By Peter Hauser, Principal, Avison Young
The Orange County multifamily sector is extremely strong. Rents continue on a positive upward trend and occupancies remain very high, hovering around 97 percent. It is unquestionably a landlord’s market. Many years of supply constrained NIMBY-ism that created the lack of new construction is coming to an end, however. The California governor has mandated that cities approve quality residential developments with the goal of increasing density and combatting the significant housing shortage.
There are currently 6,800 new multifamily units in the process of being delivered. While there are projects in the majority of cities, Irvine, Anaheim, Orange and Santa Ana are seeing the most development activity. Some very active Orange County developers include Trammel Crow Residential, Alliance, the Irvine Company,
Peter Hauser, Principal, Avison Young
Western National Group, JPI, Wermers Companies, Avalon, Fairfield, Shopoff Realty and Garden Communities. Alliance Residential is nearly complete on its 1,221-unit Park & Paseo in Santa Ana, near the border of the master-planned Tustin Legacy community. Wermers Companies is also in the process of finishing the 603-unit Elan, located less than a mile from downtown Santa Ana near the intersection of the 55 and 5 freeways. The 653-unit Avalon Brea Place is starting to deliver new inventory with amenities that include co-working space, a reservable conference room, and a rooftop spa and pool. Garden Communities has also been very active near the Orange County airport submarket in Irvine with its 960-unit Elements project. Finally, Shopoff Realty is delivering 462 units and 218 condominiums in Phase 1 of its Uptown Newport project.
Orange County rents for new construction are averaging $3,200 per unit, with $2,300 per unit for older construction. Despite the new construction here, Orange County’s rental market is anticipated to remain strong and vibrant. As new inventory is rapidly absorbed, we hope to experience a healthy supply-demand balance.
For investors, the Orange County market suffers from a lack of inventory to acquire, creating a huge amount of competition when an asset of any size comes to market. On-market properties garner many offers and usually sell near or sometimes above the asking price. The investor pool is diverse and expanding each year. Many private investors and institutional capital groups are attracted to the Orange County multifamily investment space.
Pricing in Orange County reflects average cap rates in the 3.75 percent to 4 percent range. For new construction, we are seeing low to mid-3 percent cap rates. Interest rates for 10-year, fixed-rate debt with 60 percent leverage is currently in the 3.5 percent range, up from their lows in the 2.65 percent range. Average price per unit is $320,000, with newer construction trading in the $550,000 per-unit range.
We are hopeful that the underlying higher inflation caused by the supply chain imbalances has a temporary effect and that consumer prices will stabilize through 2023. While interest rates are expected to rise this year, we are optimistic that rates will continue at moderate levels, maintaining a strong real estate market well into the future.