COVER STORY Broker Q&A: Kansas City dealmakers weigh in on cap rates, inflation, plus hot topics with clients T he apartment sector is unequivocally the darling of the commercial real estate in-vestment community today. Multifamily property and portfolio sales nationally totaled $335.3 billion in 2021, up 128 percent over the prior year, according to Real Capital Analytics. The volume of multifamily sales in 2021 was slightly more than double the volume of in-dustrial sales, the next most frequently traded property type. To gain more insight into investment sales trends in greater Kansas City, Midwest Multi-family & Affordable Housing Business conducted a Q&A with a few industry experts based locally. The trio included Michael Spero, senior direc-tor at Berkadia; Northmarq’s Gabe Tovar, vice president of investment sales; and Northmarq’s John Duvall, vice president, debt and equity. What follows are their edited remarks. Midwest Multifamily and Affordable Hous-ing Business: What’s been the big story in the Kansas City apartment market over the past year? Gabe Tovar, John Duvall: Investors are search-ing for yield, and the secondary market has proven to be a resilient harbor for new capital entering the asset class. New market entrants in 2021 included several new syndicators, private capital funds, and institutions all landing their first acquisition in this hyper-competitive sec -ondary market. generally well into the low-to mid-4 percent range for most deals that we currently analyze and bring to market. Value-add deals are often compressed about 25 basis points versus truly stabilized deals, given the value-add upside component going forward in the first few years of a new hold. For the right offerings featuring truly tremen-dous upside, in-place cap rates can even dip below 4 percent, as long as there is a clear path to immediate income bumps, and/or expense reductions over the first two to three years of the hold. A good number of buyers can be pa-tient for the first few years after their purchase, so in-place cap rates are really looked at in com-bination with pro-forma cap rates to determine what the cap rate is around year two or year three of the hold. With the expectation of continued upward movement on interest rates moving forward this year, I could see the in-place cap rate en-vironment move upward as well. We will also be closely monitoring spreads as we proceed in 2022. MMAHB: Is there a deal that you completed in 2021 in the Kansas City apartment market that was particularly newsworthy? If so, can you provide us with the granular details? Tovar, Duvall: We represented the seller of Park 67, a 352-unit community in Johnson County that sold in the third quarter of 2021. At the time of marketing, ownership had completed three iterations of unit upgrades across 30 percent of the property and were generating an average $160 premium on those renovations. We posi-tioned the opportunity to complete a program-matic renovation across the remaining units, complemented by an exterior upgrade to align the property with the competitive set. Our Midwest team generated 14 qualified of -fers from local, regional and national investors. Ultimately, the highly competitive bid process led pricing to a 3.67 percent cap rate (assuming a 90 percent tax reassessment), and the first ac -quisition for a new market entrant based in the Southeast. MMAHB: Inflation hit a fresh 39-year high in December. The Consumer Price Index jumped 7 percent year over year, the fastest pace since 1982. What impact does that high rate of infla -tion have on tenants and landlords? Tovar, Duvall: Inflation has no favorites, and unfortunately in this case its tide is raising all boats. What commenced in durable goods from supply chain constraints has been multiplied by a talent war where investors now see inflation in every line item, from make-readies to the sal-ary of a manager. Resi-dents see the final result in their rent and consum-er goods. Its effect is most broad-ly seen in development, especially as projects are priced and planned several months, if not years, in advance. The one beneficiary is multi -family owners who are now sellers. The capital markets environment has positioned them well to capture record pricing driven by an ever-increasing demand from investors seeking to hedge against inflation. This is observed across the board, from high-net-worth individuals to in-stitutional funds shifting capital allocations from alternative assets, and even other real estate sec-tors, into multifamily. GABE TOVAR Vice President of Investment Sales, Northmarq JOHN DUVALL Vice President, Debt and Equity, Northmarq Michael Spero: A major talking point for Kan-sas City’s apartment market over the past year has been resiliency. Even in the face of the ongo-ing pandemic and political and economic uncer-tainty, well-managed properties in Kansas City have held firm. Physical occupancy has been very stable, and collections for a majority of the properties we look at have been strong. General market rent growth and value-add pursuits are achievable in today’s Kansas City apartment market, which hasn’t necessarily been the case in other markets around the country. This resiliency, combined with Kansas City’s diverse set of major employers making up our local economy, continues to help attract out-of-town capital to the region, including new first-time buyers. MMAHB: What has been the recent trend in cap rates in the Kansas City apartment market, and what’s the near-term outlook? Spero: Our cap rate environment is compressed in Kansas City. We look at in-place cap rates on a tax-adjusted basis with reserves factored in. With this view of in-place cap rates, we are Spero: What’s interesting is that we have been witnessing a major increase in home purchase prices here in Kansas City, while still seeing a great deal of demand for single-family product even with the elevated pricing. Homes are stay-ing on the market for extremely short periods, and the bidding environment among prospec-tive buyers is very competitive. This leaves many first-time home buyers frustrated as the process to purchase is currently very difficult to complete. The challenge for many to buy single-family homes — combined with inflationary-related restrictions placed upon general consumer spending — can serve as a benefit to apartment landlords as it helps to keep renter demand strong with a lot of prospective buyers unable to compete on and ultimately complete purchases. Homebuyers have been in hot pursuit of the low interest rate environment. But with rates anticipated to rise, this may cool off the single-family market and keep renter demand strong given the less favorable debt available to the consumer. Looking at the big picture for sellers of apartment product, we still see a lot of buyer capital out there looking to be deployed and with very positive views of Kansas City, both historically and in the years to come. www.REBusinessOnline.com 16 | Midwest Multifamily & Affordable Housing Business | January/February 2022