If you had to summarize Orange County’s multifamily market in one word, it would be “robust.”
Generally speaking, the apartment sector has thrived across the nation in recent years, but few markets have performed better than this booming, affluent slice of Southern California. Soaring occupancy rates, rent growth, compressing cap rates, strong investor demand — these are the characteristics of today’s Orange County multifamily market. Thankfully, they should be the trends of the future as well.
Underpinning the multifamily sector’s health is the recovering Orange County economy. Over the past year, payrolls have increased by 2.3 percent, according to research by Jones Lang LaSalle (JLL). Although all the major employment sectors have experienced expansion, the largest gains have occurred in construction, financial activities and leisure/hospitality. These were the three industries hit hardest during the Great Recession. Overall, half of the jobs lost during the recession have been regained. The county’s unemployment rate in October was 5.8 percent, significantly lower than both the California and national rates, which were 8.7 percent and 7.3 percent, respectively.
Looking ahead, the economic indicators are positive: both job and population growth should average 2 percent annually until 2017.
A growing Millennial population and expensive for-sale housing market are two other dynamics fueling the success of the county’s apartment market. Orange County is within the top 50 counties nationwide in terms of the percentage of households that rent.
Orange County enjoyed a multifamily occupancy rate of 96.9 percent in the third quarter, according to a recent JLL report. Rents are also rising along with occupancies. The average effective apartment rent in Orange County was $1,588 per month in the third quarter, an increase of 3.3 percent from one year earlier.
With Orange County apartment communities performing so well, it’s little wonder why they’re highly sought after by investors. As a result, multifamily cap rates continue to compress. The rolling 12-month average for the area is 4.67 percent, a year-over-year drop of 62 basis points. A limited supply of for-sale product is one of the reasons cap rates are so low. Owners of multifamily properties in the county tend to hold their properties for the long term. Consequently, the number of annual investment sales in the county is typically much smaller than in other red-hot apartment markets like Phoenix.
The 2013 apartment sales volume through August in Orange County totaled $455 million. Apartment operators accounted for most of that activity, with $233 million in purchases. They were followed by REITs, which had $136-million worth of acquisitions. Foreign investors — particularly those from China — are also showing increased interest in the area’s apartment sector.
As we begin 2014, the future of the Orange County multifamily market remains exceptionally bright. The area economy continues to gather steam, igniting demand for apartments in an area that features both expensive for-sale housing and a limited supply of new multifamily units (there are only about 3,400 units currently under construction).
It’s been a remarkable run for the apartment sector and in the years ahead, that run is poised to continue.
— By Joe Leon, Managing Director, Jones Lang LaSalle’s Capital Markets in Irvine, Calif. This article originally appeared in the January issue of Western Real Estate Business magazine.