From its near-perfect weather, parks and beaches to its commerce-friendly environment and well-educated workforce, Orange County has plenty of attractions to offer residents, businesses and multifamily investors. Add to that list well-paying jobs in the expanding professional and business services, and tech and healthcare sectors, and you can see why demand for housing in the county is on the rise. Job growth has pushed the unemployment rate to below 3 percent, a level not seen since the fourth quarter of 1999. The strengthening economy has created a tremendous tailwind for apartment demand in a metro where the cost of a single-family home is out of reach for most households. As a result, Orange County’s multifamily vacancy rate stood at the extremely low level of 3.8 percent at the end of the third quarter.
Mark Bridge, The Bridge Group at Marcus & Millichap
The low level of apartment vacancy has also been positively affected by a change in the rate of new construction. After several years of increased supply, the amount of new housing in the pipeline has begun to decrease, having reached the apex of the current cycle in 2017. This year and next, the county will receive about 4,000 new apartments, down from the more than 4,800 units delivered in 2017. The coming new supply will also see a shift in location.
After zeroing in on beach communities for the past few years, developers have shifted their gaze to areas along Interstate 5 between Anaheim and Irvine. Over the next 18 months, two-thirds of the incoming supply will be centered in these areas. While this concentration of new product may cause vacancy to tick up moderately in these locations, the overall shortage of housing in the county should limit any potential upticks to brief periods around the lease-up phase.
The elevated level of new supply over the past few years has not deterred rent growth. In fact, rent growth has been robust, with annual percentage gains in the mid-single digits. This was spurred on by net absorption that has averaged 3,560 rentals over the past four years. The average effective rent in the county should approach $2,070 per month by year end, up more than 25 percent since 2011.
The strongest increases have been in Newport Beach and Irvine, where household incomes in the metro are highest. Rental rates in these communities can exceed the county’s average by anywhere from 20 percent to 40 percent. The most affordable apartments will remain in cities just over the Los Angeles County line, such as Buena Park, Cypress and Fullerton, where owners will experience the market’s lowest vacancy rates.
Consistent capital appreciation and rent growth are highly motivating mainstays for all Orange County multifamily investors. A full spectrum of national, regional and local players are actively allocating capital to the market. Properties with below-market rental rates and potential for value-add strategies through unit and facility improvements draw the most persistent buyer interest.
However, in recent quarters, uncovering this type of asset has become more time consuming. Buyers and sellers are seeing cap rates in the metro that typically begin in the mid-4 percent range; a level unlikely to move lower as interest rates remain on an upward trajectory. Therefore, increases in property prices will become more dependent on tenant income growth due to the high ratio of household income to rental rates.
— By Mark Bridge, senior vice president of investments, The Bridge Group at Marcus & Millichap. This article first appeared in the December 2018 issue of Western Real Estate Business magazine.