Trouble ahead for Wichita’s landlords; for renters, a break

12 Feb Trouble ahead for Wichita’s landlords; for renters, a break

These are pretty good days for Wichita-area landlords, but trouble is brewing.

The occupancy rate in January was virtually the same as a year ago, but some in the industry expect landlords to start having more trouble finding enough tenants because of an avalanche of new apartment projects set to open this year and next.

According to a recent survey by Wichita Apartment Guide, the area’s apartment complexes and buildings – with a combined 20,222 units – had an occupancy rate of 92.2 percent in January, down slightly from the 92.8 percent of a year ago. The survey does not include many of the city’s smaller complexes and one- or two-unit rentals.

The result could mean a slowdown in rent increases for the city’s 135,000 renters.

Occupancy rates of more than 90 percent occupancy are generally considered strong enough to raise rents. In the last year, nearly two-thirds of the apartment complexes in the survey said they raised rents in the last year. The average increase was 4.5 percent, or between $20 and $40 a month, according to the survey.

Andy Brooks, office manager at the Southfield and Oliver Court Apartments, 3161 S. George Washington Blvd., said his complex caters heavily to McConnell Air Force Base and Spirit AeroSystems. It’s typically at least 90 percent occupied.

“We try our best to keep it full,” he said. “There’s always a couple of units that are getting some work.”

The occupancy rate in the Wichita area has been rising since 2010-2012, when it hit a low of 89 percent citywide and lower in some sections of the city.

The popping of the housing bubble and lingering personal credit problems forced many homeowners or prospective homeowners to rent, instead. The trend has also been greatly assisted by growth in the numbers of the millennials, who are in their teens and 20s, typical ages for renters.

In the past, occupancy rates have had to rise to about 95 percent to spark new construction, but not this time.

Very low interest rates have altered financing formulas, making borrowing money to build apartments cheaper while also punishing the returns on other types of investments.

The result is more than 2,500 units built, under construction or planned for the Wichita area last year, this year and next year. That’s roughly a 10 percent increase in units overall, and a much larger increase in Class A – the newest, nicest apartments.

“When developers are optimistic and the lenders are motivated, that’s a formula for overdevelopment,” said Randy Johnston, an agent for J.P. Weigand who handles a lot of multifamily real estate.

Johnston said it’s possible that not all of the planned units will get built – at least not right away. Developers monitor the speed at which newly opened complexes fill up – a key financial metric.

“If the last couple are slow to fill, the other guys take notice and shut off the pipeline,” he said.

The results are already being felt.

“Where we are seeing some slowdown is in (demand for) Class A with the onset of the new construction,” said Samala Holt, vice president for apartments for Builders Inc. “There’s not necessarily a lot of new open at the moment, but it’s coming and it has caused the market to become stagnant because they are waiting.”

As these new units come on line, she said, the way it will play out is:

The new units are all Class A. They won’t affect other Class A properties, but it will force Class B properties to reinvest or lower rents to stay competitive. The losers will be Class C landlords who will see their tenants leave for Class B properties.

Holt said Builders Inc., owned by the Garvey family, consists mostly of Class C units.

“Yeah, we will see some issues in Class C,” she said. “We will have to get better in our marketing.

“Right now, they just lease themselves.”

Craig Hanson, president of Weigand-Omega, said he is seeing a softening of the market already, with more to come.

“There will be continued pressure as all the new supply comes into the market,” he said.

Adding 10 percent more apartments won’t necessarily be a train wreck for landlords. The 2,700 units will come in over two to three years and Wichita may keep growing, adding people, to absorb the units.

“Anytime you are bringing on 10 percent that is a lot of supply to bring on at once,” Hanson said. “With the 7.8 percent vacancy rate, that’s not as tight as you would hope for for this kind of growth, but when the rates are this low, it allows a little more speculation, allows developers to make their numbers a little more easily.”