Q3 2021 Multifamily market update

WICHITA, KS

Q3 2021

MULTIFAMILY

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

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 in 2020 with just over 300 units completed. This decline is partially attributed to COVID-19 with plans for construction delayed due to work shutdowns, uncertainty of the pandemic’s impact on WSU Traditional the market, and sharp price increases on material.

25% The largest project completed 2021 in 2020 was the 150-unit As76% pen Heights, located near the Wichita State University cam2020 pus. This continued the trend in recent years of new hous32% ing development near or on 2019 campus. From 2019 to 2021, more than 500 student hous200 400 600 800 0 ing units have been completed at WSU, accounting for over one-third of the total units built in the Wichita market during that time. Yet, with only 55 additional units planned for 2022 and no new project announcements at this time, it appears the student housing trend is slowing down.

From 2016 to 2018, most of the units added to the market came from the Northwest sector and Central Business District (CBD). Due to developments surrounding WSU and the completion of the Cottages at Crestview, the Northeast quadrant saw the most activity in 2019 and 2020. The Northeast quadrant will likely continue to lead in new development with additional construction 2016-2018 2019-2021 Future planned for Uptown Land2,500 ing in College Hill and Stoney Pointe Apartments near K-96 2,000 & Greenwich.

New development in 2021 is 1,500 up from last year, with approximately 500 units expected to 1,000 be completed before the end of the year. The largest devel500 opment, 225 Sycamore, was completed in the spring and 0 CBD NE NW added 204 Class A units to the Delano neighborhood in the CBD. The property opened with high praises and strong pre-leasing due to its high-end finishes and Class A amenities. Development in the CBD is expected to drop soon, with no new major projects announced.

Overall, 2022 will likely mimic 2020 in terms of new development in Wichita, with only a handful of projects under construction or announced. Development is expected to increase again in 2023, and beyond, as construction material costs stabilize, remaining concerns from the pandemic cease, and developers announce new projects.

National Development Outlook Much like Wichita, development delays across the country were primarily due to permitting, entitlement and professional services, construction costs, lack of general labor, and economic uncertainty. Many projects have had to re-price construction costs and make budget modifications, because of an approximate 201% increase in lumber costs. Still, multifamily is seen as a solid investment, as investors shy away from the retail and office sectors and move toward buying existing multifamily housing — or even develop new properties, despite sharp cost increases — due to solid rents and increasing occupancy.

OCCUPANCY The occupancy rate hovered in the 93% to 94% range from 2016 through 2020 but climbed to 95.5% in 2021. Fluctuation in occupancy is usually tied to development trends, as occupancy often lowers following years when a large number of units were added to the market. For example, in 2017 there were 900 units added to the market, the most recorded in a single year.

The following year, occupancy dipped below 93%. Class A properties are primarily impacted as new construction creates more options. In 2018, Class A occupancy dropped below 90%, but jumped back to nearly 95% in 2019 as new units were absorbed.

This trend continued in 2020 and 2021 – as 2020 saw a record low number of units added, while occupancy is now at a record high. Increases in occupancy were across the board in virtually all quadrants of the market, and throughout Class A, B and C properties.

Units Added to the Market 1,000

Occupancy 97%

900 800

96%

700 600

95%

500 400

94%

300

The largest increase was 200 93% in the CBD, which had 100 about 1,000 units add0 92% ed from 2016 to 2019 2013 2014 2015 2016 2017 2018 2019 2020 2021 – keeping occupancy during those years hovering around 90%. By contrast, no new projects opened in the downtown area in 2020, allowing the occupancy rate to climb to nearly 95%.

Occupancy rates in both Class A and B increased roughly 125 basis points, and Class C outperformed both of those segments with a 180-basis point increase. This would be expected since the Class C market has been the most volatile in recent years, fluctuating from 88% to 93% from 2019 to 2020, and increasing to 95% in 2021.

While the development/occupancy trend is a large variable, the decline in units added and increase in occupancy are also partially attributed to the pandemic. The eviction moratorium and concerns surrounding COVID-19 led to fewer people relocating, keeping occupancies strong.

Additionally, federal government stimulus checks, increased unemployment benefits, and PPP loans allowed for rent collections to remain constant.

A slight decrease in the market occupancy average is likely to occur in 2022, predominantly in the Class C segment, as life returns to a new normal post-pandemic and allows for a basic market correction.

225 Sycamore

RENTS Rental rates were virtually flat from 2019 through midyear 2020, with a less than 1% increase. Landlords were reluctant to push rents due to economic uncertainty during the initial stages of the pandemic. This changed dramatically from mid-2020 through Q2 2021, when the average monthly rent increased 9.4% from $697 to $763.

$775 $750 $725 9.4%

$700 0.4%

$675 3.9%

$650

2.8%

$625 4.6%

1.2%

$600

2.8%

$575

2014

2015

2016

2017

2018

2019

2020

2021

This was a trend experiPercentage Change Year-Over-Year enced across the country.

According to Yardi Matrix, nationally asking rents for non-leased apartments grew 6.3% from June 2020 to June 2021, the highest annual increase since it began tracking data. The national average apartment rent in June was a record $1,482. This comes after sluggish apartment rental rate growth, and even declines in some metros, through much of 2020. The average Wichita rental rate is still half the national average.

Even though the 9.4% increase is unprecedented in the Wichita market, the annualized change over the past 24 months was below 5% and closer to the traditional 2.5% to 3.0% average change for the market.

Rental Rates Studio ($/ SF)

One-Bedroom ($/ SF)

Two-Bedroom ($/ SF)

Class A

$1.65

$1.28

$1.11

Class B

$1.20

$0.96

$0.85

Class C

$1.07

$0.89

$0.80

Overall Market

$1.21

$1.02

$0.89

Total Wichita Market

$0.96

Class A experienced the largest increase in rents. This was expected as Class A rates had the lowest increase during the previous year. However, the opening of 225 Sycamore has pushed rates up for this segment.

Class B is the largest segment of the market and monthly rents increased on average $60 to $70 per month. This is partially due to the renovation of some units, with modern finishes allowing owners to achieve increased rents.

Class C increases were more significant, averaging $75 to $100 per month more than the previous year. Class C rents tend to be more volatile – from 2019 to 2020 they decreased 2%, which contributed to the larger increase in 2021. Class C rents are trending closer to Class B rents, but remain approximately $125 per month lower.

Seventeenth

Seventeenth

TRANSACTIONS Multifamily sales in Wichita have remained strong over the past decade, with over 2,000 units sold per year (apart from 2016 and 2017), and transaction volume averaging over $100,000,000 per year. In mid-2020 a sharp decline in transactions was expected due to the uncertainties created by the pandemic. However, by Q3 2020 it had become fairly evident that there was little to no negative impact from COVID-19 on the Wichita multifamily market.

Throughout 2020, occupancies remained strong and rent collections constant, allowing multifamily transactions in Wichita to surpass $175,000,000 and over 2,500 units sold. The stability in the market, coupled with the decline in interest rates, spurred activity in the second half of 2020 which continued into 2021. With over just 1,000 units sold in the first half of 2021, it appeared the Wichita market was on track to meet the average 2,000 units sold per year.

However, due to a large portfolio that closed in early Q3 and based on current activity in the market, 2021 could realize another record year with nearly 3,000 units sold.

Closed

Projected

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

2014

2015

2016

2017

2018

2019

2020

2021

Most of the properties sold year-to-date are smaller, mid-size properties. Activity is expected to continue throughout the remainder of the year in the mid-size property segment. Notable YTD transactions in this segment include: » Amidon Place Apartments

» Ashley Lane & Acosta Oaks Apartments

» Cimarron Apartments

» The Place Apartments

» Boulevard Apartments The most notable transactions, though, are the sale of the Fidelity Management portfolio and the 208-unit newer construction Sunstone Apartments in Andover. The Fidelity portfolio consisted of nearly 700 units in the Wichita market, along with an additional property in Topeka.

As demand has remained strong, cap rates have continued to decline. Cap rates trended upward in 2018 and 2019, which correlates with the period in which fewer units were sold in the market.

With increases in the number of units sold, cap rates have declined. For the first time, the average cap rate for Class B, the largest segment of the market, dropped below 7.0%. In previous years sales of Class A properties were nonexistent in Wichita. That has changed more recently, and 2021 YTD cap rates on Class A properties have dropped below 5.50%. With Class AClass B Class BClass CClass C the rental rate increases seen over the first half of 2021, it 9.00% is expected the average 8.50% price per unit and total dollar 8.50% 8.00% volume of transactions will 7.50% continue to increase, as net 8.00% operating incomes climb. If 7.00% 7.50% the demand for multifamily 6.50% remains strong and the cost 6.00% 7.00% of capital low, cap rates 5.50% will remain at this level or 5.00% 6.50% continue to decline.

2016 2018 2017 2019 2018 2019 2020 2020 2021 2021

Q3 2021 Wichita Multifamily Update NAI MARTENS MULTIFAMILY TEAM

2021 CLOSED DEALS

CLOSED

CLOSED

CLOSED

CLOSED

CLOSED

CLOSED

CLOSED

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

Multifamily Specialist 316 613 2447 tgarman@NAIMartens.com

Executive Assistant - Multifamily 316 928 8612 csandwell@NAIMartens.com

435 S. Broadway | Wichita, Kansas 67202 © Copyright 2021 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.

Pictured on cover: 225 Sycamore