The Orange County apartment market is currently enjoying strong fundamentals that comes from several sources. These include robust renter demand, strong local economy and historic low interest rates, all of which make for a perfect storm. As more renters enter the market due to strong employment numbers, it gives way to new household formation. While home prices in the region escalate, more would-be homebuyers are being priced out of the market and forced to remain in the rental pool, further driving competition for suitable housing and pushing rents to new levels.
Henry Camacho, Coldwell Banker Commercial Advantage
Orange County developers are responding to a growing demand for new multifamily housing developments, many of which are Class A projects targeting high-end tenant bases and price points. Many older properties, such as Class C or C+ buildings, are enjoying the blow back from these new developments when tenants seek out lower rents when compared to top-tier projects, resulting in robust rent increases.
Investors looking to place capital in today’s multifamily market are taking advantage of strong fundamentals and cheap debt. Transaction volume has increased more than 10 percent in the past 12 months, with notable sales volume in the northern end of Orange County. Confident that upward rent pressure will continue to increase net operating income, investors are willing to except lower yields and cap rates. Average cap rates are now mid-4 percent with even lower yields seen in many coastal communities.
As we know, vacancy rates and rents go hand in hand. Vacancy rates have hovered around 3.1 percent. Some cities are even tighter. Newer, high-end developments are posting a slightly higher vacancy of 3.7 percent, versus mid- to lower-end units that have the lowest vacancy rates. Tight vacancy has driven rents to a year-over-year increase of almost 6.5 percent. While South Orange County enjoys the highest rents and very strong rent growth, it is the northern sector that is receiving even stronger increases. Lower-end and mid-tier properties are seeing the greatest rent growth.
Sales velocity increased more than 10 percent in year-over-year sales, with the northern area of the county seeing the most action. Average cost indicators have pushed the average cost per unit to nearly $240,000, representing an 11 percent increase. Many investors looking to add value through rehab and strong management are looking at more mature communities in the northern end of the county where older inventory lies. Much of this inventory requires upgrades, allowing the owner to increase rents and overall value. As discussed earlier, cap rate compression has pushed down to mid-4 percent.
The outlook for multifamily assets is very promising. It includes strong renter demand, upward driving rents, low interest rates and buyer demand. Whether you are a buyer or seller in today’s market, having a strong understanding of current market conditions and knowing how to add value through repositioning or “sweat equity” are essential. Having grounded information, such as a detailed property analysis, underwriting, and a keen understanding of adding value are vital when looking to buy or sell a multifamily asset. Armed with this information, you can take advantage of the right Orange County opportunity at the right time.
— By Henry Camacho, President, Coldwell Banker Commercial Advantage. This article first appeared in the November 2016 issue of Western Real Estate Business magazine.