NAI Martens 2022 Multifamily Market Update

WICHITA, KS

2022 MULTIFAMILY

MARKET UPDATE naimartens.com • (316) 262-0000 1330 E Douglas, Wichita, KS 67214

NEW DEVELOPMENT New development in the Wichita market was steady from 2013 to 2019, adding approximately 650 units to the market each year. However, development experienced a sharp decline from 2020 through 2022 with under 1,000 units completed during this three-year timeframe. This decline is primarily attributed to COVID-19 with plans for construction delayed due to work shutdowns and uncertainty of the pandemUnits Added By Year ic’s impact on the market during the early phases of 1,600 COVID-19. This was followed 1,400 by sharp price increases on 1,200 material and labor shortage. 1,000 However, it appears the rate 800 of development will return to 600 the previous standard pace 400 in 2023 based on projects planned or currently under 200 construction.

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Future

The largest growth has been in the Northeast section of the market with over 1,500 units completed from 2016 to 2022 and that number is expected to double over the next few years. Included in this Northeast quadrant is Wichita State University.

Much of this new development has centered around WSU and providing modern housing for the student population. Approximately one-third of the 3,000 units added to the Northeast quadrant of Wichita over this 10-year period are in the area immediately surrounding the university. The remaining 3,000 units completed during this timeframe are Units Added By Quadrant evenly split between the 3,500 Northwest quadrant and the 3,000 Central Business District.

2,500 A couple of the most notable projects to be completed 2,000 within the next year include 1,500 the second phase of Uptown Landing, a mixed-use devel1,000 opment located just east of 500 the core area in the College Hill neighborhood and The 0 CBD NE NW Dumont, a 96-unit ground2016-2018 2019-2022 Future up construction located just west of the Riverfront Stadium in the Delano neighborhood. In Northwest Wichita, Avante Apartment Homes located near 37th Street North and Ridge Road is planned to have 132 units completed in 2023.

After three years of minimal units added to the market, developers have adjusted to the new norm of increased construction costs and higher interest rates with a strong increase of new multifamily development projected for 2023.

Vassar Flats

OCCUPANCY The occupancy rate hovered in the 93% to 94% range from 2016 through 2020. It has steadily climbed since 2018 and peaked at 95.5% in 2021. This increase is tied to fewer than normal new units built in the market over the past few years, which is related to unknowns in the early stages of the pandemic and increased costs of materials. Occupancy remained stable in 2022 with only a slight drop to 95%.

From 2014 – 2019 an average of nearly 700 units were added to the market each year. This decreased dramatically in 2020 – 2022 with less than 1,000 units completed over this 3-year period.

However, due to the stabilization of material costs and the calming of concerns related to COVID, it is expected this will change next year with over 700 units planned for completion in 2023.

The occupancy rate over the last 12 months of Class A units climbed 100 basis points from 95.5% to 96.5%. The Class A market also experienced the highest increase in average rental rates during this same period. These are both associated with the lack of new development. It is expected Class A occupancy will slightly soften in the coming years as more development projects are completed.

Occupancy in the Class B segment decreased over 100 basis points from 2021 to 2022 to approximately 94.6%. Class B is typically the most stable segment of the market. From 2016 to 2020 Class B occupancy remained within the 94.0% Units Added to the Market & Occupancy - 94.7% range each year, 1,000 97% 900 while Class A and Class C 96% 800 had more movement. Al700 though Class B occupan95% 600 cy climbed to nearly 96% 500 in 2021, the decrease to 94% 400 the current rate of 94.6% 300 93% 200 is within the standard of 100 the market and is expect92% 0 ed to remain stable over the next year.

Class C remained relativeUnits Added to the Market Occupancy ly flat at 95%. This is the strongest that Class C has performed in recent years. Over the five proceeding years, Class C occupancy hovered in the low 90s. This strong increase in occupancy over the past two years is attributed to the eviction moratoriums due to COVID-19, which caused less movement and a solid increase in Class B rents during this time period. A slight decrease in Class C occupancy is expected in 2023.

Increasing interest rates could be favorable for the multifamily market. These higher rates can eliminate the possibility for a current renter to consider the idea of purchasing a home. For example, based on a thirty-year loan a person could purchase a $400,000 house in 2021 at a 3.25% interest rate with a monthly mortgage payment of approximately $1,750. That same monthly payment would only purchase a $260,000 home based on a 7% interest rate. This is a 54% decrease in buying power based on monthly mortgage payments. This will cause many potential first time homebuyers to remain renters.

Taking all of this into consideration, we expect a slight decrease in overall occupancy in 2023 as a result of the increase in new units built in the market and natural changes in the occupancy rate after two years of being over 95%. However, the occupancy rate will remain above average based on rates experienced over the past 10 years.

Cottages at Crestview

Avante Apartments

RENTAL RATES Rental rates were virtually flat from 2019 through mid-year 2020. Landlords were reluctant to push rents due to economic uncertainty during the initial stages of the pandemic. This changed dramatically from mid-2020 through mid-2021, when the average monthly rent increased 9.4%. However, this stabilized in 2022 with less than 2% overall rental increases.

Even though the 1.8% increase over the past year is well below the traditional 2.5% to 3.0% change for the market, this is just an offset for the strong increase in 2021. The overall annual average increase from 2020 through 2022 is over 5.5%.

Class A experienced the largest increase in rents for the second straight year with 5% - 7% average increases in 2022, which equates to an approximate $50 - $100 rise in monthly rents. This is attributed to the lack of new development over the past couple of years and continued demand for quality product.

Class B is the largest segment of the market and monthly rents increased on average $10 to $20 per month. This is more of a standard increase that would be expected, compared to the average $60 - $70 per month increases experienced in the previous year.

Class C rents were virtually flat with less than 0.5% increase year-over-year. These rents remained nearly unchanged due to the over 6% increase from the previous year and the cost-sensitive nature of the Class C tenant. A larger increase in rents would begin to make Class C rental rates comparable to Class B, which would lead to a higher turnover rate in these properties. The stable Class C rates kept occupancies at 95% for the second straight year.

Rental Rates Studio ($/ SF)

One-Bedroom ($/ SF)

Two-Bedroom ($/ SF)

Class A

$1.79

$1.35

$1.18

Class B

$1.28

$0.99

$0.86

Class C

$1.07

$0.91

$0.81

Overall Market

$1.21

$1.04

$0.90

Total Wichita Market

$0.97

Year-over-year rental rates tend to ebb and flow in the Wichita market. If there is a higher than normal increase one year, increases the following year will be below average. For example, from 2014 to 2022 odd-year increases averaged 5.2%. Conversely, even-year increases only averaged 1.5%.

Therefore, due to the standard market flow, slowdown in the home buying market and the influx of new development (which demand higher rents) it is expected rental rates will rise above 3% in 2023.

Average Monthly Rent $800 $775

1.8%

$750 $725

9.4%

$700

0.4%

$675

3.9%

$650

2.7% $625

1.2%

$600 $575

4.6%

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TRANSACTIONS 2021 was a record year for multifamily transactions in the Wichita market. Nearly 4,000 units were sold last year totaling $250,000,000 in dollar volume. Previous years peaked at just over 2,500 units and transaction value has averaged approximately $100,000,000 per year. 2022 is on pace to rival or surpass the number of units sold in 2021. As of August, nearly 3,000 units have sold year to date, totaling over $200,000,000 in volume.

The 2021 increased activity continued into early 2022 with over $42,000,000 of property closed in January. Transactions slowed in Q2 2022 as interest rates climbed, but that quickly turned around in Q3, led by the sale of a 10-property portfolio consisting of nearly 1,000 units. This transaction accounts for one-third of all units sold year-to-date. It is expected 2022 will close the year with nearly 4,000 units or more sold, creating the potential for another record year in spite of the increased interest rates. The total transaction dollar volume could surpass $300,000,000 due to increased values and the higher number of Class A units trading in recent years.

Multifamily Units Sold - Wichita, KS 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0

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Projected

Properties sold year-to-date include a mixture of smaller and mid-size properties with a few larger transactions. Notable YTD transactions include: » Broadmoor at Chelsea

» The Eaton Place

» Pinnacle Lofts & Apartments

» Lacrosse Apartments

» The Landing at Woodlawn Tower

» 10-Property Portfolio

» Westport Apartments

» Main Street Residences

Even though demand softened mid-2022, cap rates have continued to decrease. These declining cap rates have been across the board in each class of the market with approximately 100 basis points separating each class Multifamily Cap Rates - Wichita, KS segment. The decreased cap rates are primarily attributed to 9.00% the demand in late 2021 and 8.50% early 2022, prior to interest 8.00% rate increases. It is expected the rising interest rates will 7.50% cause cap rates to level off 7.00% and potentially experience a 6.50% slight increase throughout the remainder of 2022 and into 6.00% 2023. However, property values 5.50% should remain stable resulting 5.00% 2018 2019 2020 2021 2022 YTD from increased rental rates and net operating incomes.

Class A Class B Class C

2022 Wichita Multifamily Update

NAI MARTENS MULTIFAMILY TEAM

CLOSED DEALS

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Jeff Englert

Nathan Farha, CCIM

Trent Garman

Carla Sandwell

Senior Vice President 316 847 4924 jenglert@NAIMartens.com

Senior Vice President 316 263 9669 nfarha@NAIMartens.com

Commercial Advisor 316 613 2447 tgarman@NAIMartens.com

Assistant - Multifamily 316 928 8612 csandwell@NAIMartens.com

1330 E Douglas | Wichita, Kansas 67214 © Copyright 2022 NAI Martens. Reproduction in whole or part is permitted only with the written consent of NAI Martens. The information contained herein was obtained from sources believed reliable; however, NAI Martens makes no guarantees, warranties or representations as to the completeness or accuracy thereof.