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ORANGE COUNTY, CA-Apartment vacancies are expected to continue climbing and rents will continue to decline for the rest of this year, but investment trends appear to be changing in the county’s multifamily market. Those are some of the highlights of a new report and forecast by Marcus & Millichap, which points out that persistent job losses and completions of new complexes will continue to weigh on the Orange County apartment market for the rest of the year.

“Countywide payrolls have contracted by nearly 7% since the recent peak, or by more than 100,000 jobs, suppressing apartment absorption,” the report states. On top of that, new construction thus far this year has nearly matched the number of units completed in all of last year, “increasing the supply/demand imbalance and pushing vacancy higher,” the report points out.

Marcus & Millichap forecasts that vacancy will rise 2.8% to 7.9% by year end and that asking rents will slide 3.3% to $1,518 while effective rents will drop 5.5% to $1,431 per month. The rent figure nearly matches the latest average rent listed for Orange County by Novato, CA-based RealFacts, which pegged the county’s rent at $1,534.

Marcus & Millichap forecasts that the rising vacancy and receding rent will continue in the coming quarters as large projects are delivered in the Irvine and South Anaheim submarkets. Irvine in particular could underperform this year, as the submarket’s class A vacancy rate is already among the highest in Orange County, and approximately 3,000 layoffs at major firms in the city have been announced year to date.

On the investment front, transaction velocity has dropped 47% compared to the same period in 2008, and sales activity is down nearly 60% from the previous six-month stretch. “As revenues and investor demand have declined during the past 12 months, the median price has dipped 10% to $160,600 per unit,” according to the report. Cap rates are averaging in the mid- to high-6% range, up 100 basis points to 150 basis points from last year. Cap rates in recent deals have been near 7.5%.<p.In its outlook for investments, Marcus & Millichap observes that "Trends appear to be changing in Orange County." During the first quarter of this year, it points out, nearly all of the properties that changed hands had fewer than 20 units. In recent months, however, a few larger transactions have taken place, as REITs and institutional buyers have begun to re-enter the market. "These large deals often have closed at cap rates well above current metro averages, however, and further rises are likely," the report forecasts.

Among those larger deals this year were a set of transactions in which Northwestern Mutual Insurance sold three class A apartment complexes in Alisa Viejo and Rancho Santa Margarita for more than $200 million. The properties, which included the 386-unit Aventine at Aliso Viejo, the 484-unit Alize at Aliso Viejo and the 498-unit Avila at Rancho Santa Margarita, sold at a sub 7% cap rate to private buyers.

The report notes that recently there have been signs that the expectations gap is closing and that the investment market could regain some momentum in the months ahead. “The recent rise in cap rates, along with the sale of larger assets and properties with higher vacancylevels, should aid in price discovery for buyers, sellers and lenders, which could generate further investment activity in the coming quarters,” the report concludes.

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