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ORANGE COUNTY-The county’s apartment market has long been one of the country’s strongest, both from an investor standpoint and in terms of occupancy, but even this long-robust market is showing signs of strain from the ongoing economic woes and the capital markets disarray that are driving change throughout the economy. A new report by Marcus & Millichap, for example, says that the Orange County apartment market “remains in a period of adjustment due to the region’s weakened employment base.”

Properties in the county are still posting tight occupancy rates, but “Thinning payrolls during the last 12 months have escalated class A vacancy in half of the metro’s 18 submarkets, marking the fourth consecutive quarter of reduced occupancy levels,” the Marcus & Millichap survey for the third quarter states. Other studies produce similar conclusions. A Hendricks & Partners report, for example, says that “The slowing economy, coupled with record-high gas prices, is forcingmore apartment tenants to double up” in Orange County. Renters in the county’s larger apartment complexes “are returning to roommate-friendly units to help cut costs,” according to the Hendricks & Partners report, which says that landlords are offering more concessions and keep rent increases to a minimum.

The changes wrought by the weakened economy vary from submarket to submarket within the county, Marcus & Millichap says in its report. In Irvine, where speculative condo buying was pronounced in recent years, “top-tier vacancy has surged more than 500 basis points over the past year,” the study says. On the other hand, occupancy remains high in areas where inventory additions have been minimal, such as Newport Beach, where a lack of new supply and still-healthy renter demand have caused vacancy to tick lower, Marcus & Millichap points out.

Despite the softening of the market, “Investment activity in the Orange County apartment market is expected to remain near current levels through the end of the year,” Marcus & Millichap points out. Properties are trading with cap rates in the mid-5% to low-6% range, up from a year ago, with some lower-tier properties exchanging at the high end of that scale.

Developers generally plan fewer new units in Orange County this year, although at least one large project is under way and has opened its first phase, the Irvine Co.’s 890-unit Enclave development in the South Santa Ana submarket.Although construction of new apartments is slowing, vacancy is rising due to job cuts, according to Marcus & Millichap, so the company forecasts that this year the metro’s average vacancy rate is expected to increase 90 basis points to 4.5%. It foresees rents to grow by about 3.5%, but with the concessions being offered, effective rents will rise slightly less, about 3.2%.

Hendricks & Partners points out that Orange County is “considered the epicenter of the subprime mortgage meltdown,” and the effects of that meltdown are felt throughout the county. In its forecast, Hendricks & Partners says that Orange County’s growing medical sector “may be the key to the region’s future.” In the next five years, Orange County hospitals plan to spend an estimated $2.3 billion on construction projects that will create nearly 30,000 full-time jobs, marking a four-fold increase over the last five years, which could help salve the pain of the slowing job growth associated with the economic downturn, the report suggests.

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