What’s the Matter With Wichita?

By Bob Bach, Senior Vice President & Chief Economist, Grubb & Ellis Co.

While the local economy has its share of ups and downs like most American cities, Wichita is in a state of suspended animation in its real estate sector. What’s the matter with Wichita, and what does that tell us about other similarly sized cities?

By Bob Bach,
Senior Vice President & Chief Economist, Grubb & Ellis Co.

The storyline for the commercial real estate investment market is playing out as expected at the national level. Through the first two months of the year (the most recent data available from Real Capital Analytics), the dollar volume of property sales is up by 27 percent compared with the same period in 2011. Apartments continue to lead with sales up 44 percent year-to-date, followed by office and industrial, up by 31 and 29 percent respectively, and retail taking up the rear with a decline of 5 percent in the dollar volume of sales. Cap rates, which the majority opinion said would be flat this year, indeed show no discernible trend, perhaps since it is still early in the year.

But the national statistics can obscure what is happening at the local level. A couple of weeks ago, I visited Wichita, a metropolitan area of about 625,000 perched on the edge of the Great Plains in south-central Kansas. The economic recovery has been slow to reach Wichita because of its dependence on small aircraft manufacturing, a niche hit hard by the recession, corporate cost-cutting and the consolidating airline industry. The local labor market did not hit bottom until November 2011, 21 months after the U.S. trough in February 2010. Though Wichita’s labor market expanded in three of the past four months, the outlook is cloudy due to the imminent relocation of Boeing’s local operations to Oklahoma City.

What is the local market like for commercial real estate investments in Wichita? It has ground to a halt, but not due to Wichita’s delayed recovery. The investment market is in suspended animation because there are few properties for sale. The leasing markets have improved enough for investors to sit tight and collect their rents. Are there investment options on the market in other cities across the region? Sure, but apparently they are not compelling enough to tempt owners to part with their existing properties in Wichita. My guess is that other small to mid-sized markets are in the same situation. Brokers in such markets who can convince local property owners that there are suitable properties for sale in other markets should experience some success.