industrial market in Kansas City so competitive is the rental rates charged. At the end of this past January, the average rental rate in Kansas City came in at $1,111, while the national average hovered around $1,604. With the average rental rate in Kansas City being far lower than that of the national average, the local market is able to take advantage and attract individuals and families from around the country to call Kansas City home. This competitiveness has brought the eye of institutional investors and private capital to Kansas City, resulting in all-time low cap rates for this market. Evidence of this new interest in Kansas City market is found after 48 different apartment complexes in the area were traded with a sales volume exceeding $1.19 billion in 2021. This number is only expected to grow as investors view Kansas City as a stable market with a diverse and resilient local economy.

Affordable Housing and Incentives 

Robust economic growth and lack of adequate housing supply—both for sale and for rent—has led to substantial annual rent increases across the country. This has led to a national debate on affordable housing. While the Midwest and Kansas City have been shielded from some of the extremes being felt across the country, this issue is becoming more prevalent in various City Council and economic development debates across the region.

As discussed earlier, the average rental rate across the country hovers around $1,604 per month, which is $500 more than the rental rate here in Kansas City. This delta leads some to question if an affordable housing issue exists here, and even if an argument were to be made to the contrary, the “issue” in Kansas City pales in comparison to that of other states and municipalities. Kansas City residents spend 23.73% of their income on rent, significantly lower than New York (66.22%)[1], San Francisco (39.59%)[2], Dallas (40.22%)[3] and the national average (28%)[4].

Despite the data, lawmakers on both sides of the state line aim to “fix” this affordable housing problem in Kansas City by offering development incentives only to residential developers in return for such developers bringing “affordable housing” (i.e. rent restricted) to Kansas City. If a developer elects to take these incentives, they will be required to meet certain income thresholds and mandates to ensure their development qualifies as “affordable housing.” With rising construction costs in addition to rising interest rates and rising capitalization rates, developers are weighing the benefits of applying for incentive programs tied to affordable housing, versus completing market rate apartments without any incentives but no rental restriction.

[1] The average monthly rent in New York is $3,700, according to Chris Morris in NYC is back: The average rent in Manhattan just hit an all-time record of $3,700 ($44,400 annualized), with a median household income of $67,046.

[2] Average monthly rent is $3,930, according to Melanie Woodrow in her article, 3 Bay Area cities make top 10 list for most expensive 1 and 2 bedroom rentals ($47,160 annualized), with a median household income of $119,136.

[3] Average monthly rent is $1,835 ($22,020 annualized) with a median household income of $54,747.

[4] Average monthly rent of $1,604 ($19,200 annualized) with a median household income of $67,521.