Steve Heri

Surpassing Los Angeles, Orange County now has the highest apartment asking rents in Southern California. According to new research from NAI Capital, average apartment rents in Orange County are $2,024 per unit, the highest rate in Southern California.

"The Los Angeles market had always had higher rents than Orange County, but the rental market has been really strong in Orange County and there has been a lot of new construction," Steve Heri, SVP at NAI Capital, tells GlobeSt.com. "That new construction has been the driving factor of the rental growth."

Although Orange County rents are now the highest in Southern California, rents in the market increased nominally in the second quarter, up 1.9% quarter-over-quarter and 3.2% year-over-year. According to Heri, this is actually a sign that rent growth is slowing, not increasing. "The actual rent increase is 3.2%, which is about what the consumer price index is," he says. "So, I don't see, at least in the last year, that we have had a huge jump in rents. It is supply and demand, and rent increases are slow down."

This fact is underscored by concessions and specials offered by new developments, and as a result, Heri also expects new construction activity to slow down as well. "The market is leveling off, and there are specials and concessions made on the high end," he says. "Construction lenders are a little more hesitant to make financing when the projected rents are topping $4,000 and $5,000 per month. Because of the cost of land, that is what developers end up building, but what we really need is work force housing and more affordable housing. I think that we are start to see new construction slowing down. I think that we are going to see some changes."

While the market is slowing and the construction pipeline probably won't grow, there also isn't an overbuilding problem, and the new supply is expected to all be absorbed. "We aren't going to see overbuilding, but I think the supply is going to slow down," says Heri. As for the high rents, they will likely push renters into other, more affordable markets. "If people can't afford prices in the coastal markets, they will go to the Inland Empire because it is more affordable," adds Heri.

The Orange County submarkets with the highest rent also have the highest vacancy rate. Newport Beach, for example, has asking rents at $2,647, well above the market average, with a 5.3% vacancy rate. In Irvine, asking rents are $2,400 with a vacancy rate of 4.7% and in Laguna Beach, rents are $2,300 and the vacancy rate is 7.1% The market average vacancy rate is 4.5%, 10 basis points lower than this time last year. Overall, markets with strong job centers have performed the best in terms of demand. "High-tech and higher paying jobs have been attracted to Orange County, and those workers are willing to play higher prices in rent," says Heri. "That has driven up the market."