Q3 2019 Multifamily market update

Q3 2019

MULTIFAMILY

MARKET UPDATE

DEVELOPMENT THE FUTURE OF WICHITA’S MULTIFAMILY MARKET The past few years Wichita has seen numerous new complexes enter the market through new construction and through redevelopment of older structures. More than 1,000 proposed units are on the drawing board across Wichita. From 2014 to 2016 an average of 650 units were added per year with a spike in 2017 as over 800 units were added.

The trend moving forward seems to be in line with 2018’s 500 units a year pace.

The northeast quadrant saw the The Cottages at Crestview completion of the 348-unit Cottages at Crestview in 2019. The CBD had a few unique projects completed, with the Spaghetti Works building converted to 41 apartments and shipping containers transformed into 8 studio apartments at 430 S. Pattie.

Only two projects are currently under construction. Copper Creek at Hampton Lakes is being built in phases, with the first 108 units complete this year, the next 108 expected to be finished in 2020 and the same amount slated for 2021 or beyond.

NEW UNITS ADDED TO THE MARKET BY YEAR 831

651

654

808

640

533

507

505

347

2013

2014

2015

2016

2017

2018

2019

2020

Future

The Gentry Apartments near Wichita State University, an 84-unit project in two buildings along 17th Street, broke ground in late July. Plans were announced for another project, the 150-unit University Gardens Apartments, which will be located at the northeast corner of 21st & Oliver.

95% A number of proposed projects would add an additional 1,019 units to the market. One of the largest proposed is the 204-unit Delano Catalyst project, slated for the area northwest of Douglas & 95% McLean. The project also includes a hotel and 10,000 square feet of commercial space. The original project had94% an October 2020 deadline, but recently the city council moved the deadline to June 2021.

The Ridge Pointe development has yet to begin construction. The project would create a 13294% unit community consisting of two- and three-bedroom residences. Ridge Pointe will be located along Ridge Road between 37th Street and Highway K-96.

93% Development activity in Wichita is slowing somewhat after a busy few years, particularly in the CBD. It is 93% likely fewer than 350 units will be added in 2020. However, a number of projects have been announced and are in the planning stages in the CBD, northeast and northwest quadrants, so 92% development has the potential to pick2015 back up in the near2017 future. 2018 2013 2014 2016 2019

OCCUPANCY 831

651

OCCUPANCY OVERVIEW 533

654

808

640 507

505

The Wichita multifamily market is projected to end 2019 adding about 500 units, approximately 347 the same number as in 2018. Distribution throughout the market differed. In 2018, new units focused on the CBD while 2019 saw the strongest development in the northeast. The new units entering the market did not appear to have had a major effect on occupancy, considering northeast occupancy increased since last year. Occupancy in the CBD increased, showing that 2013 2014 2015 2016 2017 2018 2019 2020 Future the 350 units added to the downtown market in 2018 and the repositioning of the Renew Wichita luxury apartments were well received.

The CBD Class A inventory OCCUPANCY RATE has experienced strong 95% 95.5% absorption, with all properties operating at over 90%. The overall 95% 95% CBD Class A occupancy increased 94% 94.5% from 88% in mid-2018 to 94% 94% in mid-2019. Overall, Class A 94% occupancy showed improvement, 93.5% 93% increasing from 90% last year to 93% 94.5%. The northeast remained 93% steady, reporting a current rate of 92.5% 92% 2013 2014 2015 2016 2017 2018 2019 95%. The northwest saw the most improvement, going from the lowest Class A occupancy in the market last year to the highest this year, due to new construction units being absorbed.

Class B apartment complexes represent the majority of the apartment inventory in Wichita making up 70% of the units available in the market. Class B has been a very steady market with 94% of available units currently occupied. The southeast region has the strongest occupancy, with a rate of 95.5%. The northwest contains the largest amount of Class B units, accounting for 32% of the market, and currently has an occupancy rate of 93.5%. Given the strong demand for units in the Class B rental rate range and the convenience-oriented locations of a majority of complexes, this market is likely to remain steady.

Wichita Class C communities reach tenants searching for below-market affordable housing options. The Class C market saw a slight decrease in occupancy, going from 91% in 2018 to 88.5% this year. The southeast quadrant, which contains the largest percentage of the Class C units, saw a 5% drop in occupancy. Much of this decline is due to lower performing Class B properties reclassified as Class C properties, thus increasing the inventory. Well maintained Class C properties are operating above 90% occupancy.

RENTS

RENTAL RATE OVERVIEW Overall rental rates increased and mid-2019 monthly rents were 4.5% higher than a year ago. These were above typical increases, with the year-over-year change normally in the 2.5-3.0% range. New development in 2017 caused higher rents which is the most likely reason for the large increase. With development slowing, however, it is likely the market will once again level out. Considering the response to increased rents in 2019, rent growth is not likely to have a negative effect on occupancy in the near future.

A units downtown continue to perform well with significantly higher rents than northeast and northwest.

Class A:

Class C:

Class A monthly rents were flat overall. Rental rates per square foot increased significantly however, with studio rents increasing by $0.21/SF. This sharp increase is due to smaller urban units added to the CBD. Class

Monthly rents in Class C increased by 5.43%.

All unit types except two-bedroom reflected this increase. Historically, when the market has seen a strong increase in Class C rents, the following year rates remain fairly steady.

Class B: Class B has historically been the most stable market. Monthly rents increased by 5.84% this year. Rents increased in all unit types, with the largest improvement being in three-bedroom units. The rental rate per square foot also increased across the board and, similar to Class A, saw the biggest change in studio units.

RENTAL RATES Studio ($/ SF)

One-Bedroom ($/ SF)

Two-Bedroom ($/ SF)

Class A

$1.59

$1.17

$1.00

Class B

$1.07

$0.86

$0.74

Class C

$0.99

$0.82

$0.70

Overall Market

$1.07

$0.91

$0.79

Total Wichita Market

$0.86

SELLER’S MARKET Activity in the Wichita multifamily market has been very robust in recent years. Transaction levels reached a high in 2015 and 2016 with over $120M of properties sold each year. 2017 and 2018 were slightly lower, but demand for quality product continues. $155,000,000

• Over 14,000 units have sold $135,000,000 in the Wichita market over the past 6 years, which accounts $115,000,000 for over 40% of the market.

DOLLAR VOLUME SOLD $155,000,000 $135,000,000 $115,000,000 $95,000,000 $75,000,000 $55,000,000 $35,000,000 $15,000,000

2013

2014

2015

2016

2017

2018

2019 Projected

$95,000,000

•$75,000,000 Buyers have been aggressively growing their portfolios in the Wichita market in an effort to remain ahead of increasing interest rates. $55,000,000

13.00%

• The decline in transaction volume over the past two years is due to a lack of available properties.

12.00% $35,000,000 Buyer demand for quality assets is stronger than ever, which has led to many properties selling 11.00% $15,000,000 off-market and above asking price in some instances.

2013

2014

2015

2016 2017 10.00%

2018

2019 Projected

• These factors have created a seller’s market for multifamily with increasing values.

9.00% 8.00% 7.00% CAP RATE 13.00%

6.00%

12.00%

2013

2014

2015 Class B

11.00% 10.00% 9.00% 8.00% 7.00% 6.00%

2013

2014

2015 Class B

2016

2017 Class C

2018

2016

2017 Class C

2018

2019 Projected

Values have INCREASED due to STRONG DEMAND

2019 Projected

Multifamily values have increased along with demand. The average per unit sale price has varied in the recent years, primarily due to the quality of product that has been available more recently.

However, cap rates have steadily decreased since 2013 and more recently leveled off.

• New units have steadily been added to the Wichita market since 2013. However, very few Class A or new construction developments have been sold. This has created high demand for 100+ unit, stabilized, Class A/B properties.

• Values will most likely remain steady or potentially increase due to strong buyer demand as long as interest rates do not see major changes.

The combination of strong demand and decreased cap rates, which may have reached their lowest point with the potential to climb, creates the ideal timing for an owner to consider selling their property.

Q3 2019 W I C H I TA , K A N S A S

MULTIFAMILY MARKET UPDATE

Multifamily Team

Jeff Englert

Nathan Farha, CCIM

316 847 4924 jenglert@NAIMartens.com

316 263 9669 nfarha@NAIMartens.com

© Copyright 2019 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.