By Pat Swanson, Executive Vice President, Colliers Orange County
Lack of supply remains most evident in the Orange County multifamily market, with vacancies trending near historic lows at 2.3 percent. As supply dwindles, we have seen the pressure felt by investors to ramp up and hunt for the elusive value-add opportunities in this marketplace. Many profit hunters actively seek properties with upside in rent, accessory dwelling unit (ADU) potential and inadequacies as part of the existing management.
A recent example is a 12-unit, single-story Garden Grove asset on a large parcel of land that was purchased below replacement cost. The Florida-based seller operated and managed the building remotely and desired to move his assets closer to home. Due to the long-distance operations, the local buyer felt they could control the property more efficiently by adding improvements to generate higher rents, while also taking advantage of the open spaces that could accommodate additional ADU units. This was a perfect fit for both parties, and we were able to execute the deal. It shows the type of value-add complex that has become highly sought after.
Like the investors who flocked to Garden Grove, similar buyers have reevaluated their wants for quality Class A assets. Many have elected to purchase Class C assets with a consistent tenant pool of renters by necessity.
In terms of geographic desirability, submarket cities like Costa Mesa, Orange and Santa Ana were not traditionally viewed or targeted as development opportunities…until recently. Today, we see those areas emerging as highly sought-after development markets where new construction is underway. Beyond Orange County, buyers are more willing than ever to relocate out of state, which would have previously been considered atypical. Contributing factors include steeper government relations, more favorable tenant rights, less landlord control, migrant territories and tax incentives. Arizona, Tennessee, Texas and Florida are among the states receiving an influx from relocation.
Historically, Orange County has been an attractive national market with strong demand due to robust job growth, great weather and a severe lack of rental housing supply. With land being scarce due to natural barriers to entry, the existing property supply is at a premium. This allows apartment owners to improve their assets at a much lower cost than rebuilding. Backed by a diverse economy and employment pool that continues to draw professionals and investors from around the world, Orange County will continue to be attractive to a wide variety of investors in the future.