Panelists Banks Floodman, director of business development, Sunflower Development Group, Fletcher Harder, project manager, Neighbors Construction Company, Michael Sullivan, founding partner, MMG Real Estate Advisors, and Nicole Yates, co-founder, Yates and Yates Co., gathered at the Homebase HQ last week with a sold-out audience to discuss the multifamily market at MetroWire Media’s 2022 KC Multifamily Summit.
Jen Macias DeMeyer, director of marketing, Homebase, moderated.
Like other segments of the commercial real estate industry, the multifamily market is feeling the impact of rising construction costs and global supply chain issues.
“One of the most difficult things about multifamily is there’s thousands and thousands of pieces that go into that building. So a small thing like a piece of plastic going from $5 to $9 may not seem like a major thing but it could cost a job hundreds of thousands of dollars,” said Harder.
Harder said in order to meet their contract obligations and schedules, contractors and their subs must obtain their product early and often and have it on hand.
“That requires a huge amount of money up front to get that done, but to reduce your risk at the end is worth it. And it takes a lot of different things, whether it’s warehousing the product and yes, there’s some costs that are associated with that, but really what it comes down to is scheduling right now is more important than it ever has been,” Harder said.
Floodman said that construction costs and supply chain issues have forced his company to call upon equity sooner than it ever did before.
“Usually we’ll have equity last for the first six to seven months of the project as we do the site work, etc., but now we’re having to source FF&E and different sorts of materials to ensure that we can meet the deadline that we need to. And that equity, as you all know, is not free. . . . We’re having to really budget for a much higher accrued interest than we would normally have to before the pandemic and supply chain,” he said.
Sullivan said the multifamily investment market is strong, despite the rise in interest rates and the resulting impact on cap rates.
“A lot of our deals that we underwrote 60, 90, 120 days ago are still meeting or exceeding top end pricing by the end of the competitive process. So you look at those and you feel really confident about where the investment market is,” said Sullivan.
Sullivan said he thinks that the market has hit its peak from an interest rate standpoint for most products.
“I think within 12 to 24 months we’ll be back to cap rates that we started with at the beginning of the year,” he said.
COVID changed the marketing strategies to drive qualified tenants to new multifamily developments, said Yates.
“We went a lot more digital than our typical outreach or events that we would host because we were limited to that,” Yates said.
She said the reliance on technology as a leasing tool will continue, citing virtual tours as an example.
The panelists discussed some of the current must have or desired amenities to attract and retain tenants. These include a spa room, podcast room, coop work space and secured dog parks.
Sullivan said it’s important to build spaces that are flexible.
“So the podcast room of today may need to be a massage room or it was a massage room 10 years ago. . . . Build common use spaces, leave them flexible so that whatever the podcast room is five years from now is something that you can accommodate that tenant for what they’re looking for,” said Sullivan.
“From the construction standpoint, obviously the budget becomes a concern. What we’ve been seeing on a lot of these developments is multi-purpose areas. You may have a fitness room that has a climbing structure or they’ve got a cross-fit section to it,” Harder said.
Sullivan predicts that the single family rental is the future of a big segment of the multifamily industry.
“How do you keep the person who no longer is willing to stay in a 500 to 700 SF studio on the large side, and what do they do when they start having a family and moving on. Being able to build a horizontal apartment community and still provide all of the amenities but not make somebody commit to the back end purchase of a home, I think is a way to get them into the rental space that is going to be here for the long term,” Sullivan said.
Floodman said Sunflower Development has plans potentially to build townhomes on land adjacent to some of its multifamily projects.
“[W]e would line 15 to 20 to 30 townhomes, brownstone kind of concepts that the people that live there actually could utilize the amenities of the apartment next door. They’re still in process, but we think that there’s definitely a market for them, especially because they would be 1500 to 2000 SF as opposed to the smaller studios or ones,” said Floodman.
But, building the single family rental property comes at a high price because you do not have the same economy of scale for your buying power, said Harder, unless you can command high enough rents.
“The other big issue is just the price of the dirt. That’s the reality. We’re a market in Kansas City where we might be $10 to $15 to $20 thousand per unit on your dirt. If you’re going to go price 20 townhomes, that dirt is $2 or $3 million, you’ve got a budget buster from the beginning,” said Floodman.
Although rents in Kansas City continue to rise, Kansas City’s rents, which average $1150, are really cheap compared to other markets. Sullivan said rents in Denver are $1000 more than those in Kansas City.
“High quality of life. Low cost of living. . . . We’ve got a ton of upside. Kansas City is not a secret anymore. I think people are starting to realize from a technology perspective, from an amenity experience perspective, we’ve got a pretty good quality of life,” said Floodman.
Feature photo: Homebase hosted MWM's sold-out Multifamily Summit in Downtown Kansas City last week. Mark your calendars now for MWM KC's next event - Mixed Use/Retail Summit - on July 21st. Feature photo credit: Blake Miller, Homebase. To view the event's Facebook photo album, click here.