Where is OC Multifamily Headed?

IRVINE, CA—Orange County apartment rents have surpassed previous peak rents of 2008, and concessions are no longer the norm—and in fact are non-existent in most markets, Ray Eldridge, SVP at CBRE tells GlobeSt.com. Eldridge will be part of a panel of experts who will discuss what lies ahead for the multifamily market in Orange County at RealShare Orange County here on August 21. For information about the event or to register to attend, click here.

“Given Southern California's strong multifamily fundamentals and strategic location, coastal Orange County fared far better than many major metropolitan statistical areas during the national economic downturn,” says Eldridge. “Driving the strong demand for rental housing is the county's extremely high quality of life, low home affordability, mild climate, diverse employment base and coastal orientation. Current unemployment within the county is 5.2%, the lowest it has been since June 2008. County employment is very strong as compared to California as a whole (7.4%) and the nation (6.1%).”

Other RealShare Orange County panelists also spoke with GlobeSt.com about employment and the multifamily market. “Orange County is a significant employment engine for Southern California,” says Richard Castillo, VP at MVE & Partners. “With employment opportunities comes a demand for housing in close proximity to the workplace. Also, the modern workforce wants flexibility and choices in the way they live. Multifamily housing in Orange County has evolved to provide these choices through unique developments that offer excellent amenities and high-quality design that encourage social interaction and convenience to the workplace.”

But the sector hasn't always looked so rosy. Eldridge says the combined impact of a national economic downturn, local job loss and a 40% decline in average home values contributed to Orange County experiencing its first apartment rent decline in recent memory during 2010. “Fortunately, the journey was short lived and rental rates hit a bottom of $1,482 in Q3 '10—a 9% drop from previous peak rents of $1,594 in Q4 '08.”

Eldridge credits limited new apartment construction and rising employment for Orange County's multifamily rental-rate turnaround in early 2011, adding that as a consequence of recession-related peaks and valleys, the market had remained essentially flat from 2007 to 2012. “Looking forward from 2011, rental rates have increased by 15.2% to an average of $1,729 in Q2 '14, which is the sixth highest average in the nation. This 5%-per-year average rent increase is reminiscent of pre-recession conditions.”

Alexa Mizrahi, loan originator for Lone Oak Fund and another RealShare Orange County panelist, tells GlobeSt.com the multifamily market remains extremely strong in Orange County. “Properties are trading at historically low cap rates, and many transactions are closing all cash. There's an overwhelming amount of competition on both the acquisition and financing sides of transactions today. We've seen a resurgence of private capital and construction lending in the market and we expect to see this trend continue into 2015.”

Mizrahi adds that rental demand continues to increase in Orange County. “This is fueled in part by rising single-family home prices, along with the challenges for a consumer to obtain credit in a more regulated lending environment. High-end homes in 1% (or the wealthiest) neighborhoods of Orange County are appreciating at the fastest rate. We recently reviewed a single-family home transaction in Emerald Bay where homes were trading at $3,000 per square foot.”

Countywide multifamily occupancies this year remained about 95% and currently average 95.1%, Eldridge says. “Rental rates are forecast to increase by 3% to 6% over the next 12 months, as rental demand is forecast to continue to outstrip new supply. Given the county's dynamic expanding economy, core infill submarkets may benefit from above-average rental increases.”

Between 2013 and 2019, Orange County is expected to gain a total of 137,000 new jobs, Eldridge adds. “During this prior, new apartment supply is forecast to add less than 20,000 new apartment homes from 2013 to 2019. Vacancy rates are expected to maintain 5% or lower, while rents are forecast to grow to $2,038 per month, a 17.9% increase over today's $1,729 average, according to CBRE Econometric Advisors and Real Facts.”