Los Olivos Apartment Village is slated for completion here by year end.

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.

In San Diego, apartment construction is also on the rise. Along the I-15 corridor, from I-8 to Rancho Bernardo, thousands of units are under construction, and Downtown San Diego is another area of concern, says M&M. While the pipeline of projects is not overwhelming, there is uncertainty as to the demand for high-priced apartments, which could push up vacancy, increase concessions and slow rent growth in the Downtown area. Vacancy for all properties in the area has climbed 170 bps in the past six months, prompting operators at newer buildings to slash effective rents by 7% during that time.

However, aside from these areas, the supply-demand balance remains favorable for owners, according to M&M. The neighborhoods surrounding Downtown and along the coast are reporting very tight conditions, which should support healthy rent growth through the end of the year.

Investors have been enthusiastic about the local San Diego apartment market, although the scarce number of available listings is encouraging potential buyers to rethink strategies, driving up pricing and encouraging multiple bids on attractively priced listings. In the popular neighborhoods of North Park, South Park, University Heights and Hillcrest, investors considering redevelopment may find opportunities, and value-add buyers in these areas will target older properties with some developable land that can be enlarged and repositioned, says M&M.

Farther away from the core, investors will seek assets where operators have failed to maintain pace with aggressive rent hikes. Currently, average cap rates within the core submarkets of San Diego and near the coast are below 5% in most cases, and M&M expects investors seeking higher yields to target inland properties, where first-year returns can approach 6%.

The fundamentals for the San Diego market overall are good, according to M&M. Employment should see a 2.5% increase of 32,400 workers as compared to 2013′s 21,200 new hires. Developers will bring 4,500 rentals online in the county this year after adding only 1,400 units last year, a 1.6% rise in inventory. Vacancy will rise to 4% by year end, an increase of 40 bps, yet despite the increase apartment demand is expected to rise 1.2%; last year, vacancy rose by 10 bps. And rental growth is expected to be moderate this year, finishing 2014 at $1,512 per month, a rise of 3.5% annually as compared to a 3.8% rise in 2013.

Multifamily investment in other parts of Southern California is also strong. As GlobeSt.com reported earlier this week, the Bascom Group LLC and certain funds managed by Oaktree Capital Management LP launched with its first acquisition, the Springs Apartments, a 320-unit garden style community located at 650 Ebbcreek Dr. in Corona. The property was purchased for $43.2 million.