Kansas City is the most centrally located major metro area in the nation. Often referred to as the Heartland, or Heart of America, it typically off ers a steady pulse, with the rise and fall of economic trends having a more gradual impact than in most other areas.

In its usual way, Kansas City trailed the rest of the country in entering the Great Recession, and it is also trailing in the recovery, with job losses continuing through August. Even so, the August unemployment rate of 8.7 percent was below the national average. The Mid-America Regional Council recently off ered an encouraging assessment of Kansas City's job market, projecting job growth in the range of 5,000 to 19,100 positions for 2012.

Despite the slow economic recovery, several locally based companies continue to expand, including Cerner Corp., Children's Mercy Hospitals and Clinics, Burns & McDonnell, UMB Financial Corp., and Waddell & Reed Financial. However, the most recent major announcement came from Ford, which said it would invest $1.1 billion in upgrades to its Kansas City–area plant. When the upgrades are complete, the Ford workforce will grow by 1,600 to a total of 5,400 jobs. These new jobs will be an additional boost to an apartment market that is already showing strength. And investors interested in looking beyond coastal urban core markets are beginning to take note.

Solid Fundamentals

The Kansas City apartment market improved in each of the primary measures of market condition in the first half of 2011. Vacancy rates declined, rents increased, and the frequency of concessions fell.

Kansas City's vacancy rate averaged 6 percent in June. This was 200 basis points (bps) lower than at the end of 2010, according to Cassidy Turley's semi-annual survey of the apartment market. Vacancy of Class A properties also fell by 200 bps from December to June and was just 4 percent at the end of that period. Across classes and submarkets, almost every sector recorded a drop in vacancy through the first half of 2011.

Rents increased by 2.5 percent from December to June for all classes, reaching an average of $751 metrowide, but Class A properties showed the greatest strength. Average Class A rent was up 4 percent over the end of 2010, reaching $919 in June.

Concessions have been a fixture in Kansas City's apartment market for more than a decade, but the trend is currently headed in the right direction. At the end of June, a concession was off ered by 58 percent of properties, down from 74 percent at the end of December 2010. The drop is encouraging, and as vacancy remains low, the trend is likely to continue.

Modest employment growth, combined with favorable housing trends, will provide additional improvement in fundamentals during the next two to four years.

Construction Is Rebounding

According to the Home Builders Association of Greater Kansas City, the Kansas City metropolitan area produced between 3,000 and 5,600 multifamily permits annually from 1997 to 2006. Then, developers put their plans on hold, thwarted by the vice grip on credit in the broader economy. In 2010, only 253 permits were issued. Thankfully, construction is beginning to rebound from this near-death experience. Through the first eight months of this year, 576 permits were issued for the region, and that number is projected to grow.

Johnson County, Kan., has long been the focus of all types of development, including apartments. In the affluent community of Leawood, Kan., construction is under way on 215 units at The Village at Mission Farms, part of a mixed-use development that includes retail and office space. Less than a mile west, in Overland Park, Kan., 288 units are planned in a development named Highlands Village. Construction is slated to start there next year.

The Plutus Capital Group of Kansas City, Mo., has announced a 375-unit project called Huron Hills for the western part of Wyandotte County, Kan., and construction may start there early next year. Locally based Price Development Group plans to build a 188-unit property named 46 Penn in the upscale area called the Plaza in Kansas City, Mo. Some smaller projects are also in the works.

Investment Outlook

After a lull in 2009 and 2010, the sale of apartments is also up in Kansas City. The value of transactions in the first eight months of 2011 exceeded $160 million, according to data from research firm Real Capital Analytics and other sources. This was well above the metro's annual totals for 2009 and 2010, which were $89 million and $76 million, respectively.

Local investors remain active in the market, but the number of outside investors pursuing Kansas City properties has increased. Interest in well-occupied Class A properties is intense. Cap rates for these assets have been in the range of 6 percent to 6.7 percent this year.

In 2009 and 2010, only three sales involved properties built in the past decade. In the two years combined, only one property sold for more than $100,000 per unit. In contrast, transactions in 2011 have included five properties built since 2000, four of which sold for more than $100,000 per unit.

The highest unit price to date was for the 276-unit Fairways at Corbin Park, in Overland Park, Kan. It was completed in 2010 and sold in August 2011 for $30.5 million, or $110,500 per unit. The 324-unit Cordillera Ranch sold in June for $32.5 million, or $100,500 per unit. It occupies the part of Kansas City, Mo., that lies north of the Missouri River and was built in 2009. Both transactions were 1031 exchange deals facilitated by First American Exchange Co.

The next major transaction on the horizon is the sale of The Briarcliff City Apartments. This 263-unit luxury apartment community opened in 2010 and is currently on the market. It is expected to trade quickly and at a cap rate below 6 percent. With this as a benchmark, other owners of quality product may put their properties on the market soon.

Indeed, as Kansas City's occupancies stabilize and concessions burn away, the development and dealmaking side of the business is ramping up. And the appeal of upper-end properties is expected to continue, as sellers of institutional-grade property achieve solid cap rates, and buyers lock in the lowest interest rates they've seen in years. And that's great news for the Heartland.

Carolyn Bagnall is director of research for Kansas City–based commercial real estate research firm Cassidy Turley.