Housing Unaffordability Keeps Rental Demand Strong

Surging single-family home prices in Orange County aren’t slowing down—and they are likely to keep residents in the renter pool for years longer. According to a new report from JLL, the average home price in Orange County is $821,000, producing an average mortgage of $4,242 per month. Even worse, at current income rates, the average resident would need to save for 31 years to afford a down payment. As a result, multifamily vacancy hit 3.4% in Orange County last year, and rental rates increased 2.3%. In 2019, expect even stronger rent growth and more demand as home prices continue to rise.

“There are a lot of economic drivers in Orange County that help drive residents to apartments. One of those is surging single-family home prices,” Darcy Miramontes, EVP at JLL, tells GlobeSt.com. “There is also a big employment base that attracts young professionals and millennials that are not quite established or don’t quite have the income to buy a home. That is also helping to drive multifamily occupancy.” Bob Patterson, SVP at JLL, underscored the impact of single-family housing on multifamily occupancy. “The demographic trends are very favorable and the income trends are favorable, but the cost of housing is so incredibly high that renting is really the only choice for a significant number of Orange County residents,” he says.

While the single-family housing market is expensive, there continues to be a limited supply of apartment units. “The supply is concentrated in Irvine and Anaheim. There are more economic and entertainment centers in Orange County, but that supply isn’t spread throughout Orange County, so there is a high demand in some of those other areas for existing apartment product,” says Miramontes. There is some new construction. East Anaheim and Orange have a combined 1,073 units under construction, and West Irvine has another 883 units in the works.

The demand trends have also produced surging rental rates. Rates increased 2.3% last year, with the average apartment rent at $2,043. In 2019, rental rate growth is projected at 2.7%, but could exceed that number, thanks to growing anti-development sentiment that could limit new supply. “I think that underestimates what we are actually going to see because of the supply constraints,” says Patterson. Miramontes added, “We might not have the big ups and downs that some markets have in terms of rent growth, but it has been very steady.”

There is, of course, a downside. With such strong demand, few owners are willing to part with their properties. As a result, there is limited investment opportunity, particularly for those trying to enter the market. “We don’t have as many willing sellers. That is not only because properties are performing well but also because owners can’t find another property to trade into, if they want to stay in Southern California,” says Miramontes. “If they can’t find a proper 1031 exchange, then they are more likely to hold onto their asset rather than take a tax consequence. Investors like this market and they believe in the fundamentals.”

Well there is strong demand for multifamily assets, there are far fewer opportunities than capital. That can produce double-digit offers when properties do come to market. “The problem really is the difficulty in finding the deals,” says Miramontes. “There are just so few deals, and we have much more investment dollars targeting California that we do transactions activity.”