In the Lap of Luxury

Tim Hickok surveyed the rubble of a residential building sector after the real-estate crash of 2007, and the smoke rising from those ashes smelled like . . . opportunity.

For the past three years, Hickok has been hip-deep in apartment construction, which turned upward in
2011 after single-family home sales—and permitting for them—hit the skids. And he’s been busy.

“I predicted this years ago,” says the president of Hickok-Dible Companies, which not only builds and manages multifamily sites as well as investment strategies. “It’s what I call Apartment Nirvana: Millennials don’t have a job, and if they do, they got out of college and had to do something menial to get by, instead of what they studied for.”

Combine that, he says, with older Baby Boomers who are eager to downsize and get out of the maintenance requirements of home ownership, and the multifamily squeeze is on—the Kansas City market is at 95 percent occupancy, and units are going up all across the metro, especially the luxury units going in at market rates.

The numbers bear out what apartment developers and multifamily builders, single-family contractors, subcontractors and realty professionals have been going through in recent years. They also tell the story of a market recovery that differs sharply from what the nation as a whole is experiencing, and point to some eyebrow-raising trends in the longer-term single-family market—and the implications those trends have for the broader regional economy. Among the relevant numbers:

• For the first time, multifamily construction is on pace this year to top single-family building in the Kansas City region; through the first 10 months of 2014, area municipalities issued 3,168 multifamily unit permits, compared to 3,126 for single-family units. To put that in perspective, as recently as 2007, rates of single-family construction permitting were four times that of multi-family, surging to nearly 9-1 in 2010 as construction overall hit the skids.

• A 50-50 permitting split between those residential types puts this market far ahead of what’s happening nationally. Last year, apartment construction reached 33 percent nationwide, a 40-year high. The even division here means that Kansas City is outpacing national multifamily building rate by roughly half.

• On the single-family side, the region’s supply of new homes fell into what realty professionals consider a technical state of balance last year, with neither borrowers nor sellers at an advantage. But that balance took place against a backdrop of far fewer homes on the market: Current monthly sales rates are only about one-fourth of the pre-crash transaction levels—835 in June 2006—according to the Kansas City Regional Association of Realtors.

• Perhaps more troubling for the single-family sector, only once since August 2008 has the level of new home sales in any given month topped 300—and that was more than four years ago, in June of 2010.
Economists caution that not all construction is equal; on average, the costs to build a single-family home now stands at about $323,000 nationwide, sufficient to generate nearly three full-time jobs, says the National Association of Home Builders. By comparison, rental apartments on average have a construction value of $128,000—yielding just over one full-time job.

The longer-term implications of that will vary depending on how long the boom lasts. But for now, the numbers are nothing but sunshine for companies that live in the multifamily space.

Roger Neighbors, whose family contracting business scrambled to find work in 2009 and 2010 as apartment-building jobs became scarce, saw the market turn around almost immediately. By 2013, bill-
ings had quadrupled, rocketing Neighbors Construction to No. 2 on Ingram’s ranking list of top area general contractors.

“I don’t see it slowing down for several more years,” Neighbors said. “We have three years of backlog coming up for work that’s being planned,” and the longer-term outlook is promising as well. “The trend is not to own houses any more, and that has fueled apartment development and the upsurge in it. I think it’s going to stay that way.

Not everybody wants a house and a mortgage; they want to be mobile and do what they want, and they can get that by renting.”

But renting itself is changing dramatically, with the boom incorporating acre after acre of higher-rent, luxury units.

“The demand for finished units—it’s incredible right now,” says Mike McKeen, a principal with ePartment Communities. “The vacancy rates are very low in newer Class A products, and these are all market rates.”
The demand, he said, is translating into record rents in Kansas City. “We’re pushing numbers that haven’t been seen on a square-footage basis in the region,” McKeen said. “We’re really pleased with the way things are leasing up and the demand. The absorption of units as we’re building them is remaining strong. Cap rates are low, occupancy levels are high, the annual rent increases are continuing. And there’s a strong push to be in these kinds of units that haven’t been in Kanas City in the past.”

Before developers broke ground on the Village at Mission Farms in 2011, or ePartments’ projects in Briarcliff, McKeen said, “there wasn’t any significant luxury stuff built here in 30 years—that luxury market with walkable amenities and lifestyle options tapped into that pent-up demand. People sometimes don’t know they want until it’s built, but when it is and they see it, they realize they want it.”

That’s what’s driving the demand for amenities like saltwater pools, botanical gardens, concierge limo and other services, fitness rooms—“all those things that people are paying for before, separately, are now becoming part of the lifestyle at one place,” McKeen said.

Around the metro area, the range of projects is impressive:
• At 80th and Metcalf, ePartments has a $40 million mixed-use infill project that will blend office and retail space with apartment units, offering walk-to-work convenience and access to the retail venues and community attractions in downtown Overland Park.  

• In the wider-open space on the city’s south side, the Avenues at Overland Park will roll out 402 new apartment units in 40 buildings. Those one-, two- and three-bedroom units will come with attached garages for each unit, and the site will feature a clubhouse with pool and cabana when it opens next year.

• Leasing has begun at for the 176-unit 51 Main project south of the Country Club Plaza. Another ePartments project, it features amenities like a guest suite, valet cleaning and grocery store, on-site dog wash and wine lockers with a tasting room.

• The Highlands Lodge Apartments, also in Overland Park, is a 184-unit complex in five buildings that will take advantage of natural surroundings like trees and streams, provide garage parking, and connect to the new City trail.

• Neighbors Construction is erecting the 350-unit Retreat at Tiffany Woods in Northland, off Tiffany Springs Parkway.

Out west, the 311-Village West II is now under way, and on the suburban southeast side, the New Longview project is a 309-unit development. It’s a lot of quality living, but when you consider the numbers of units, is it too much?

Saturation Point?
“I’m nervous, don’t get me wrong,” says Hickok, notwithstanding the full workload he’s juggling. “I’m concerned about supply and demand, but my velocity of rent increases is about as vigorous as I’ve ever seen it. If it gets to be too much, we’ll probably just fall off a cliff—it will be a sudden event, like the currency crisis.”

One measure of how hot things has become, he said, is a super luxury project going up in Lenexa, at the site of failed condo project. “It outpaces my wildest dreams of what I could get in rent,” Hickok said. “I’m flabbergasted at what the market was willing to pay, even with the granite countertops, two-car garages, that sort of thing.”

“The only thing that needs said,” McKeen noted, “is the potential for oversaturation. A lot of this is coming in the exact same spot, building luxury products. We’re start to see that in certain areas. Two or three years ago, you could build anywhere and hit a home run. There wasn’t the competition. That’s not necessarily the case now. You have to be very strategic—you don’t want be the one caught with your pants down.”

Neighbors notes that the last of the Boomers have now turned 50, meaning the front end is past retirement age, and the back end has empty-nest syndrome. Unlike demographic waves that have come before, the sheer numbers involved in a cohort of 78 million people suggests that Boomers will keep demand elevated. They may be older, but many are fitness buffs who have a lot of years ahead, and are weighing the time involved in home upkeep against other interests that may be competing for the quality time they have left.
“Seniors are heavy into market-rate apartments right now,” Neighbors said. “Maybe they’ve sold their house or don’t want a mortgage—that’s happening. With apartments, they can lock up a unit and go on trip, they don’t have to worry about maintaining anything. They’re not old enough for a nursing home, and they’re selling their place and renting apartments with attached garages and places where they feel they have security, so for them, it’s just the next step.”

Jim DeLisle, director of the Lewis White Real Estate Institute at the University of Missouri-Kansas City, said it’s important to view the current dynamic as part of a cyclical phenomenon—one that can eventually inflict some pain if overbuilding occurs in multifamily now, the way it did in single-family in the run up to 2006.
“If we build in structural shifts without understanding them, you can get overbuilt,” he said. “I’ve been raising the flag on this for a couple of years.” As a matter of pure market change, he noted, “structural shifts don’t occur often or quickly, and the local market could be flirting with excessive supply, long term.
But that won’t be across the market; DeLisle noted. “If you look at the concentration of these new developments, they tend to be clustered,” he said. “You have to have product stratification, matching the product line up to market segmentation, where the demand is. If you get those in sync, you can increase the overall supply, but if not, you run into a problem.”

Fred Delibero, CEO of Lee’s Summit-based Summit Custom Homes, is viewing the multifamily developments from the perspective of the largest permitting homebuilder in the metropolitan area. The need is real, he acknowledges, but the growth arc isn’t infinite.

“I see that segment of residential growth leveling off over the next year or two as supply begins to outpace demand, because so many investors have flocked to that segment of the business,” Delibero said.  “Look, we’re coming off a great depression of sorts for the housing market, and 2013 was a very strong growth year that drove up prices for materials, created a shortage of qualified labor, and devoured a great number of the developed lots in the market.”

The good news, he said, is that “prices have leveled off, lot supply is stabilizing as more firms get back into single-family lot development in a much larger way, home prices remain at historically affordable prices, and mortgage interest rates are still at near record lows.”

He also noted that the resale market was gaining momentum, which is putting more buyers in the market.  
“All in all, we think 2015 will be an up year for single family construction, albeit maybe not as much as many would like,” Delibero said. “We’re calling for about a 8 to 10 percent uptick in single-family permits and sales locally in 2015, with an even greater bump of 10 to 15 percent in 2016.”

Millennials, he said, will eventually find their way into the suburban single- family home market. That might be later than previous generations, he said, but “ultimately, they’ll have a few kids and be drawn to the larger homes and safety that the suburbs offer.”