Q2 2020 Multifamily Update

WICHITA, KS

Q2 2020

MULTIFAMILY

MARKET UPDATE naimartens.com • (316) 262-0000 435 S. Broadway, Wichita, KS 67202

OVERVIEW The Wichita multifamily market remains strong after a year of negligible fluctuations in rents, occupancy rates $725 and new units built in the market, though owners and developers are cautious given the unexpected shock of a global pandemic. Pauses on evictions and economic uncertainty have caused owners and managers to get $700 creative with day-to-day operations and be flexible on rent collection policies, but, according to local contacts, many have been able to adapt without too$675 many issues. Rent collection remained strong in March and April with a slight increase of bad debt in May. Local owners and managers indicated that less than 10% of tenants asked for rent relief. Federal relief through $650 stimulus payments and the CARES Act aided tenants in continuing to pay rent. Tenants in Class C properties were impacted the most due to a higher rate of furloughs and layoffs and being less likely to have money set aside $625in savings to cover rent. Leasing activity has been slower for the time of year but steady. Overall, multifamily managers are being proactive and continuing operations as best they can, for now, but are unsure of what the $600summer and fall will bring. The coming months will give everyone a better sense of the long-terms effects of COVID-19. $575

As for the past year in multifamily, the Wichita market remained steady with change 2014 2015 2016 2 0 1no 7 dramatic 2018 2 0 1 9 in units 2020 added, occupancy or rents. Nearly 700 units were added to the market in 2019, in line with previous averages.

Occupancy saw slight increases, with the largest change in the Class C market. Rents remained relatively flat with a less than 1% increase overall. So far,1,000 the multifamily market has not yet seen any indications of a downturn.

900 800 700 600 500 400 300 200 100

The Suites & The Flats at WSU

225 Sycamore (expected 2021)

0 2013

2014

2015

2016

2017

Units Added to the Market

2018 Occupancy

2019

2020

2021

Projected

DEVELOPMENT 3,000

•

For a number of years, the Wichita multifamily market added just over 600 units per year, then in 2017 the 2,500 market saw a large spike. Since 2017, the units added each year has fluctuated, though still averaged out to around 600 per year.

2,000

•

2019, 2020 and 2021 all seem to be following a few similar trends in development; 1,500

» A large percentage of new units being added in the Northeast quadrant 1,000

» A slower growth rate in the Northwest and Central Business District (CBD) after significant growth in recent years 500 » An increase in student-focused projects near WSU 0

•

2013or are2014 2015 to be 2016 2017 by 2021, 2018 including: 2019 In the Northeast, a few large projects have finished on schedule completed Cottages at Crestview, additional units at Stoney Pointe andTotal another Projected phase at Uptown Landing.

Class B Class C

•

Surrounding the WSU Campus, a number of new student-geared developments are adding about 450 units to the market by the end of 2020 – accounting for 65% of the units added to the market in 201951% 2020.

2020

•

After seeing a large percentage of the new units added in recent years, Northwest slowed down in 2019-2020, but is expected to gain about 200 units in 2021 with additions to Copper Creek and work on the Ridge Pointe development.

•

•

32% 2019

2018

12% 2017

Similarly, in the CBD, after a spike in larger developments, just a 0 200 400 600 800 couple smaller projects finished WSU Traditional in 2019-2020. The CBD is also projected to add more than 200 units with the completion of 225 Sycamore, the apartment portion of the Delano Catalyst project, slated for a 2021 opening.

1,000

At this time, no sizable projects have been announced past 2021. While development is still expected, the pandemic could keep new projects to a minimum as developers assess the long-term effects.

2020

OCCUPANCY •

The Wichita market saw a slight increase in overall occupancy during the past year.

•

Overall occupancy has remained stable from year to year, generally hovering around 93%, with the exception of 2015’s rate of 95%.

•

Fluctuations are seen each year depending on the number of new units added to the market. » Class A occupancy saw a large dip following the addition of more than 900 units in 2017; causing the rate to drop below 90% in 2018 and bounce back to nearly 95% in 2019 as those units were absorbed.

•

Year-over-year both Class A$725 and B remained stable around 94%.

•

The overall increase in the occupancy rate is attributed to Class C units, which has been closely correlated $700 with fluctuations in Class C rental rates over the last couple of years. » From 2018 to 2019 Class $675 C rents increased 5.5%, causing Class C renters to consider upgraded units in the Class B market, and resulting in Class C occupancy decreasing to 88% that year. $650 » In 2019, the Class C rental rate average slightly decreased, leading to an increase in occupancy to 93%. $625

•

When broken down by quadrant, occupancy rates are fairly consistent. $600

» Northeast and Northwest are currently performing the best, approximately 95%. $575at 91%. This is primarily attributed to the number of new high-end units » CBD is currently lowest 2014 2015 2016 2017 2018 2019 2020 developed in the CBD from 2017-2019 and, on the flip-side, the undesirable nature of the Class C units in the CBD.

•

Predicting occupancy trends for the next year is a challenge with the current pandemic creating uncertain conditions. Normally, the below average addition of units to the market would signal an increase in occupancy, but, given the economic effects of COVID-19, occupancy levels are instead predicted to remain flat.

1,000

95.00%

900 94.50%

800 700

94.00%

600 500

93.50%

400 93.00%

300 200

92.50%

100 0

92.00% 2013

2014

2015

2016

2017

Units Added to the Market

2018

2019

Occupancy

2020

2021

Projected

3,000 2,500 2,000 1,500 1,000 500 0 2013

2014

2015

Total

2016 Projected

2017

2018

Class B

2019

Class C

51% 2020

32% 2019

2018

12% 2017

Stoney Pointe Apartments

0

200

400 WSU

600 Traditional

800

1,000

2020

RENTS •

•

•

•

$725 $700

Average rents remained steady, with a less than 1% increase from 2019 to 2020. This follows the higher than normal increase of 4.5% that took place from 2018 to 2019 – a standard increase is 2.5% to 3%.

$675 $650 $625 $600

Class A saw almost no change, with a less than 1% increase on monthly rents.

$575 2014

2015

2016

2017

2018

2019

2020

Class B increased by 2%. Many owners continue to remodel the interior1,000 of Class B units with modern finishes and achieve $50 - $100 per month higher rents.

900 Class C rents actually decreased by 2%.800This decrease was a response to the lower occupancy rate seen in 2019 after Class C rents increased by7005.5%.

600 500

RENTAL RATES

400 Studio 300 ($/ SF)

$1.66 100

Class B

$1.140

Class C

$0.99

Overall Market

$1.11

Total Wichita Market

3,000 $0.88

2013

93.50%

93.00%

$1.16

$1.00

92.50%

2014

$0.90

2015

2016

2017

$0.78

$0.79

2018

2019

$0.69

Units Added to the Market

Occupancy

$0.93

92.00% 2020

2021

Projected

$0.81

2,000

STUDENT HOUSING 1,500 1,000

Student housing has been a hot segment of 500 the national multifamily market for the past two decades. A typical university provides on-campus housing for roughly a fifth (21.5%) of its student body, based on 175 universities 0 tracked by RealPage.

2013 2014 2015 2016 2017 2018 2019 2020 WSU has historically been more of a “non-traditional” university a higher percentage ofClass students living Total with Projected Class B C off-campus, but the WSU on-campus bed-to-student ratio has been growing since about 2005. In a six-year period 1,800 student-housing beds were added at WSU. In 2014, WSU built the first new student housing facility in several decades; the 815-bed Shocker Hall 51% predominately housing freshmen students. More recently, The Flats at WSU (369 beds) was completed in 2017 and The Suites at WSU (220 beds) in 2020 2019. Antiquated student housing facilities, such as Wheatshocker Apartments and Fairmount Towers, no longer met the needs for current student housing and were demolished 32% in 2014 and 2018 respectively.

2019

As the net number of beds increased, so has enrollment at WSU. The number of students increased from approximately 15,000 in 2014 to over 16,000 in the Fall 2019 – a more than 7% increase in a 5-year period.

2018 New housing options have led to a higher demand among students with a desire to live on campus. Occupancy at Shocker Hall, The Flats at WSU and The Suites at WSU has remained over 95% the last few years.

12%

2,600

17,000

2,400

16,500

Bed Count

2,200

16,000

2,000

15,500

1,800 15,000

1,600

14,500

1,400

14,000

1,200 1,000

13,500 Fall 2014

Fall 2015

Bed Count

Fall 2016

Fall 2017

Enrollment

Fall 2018

Fall 2019

Projected Enrollment

Fall 2020

Student Enrollment

Private development geared toward students 2017 has increased as well. Currently under construction are Aspen Heights (327 beds) located just north of the intersection of 21st & Oliver and Seventeenth (147 beds) south of campus on 17th Street. Seventeenth is now leasing as construction is near complete and Aspen1,000 Heights will 0 200 400 600 800 be finished later this summer.

WSU Traditional

Fall 2013

94.00%

Two-Bedroom ($/ SF)

2,500

As mentioned previously, on average, universities have on-campus housing options for approximately 20% of their enrollment. WSU has historically been below that average, at approximately 16%. Following the closure of the Wheatshocker Apartments, that dropped to near 12% and remained near that level until recently. Given the completion of the projects currently under construction, the ratio should increase to approximately 15%.

94.50%

One-Bedroom ($/ SF)

200

Class A

95.00%

TRANSACTIONS •

5

2016

•

•

2015

•

2019 was another strong year for multifamily transactions in Wichita, with more than 2,400 units sold. The only year with a higher volume in the past decade was 2014 with 2,700 units sold. Notable transactions of 2019: » Farmington Place Apartments

» Ridgeport Apartments

» Conquistador Apartments

» Southlake Village Apartments

» Somerset Apartments 2018 2019 2020

» Westlink Village Apartments

2017

Despite an above average number of units being sold, the total transaction values are less than $100 million.

The lower than normal transaction values do not reflect a decrease in property values. Rather, it is caused by an increase in the number of Class C units selling compared to Class B.2018 2019 2020 2021 2016 2017 2020 hadOccupancy a strong Projected beginning, with nearly 1,000 units sold in the first four months. Notable transactions include:

nits Added to the Market

•

95.00%

3,000

94.50%

2,500

94.00%

2,000 93.50%

1,500 93.00%

1,000 92.50%

500

92.00%

0 2013

2014

2015

Total

2016

2017

Projected

2018

Class B

» Kingston Cove Apartments

» Pine Creek Apartments

» Brickstone At Woodlawn

» Westview & McLean Apartments

2019

2020

Class C

Even with the concerns of what impact COVID-19 will have on the market, it is expected 2020 will be another strong year for multifamily transactions due to the solid start to the year and deals currently in the pipeline. » Activity stalled near the end of the first quarter as some buyers were more cautious and financing requirements became more difficult in specific situations.

4

2015

Total

2016

2017

2018

2019

2020

» By Class middle of the second quarter, buyers B Class C returned to a more aggressive mindset with plans to grow their portfolios.

Projected

» It is expected the number of units sold in 2020 will be similar to 2019 and surpass many of the previous years.

•

Cap rates have appeared to level off again after a few years of fluctuations. » Cap rates hit their low in 2017, which correlates with the lowest number of units sold in the market.

400 WSU

» Over the last two years cap rates have 600 climbed800closer 1,000 to levels experienced from Traditional 2014-2016 and have started to flatten.

CAP RATE Class B

Class C

10.00% 9.50% 9.00% 8.50% 8.00% 7.50% 7.00% 2013

NAI MARTENS MULTIFAMILY TEAM

2014

2020 CLOSED DEALS

2015

2016

2017

2018

2019

Q2 2020

MULTIFAMILY

MARKET UPDATE Multifamily Team

Jeff Englert

Nathan Farha, CCIM

316 847 4924

316 263 9669 nfarha@NAIMartens.com

jenglert@NAIMartens.com

© Copyright 2020 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 Company makes no guarantees, warranties or representations as to the completeness or accuracy thereof.

Pictured on cover: Seventeenth