Class B Apartment Rental Rates in Wichita Expected to Rise in 2019
National Real Estate Investor recently ran this article about multifamily rental rates. The NAI Martens multifamily team of Jeff Englert and Nathan Farha, CCIM reviewed the article and provided a Wichita perspective.
In Wichita, Class B has traditionally been the most stable property class. NAI Martens’ most recent multifamily update reported that in 2018 Class B rental rates increased across the board, with the exception of two-bedroom rents, with an overall average Class B rate of $0.79/SF.
For 2019, Englert and Farha are predicting that Class B rents will continue to rise due to three factors; 1) steadier occupancy in Class B compared to other segments, 2) owners will continue to upgrade/remodel units in order to achieve higher rental rates and 3) the substantially higher Class A rates create opportunities for Class B to raise rates and decrease the gap.
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Read on for more of a national perspective.
Rents are likely to rise faster for older, class-B apartments in 2019 than for any other class of apartment property.
“We expect Class-B to continue to have the strongest average rent growth, as it has through recent history,” says Andrew Rybczynski, senior consultant at research firm the CoStar Group.
Rents continue to rise for new class-A luxury apartments as well. Strong demand is quickly filling new units as they open and, as a result, rents are rising faster than inflation. At the same time, rent growth is finally slowing down for class-C and class-D apartments—simply because many of those renters are already paying as much as they can afford.
“While occupancy is sky high in
Less competition for luxury renters
In many parts of the country, developers cannot find enough construction workers to finish their apartment projects on schedule. They are likely to open fewer new class-A apartments in 2019 than they have in prior years, according to Rybczynski. In 2018, developers also faced construction delays, which allowed a return in rent growth at the top of the market.
“Until those delays work themselves out, class-A rent growth will perform better than the relative lows at the end of 2016 and through 2017,” says Rybczynski. He predicts rents will grow 2.9 percent in 2019 for class-A apartments, compared to 2.7 percent last year.
“Class-A units gained a bit of momentum in pricing power during 2018, reflecting that lease-up of new supply progressed so well, especially in the last half of the year,” says Willett. He says rents grew by 3.2 percent on average in 2018. He anticipates slower rent growth in 2019, in the middle to high 2 percent range.
“Another year of sizable deliveries when job production is expected to slow should result in some cooling of class-A rent growth in 2019,” says Willett.
Class-B apartments in the lead
Class-B apartments have generally stayed fully occupied, even in markets where developers have built thousands of more expensive, class-A units. So, rents at class-B communities have moved steadily higher, while many landlords at class-A buildings have had to offer steep discounts.
That’s because class-B apartments are usually priced several hundred dollars lower than new class-A properties. “Class-B benefits from being cheap relative to class-A, while experiencing relatively little supply risk,” says Rybczynski. He predicts rents will rise in the high-2-percent range for class-B apartments in 2019. That similar to the 3.1 percent average growth in 2018.
According to Willett, “Class-B properties should experience the strongest rent growth in 2019, with the expected performance level holding near 2018’s growth rate of 3.5 percent.”
Slowdown for class-C apartments
Rents will probably not grow as quickly for class-C apartments in 2019, compared to the year before.
“That reflects affordability constraints for the renters who live in that lower-end product,” says Willett. Many of the people who live in class-C apartments are already paying a large share of their income in rent. Rents climbed 2.9 percent for class-C apartments in 2018. “The 2019 result likely will slip a little more to around 2.5 percent.”
CoStar predicts rents will rise 2.6 percent for class-C units in 2019, on averages. That’s up slightly from 2.6 percent the year before.
Top neighborhoods and markets
Across the U.S., rents are likely to rise the fastest in neighborhoods with a large number of older, class-B apartment units renting at relatively low prices and little new construction.
Often these neighborhoods can be found in smaller cities or suburban areas, far from the overbuilt downtown areas of larger cities.
“On average,e the strongest rent growth is in the suburbs,” says Rybczynski. “This is more a supply story than demand. Over the past cycle an outsized share of supply has flowed to urban environs, and that continues to be the case.”