OC, SD Apt. Deliveries to Impact Operations
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IRVINE, CA—With several multifamily developments due for delivery over the next couple of years, both the Orange County and San Diego markets are expected to experience operations changes before the end of the year, according to Marcus & Millichap. Some of the changes include widening concessions by landlords, increased vacancy and decelerating apartment rental-rate growth.
GlobeSt.com was unable to reach M&M prior to deadline to discuss the similarities and differences between the Orange County and San Diego apartment markets and how the markets will fare comparatively by year end.
Construction is underway and lease-up has begun at two major projects slated for completion in Orange County this year: Los Olivos, the largest apartment property in the county, which began accepting residents during Q2 2013 and is slated for completion here by year end, and Park Place, also in Irvine with nearly 1,000 units, which will begin leasing this summer. While demand is strong for these units, thousands of additional units are scheduled to come online during the next several quarters in the county, which should begin to put upward pressure on vacancy in the second half of this year, says M&M. While the pace of acceleration may slow, overall rent growth is expected to remain strong through year end before slipping closer to the inflation rate in early 2015 for this market, the firm predicts.
High-net-worth buyers are fueling Orange County’s apartment-investment market with capital, pushing cap rates to very low levels—below 6% for most properties and below 5% for class-A and –B properties. As a result, many buyers are turning to alternative investment vehicles rather than traditional underwriting standards. Typically, this would push savvy local operators to the sidelines, says M&M, but low interest rates and accumulated equity are encouraging owners to refinance and redeploy funds into apartments. While repositioning deals can be found, South Orange County investors may want to consider the influx of top-tier properties coming line over the next 24 months before making that commitment.
In a nutshell, Orange County rental construction will jump to 5,100 units this year after only 1,700 units were added in 2013. Apartment vacancy is expected to settle at 3.9% by year end, down 20 basis points from the end of 2013, but 40 bps higher than the rate at the end of Q1; demand is expected to rise 2.6% this year. Effective rents should climb 4.4% to $1,737 per month as compared to last year’s 4.5% improvement.
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