Last Friday, CCIM Kansas City hosted Mike McKeen, president of EPC Real Estate Group, and Brendon O’Leary, EPC’s vice president of development, who gave a SWOT (strengths, weaknesses, opportunities, threats) analysis of the Kansas City real estate market, with emphasis on the multifamily segment.
EPC is a local real estate development company founded in 2000. McKeen said EPC has always been at the forefront of innovation, including building the first wireless internet project in the country.
In its early days, EPC did a lot of industrial development, but in the past 10 years, McKeen said the company’s niche primarily has been mixed-use products in urban infill areas and urban-suburban areas like Downtown Overland Park and Lenexa City Center. The company has branched out from the local market, with sites in Wichita, Topeka, Utah, Texas and Arizona.
Over the past 20 years, EPC has developed more than 4,000 apartment units and in excess of a half-million SF of office and retail space in the Kansas City market.
O’Leary said the strong economy in Kansas City and rent growth in the multifamily market are market strengths.
“On average, rent growth in Kansas City has been about 10 percent year over year. And most of our properties are experiencing about 15 to 20 percent rent growth [for new rents] year over year,” said O’Leary.
O’Leary said another strength of the market is the high multifamily occupancy rates which are at approximately 97 percent.
“I’ve never seen it that high. It’s pretty amazing,” he said.
Another strength in Kansas City and across the country right now is the technology that developers are using in real estate, O’Leary said.
“We’re using business intelligence to see real-time data, and we’re using that data to make real-time decisions. I think the real estate industry has been slow to adopt technology, but it's finally really, really good,” said O’Leary.
Kansas City is still very affordable, O’Leary said, but a market weakness is that rents in Kansas City are too low compared to other markets like St. Louis and Nashville. Only seven properties in Kansas City rent for more than $2/SF.
Another market weakness is the cost of construction, which is driving up the cost of new housing.
“With current construction pricing, we have to pro forma rents that are 25 percent above the highest in the market. So if we’re going into a market where the highest rents are $2 per foot, with current construction, we have to go in with no incentives and have to basically say we’re going to be 25 percent above the market. That’s something I think a lot of developers are struggling with,” said O’Leary.
McKeen presented a list of seven threats to the Kansas City real estate market, with the first being construction material costs, which have risen 50 percent since 2018 — and 30 percent since 2020.
“Construction materials I think is the biggest threat out there that everybody’s having to react to, and because you can’t predict it, there’s no planning to really put in place ahead of time so you’re kind of reacting in that scenario,” he said.
McKeen said construction labor costs and availability is the second biggest threat.
The third biggest threat is land costs, which McKeen said have doubled over the past 10 years.
State and local regulations in a thriving multifamily market present the fourth threat.
“There’s an opportunity for cities to capitalize on that and be a little more selective in what they want to do and use the drive to build these products to help address the things they campaigned on and . . . the things they need. So you’re seeing a lot of things pushed that maybe are not highest and best use or maybe they wouldn’t do otherwise,” McKeen said.
Operating costs are another market threat. The competitive nature of staffing a multifamily project has driven up a project’s operating costs.
“As these get more popular, there’s a handful of people in Kansas City that are truly skilled at leasing up brand new properties. They’re in high demand so they’re expensive. Getting the right people is important,” said McKeen.
McKeen said property taxes specific to Kansas City, Missouri (Clay and Jackson counties) also present a threat.
The final threat is NIMBY-ISM or not in my backyard. McKeen cited EPC’s recent proposal to build a multifamily project adjacent to the Deer Creek Golf Club in Overland Park which was defeated by neighborhood opposition.
McKeen said there are opportunities for development in the high-demand multifamily market.
“The fundamentals are still solid. We don’t see that changing anytime in the near future unless something happens to the single-family market and they somehow get those more affordable, and then I think you will see a shift,” he said.
McKeen said he expects to see more suburban development in the multifamily market to accommodate people working from home who want more space.
McKeen said unit sizes have decreased over the past 10 years, as the cost of building them has increased. It’s harder to increase unit sizes on an infill site and make the project profitable.
“So I think you’re going to see larger units happen in the suburban areas, and that’s going to give people that work-from-home model,” said McKeen.
Multifamily communities for active adults over age 55 also present another opportunity, which McKeen said probably will change the way independent living looks and give older adults a more reasonably priced option over independent living facilities.
And, McKeen said industrial is still a good play going forward.
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Feature image: EPC Real Estate Group’s 206-unit, active-adult project in Fairway, Kan. has been approved to begin construction later this year (2022). Rendering credit: Klover Architects.