“Basically, we’ve had just a super rosy environment over the last three years.. From a development standpoint, it couldn’t have gotten much better. When your biggest challenge is the happy trouble of trying to get materials, that’s a pretty good day,” said Joe Downs, executive vice president and general manager, The Opus Group.
Downs was the featured speaker at last Friday’s monthly breakfast meeting hosted by CCIM Kansas City.
But, Downs said, the rosy environment has quickly changed with the rise of interest rates.
“It’s just a different environment, and it’s hard to reconcile because the supply and demand metrics seem so great. The third quarter reports that the brokerage shops just issued, they’re phenomenal. Another 2.5 million SF of warehouse absorption and record construction. These are all deals that started before the last six months. Things have changed really fast, really drastically,” he said.
“What we’re sensing and experiencing is that demand is still out there. It’s hard to tell if that demand is today’s board level decisions or six or nine months ago board level decisions, but it’s still there,” said Downs.
He said that all of Opus’ properties that are unencumbered by leases are still experiencing strong prospect activity.
Downs predicts that the interest rate environment will start to put a damper on new supply.
“I think you’re going to start to see supply slowing down. . . . I think everyone is busy right now, but that pipeline for 6, 12, 18 months is a little less certain,” he said.
Downs said it is getting harder and harder for developers to get construction loans as interest rates rise.
“Lead times on materials are drastically different. We just got a precast quote in Kansas City. What was a 14 or 15 month lead time is now 6 months, 7 months so you can tell there’s early signs of [a slowdown in] the construction industry,” he said.
Downs said there is a sense that construction costs, which have risen steadily in the past three years, are starting to modulate, but it is too early to be certain.
“We’re sensing that costs are modulating. Certainly some of the supply chain items are getting worked out. It’s just going to take time, about 18 months, until we really know,” he said.
Values also have risen greatly in recent years. Downs said values are approximately 150 percent of what they were just four years ago. However, he said those values are starting to fall.
Downs said rent is the only toggle left to pick up the slack created by rising costs and dropping values.
Downs said tenants currently are willing to pay increased rents.
“I would say in the last several months, we’re talking about 10, 15, in some places 20 percent rent growth from what we were quoting in the first quarter. It’s just necessary to overcome what I was talking about on value and costs. So things are still moving along, but it’s just a much more variable environment right now,” he said.
Downs said it’s a great time for the unlevered buyer.
Opus, which will celebrate its 70th year in business next year, has been active in the Kansas City market for more than 20 years. Downs said Opus has built more than 30 buildings in the market.
He discussed some of its recent projects which include Westley on Broadway, a 256-unit mixed-use multifamily apartment building in Westport, which was delivered during COVID and is fully leased.
“It is super rare to get 1.7 acres in an urban environment. Usually, we’re dealing on half an acre. To be able to spread out like this and really create an asset of size and scale is significant,” Downs said.
Currently under construction is Briarcliff Apartments, another 256-unit mixed-use apartment project which Downs said will deliver in mid-2023.
Opus also currently is constructing Liberty Heartland Logistics Center, a five-building industrial project located in Liberty near I-35 and Highway 69. Downs said Hallmark Cards, Inc. will anchor the project and take occupancy of an 850,000 SF build-to-suit distribution facility early next year.
Downs said deals in the foreseeable future are likely to be more modest and very understandable.
“We’re very focused on understandable deals that are more simple and modest in nature and size to meet the demand and the great locations. It’s kind of what you do when things are less clear around you,” he said.