Strong OC Fundamentals Accelerate Multifamily Construction

Patrick Swanson, Senior Vice President, The Swanson Apartment Group, Colliers International in Irvine, Calif.

Patrick Swanson, Senior Vice President, The Swanson Apartment Group, Colliers International in Irvine, Calif.

Multifamily remains the most desirable asset class in Orange County due to a steady increase in apartment rental demand, strong sector fundamentals and the county’s emergence as a Southern California leader in the economic recovery. These factors have become a catalyst for a surge in multifamily asset construction.

Apartment rental demand continues to grow in Orange County due to the high barriers to entry in the housing market and recent memories of the Great Recession. Median home values, which now exceed $580,000, place home ownership out of reach for many households. Orange County’s population also grew 4.31 percent from 2010 through 2014, according to Census data. This growth pattern is predicted to hold through 2019, with an expected increase in population of 5.17 percent, or an average of 32,478 residents annually.

Orange County’s emergence as a leader in Southern California’s economic recovery is evidenced by superior employment rates in comparison to competing markets. Orange County experienced a high unemployment rate of 10.2 percent in January 2012. That rate has now declined 4.89 percent, as of May 2014. Orange County’s employment figures have increased investor confidence in the region, especially when compared to the national average of 6.3 percent, California’s 7.8 percent and Los Angeles County’s 8 percent.

Landlords have capitalized on apartment rental demand and improving employment figures by increasing average apartment rents by 2.9 percent in the past year and by 0.4 percent in the second quarter of 2014. The average Orange County apartment currently rents for $1,663 per month, or $1.89 per square foot. Occupancy has increased 0.6 percent in the past 12 months to 96.4 percent.

Investors have recognized the strength of Orange County market fundamentals and used historically low interest rates and a positive long-term investment outlook to justify aggressively priced apartment acquisitions.

Capitalization rates have remained relatively flat over the past 12 months for transactions greater than $10 million. This is an increase of about 27 basis points to 5.35 percent at the end of the second quarter of 2014. This rise may be attributed to an increase in 10-year Treasury Bonds during this time frame of about 25 basis points. The number of transactions has increased about 16 percent, while the average price per unit is about $201,788.

In the $2-million to $10-million range, 2014 is on pace to see 15 percent fewer transactions due to the conservative nature of many sellers who are unwilling to acquire additional leverage, not to mention the lack of seller confidence in alternative investment vehicles. Aggressive private capital investors who are competing for assets have compressed the average capitalization rate this year by about 34 basis points to 4.84 percent. The sales price per square foot has increased 30 basis points to $250 as of Sept. 1, 2014.

Multifamily developers are capitalizing on the strength of Orange County fundamentals. An estimated 1,832 apartment units were completed in the county in 2013 and 2014. Incredibly, about 7,086 apartment units are currently under construction, with Irvine Apartment Communities leading the way with about 3,263 units. The Sares-Regis Group added 487 coastal Huntington Beach units and The Picerne Group is under construction on 483 apartment units on Jamboree Road in Newport Beach.

Expect this increase in supply to create short-term volatility in rent and occupancy rates through 2015 as newly constructed units flood the market. For example, occupancy is predicted to decrease 50 basis points as a result over the next 12 months. Orange County multifamily investments will remain in high demand among investors, however, and asset fundamentals will remain relatively stable in the foreseeable future.

By Patrick Swanson, Senior Vice President, The Swanson Apartment Group, Colliers International in Irvine, Calif. This article first appeared in the October 2014 edition of Western Real Estate Business magazine.

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