Kansas City Multifamily CAP Rates Vary Widely by Property Class

This morning when I was catching up on the morning news, I came across the Block Real Estate Report for Metropolitan Kansas City 2012 (see link at end of post). The report had some very interesting research in it regarding the multifamily market in the Kansas City area, which I thought you all might be interested in.

Kansas City is a stable market that doesn’t have the wide fluctuations in value as some other areas of the US. However, KC does reflect the multifamily market across the US, and is expected to stay strong in 2012.

The multifamily market’s strength has been fueled by increased renter demand and historically low interest rates.  The multifamily market is expected to stay strong in 2012, as interest rates and market fundamentals are expected to stay strong and interest rates are expected to stay low.

The Kansas City multifamily market rebounded in 2011. With very few sales in 2009 and 2010, sales in 2011 were much closer to historical norms, reaching nearly $400 million.

However, Class A and B sales were fueled by a few very large investors. Prices and CAP Rates varied widely depending on property classification (See “The ABCs of Determining Multifamily Property Classifications” . Class A properties that are well-located sold at a premium, while Class C apartments CAP Rates trailed Class A properties by 3.4%.

These variations in CAP Rates show larger, institutional investors pushing for quality properties and their willingness to pay more. Meanwhile, Class C apartments Cap Rates stayed low as non-institutional investors were willing to pay less for aging properties, those with higher deferred maintenance, and properties with lower quality tenants.

According to the Block Real Estate Report for Metropolitan Kansas City 2012, Kansas City Class A multifamily CAP rates averaged 6.3%, Class B multifamily CAP rates averaged 7.3% and Class C multifamily CAP Rates averaged 9.7%.

The Block report said, “With over $223 million in total transactions, Class A properties accounted for more than half of all sales volume while accounting for only 36% of the number of units sold. Apartments sold for an average of $95,700 per unit and capitalization rates dipped to 6.3%. The Fairways at Corbin Park represented the highest price per unit at $110,507. Five of the eight Class A transactions occurred in Johnson County, solidifying the area’s reputation as one of the most desirable in the Kansas City metropolitan area.

The Northland submarket also kept its winning streak going from 2010 with two significant Class A sales, including Barrewoods, which fetched the most aggressive capitalization rate in 2011 at 5.7%.

Class B apartment sales totaled $119 million and included more than 2,150 units sold for an average sale price of $55,300. The average capitalization rate was 7.3%. The market for Class B units was driven largely by the aforementioned portfolio sale to GoldOller, which paid $55,197 per unit with a capitalization rate of 7.5%. Other significant Class B transactions included the 232-unit Signature Place in Overland Park and the 220-unit Clarion Park in Olathe. Class B sales were split nearly evenly between the Johnson County and Kansas City South submarkets.

Pricing for Class C properties continued to trail Class A and B properties significantly. Despite representing 31% of all units sold, Class C properties represented only 11% of all sales volume. Average sale prices of Class C properties was $21,200 per unit on just over 2,000 units sold in 2011.

Capitalization rates for Class C properties averaged 9.7%, a 240 basis point premium over Class A units and a 140 basis point premium over Class B units. Significant sales included lender sales of Country Meadows in Lee’s Summit and Timber Wind in Independence. The Eastern Jackson County submarket captured over three-fourths of all Class C sales.

Strong demand is expected to continue throughout 2012 as fundamentals are anticipated to remain strong and interest rates expected to remain low.”

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