WESTERN SNAPSHOT, JANUARY 2007

Orange County Multifamily Market

Declining housing affordability will continue to support the Orange County apartment market in 2007. While the local housing market has cooled, the median price for a single-family home in Orange County is approaching $750,000, making it very difficult for current renters to become first-time buyers. Multifamily vacancy is forecast to remain relatively unchanged this year, but elevated renter demand is likely to lead to some tightening in areas such as Irvine, where job growth has been picking up steam.

Apartment construction remains steady, but developers have stepped up condominium construction. While condos will tempt some renters, the gap between mortgage payments for the median-priced condo and the average Class A asking rent has increased significantly in the past year. Job growth in the white-collar professional and business services sector is also expected to boost demand for Class A units this year. Orange County employers are expected to increase payrolls by 1 percent or 14,900 positions this year, after 20,000 new jobs were added in 2006.

Apartment transaction activity in Orange County is expected to remain at current levels after a significant slowdown in 2006. For much of last year, activity was stymied by rising interest rates and falling cap rates, but both appear to have stabilized, which will likely spur increased investor activity. Demand remains strong, and robust NOI gains will continue to attract buyers to the market. With market vacancy quite low, buyers are increasingly targeting properties that exhibit upside potential either through occupancy improvements or aggressive rent growth. In the northeastern submarkets including Fullerton, North Anaheim and Orange, rents remain well below the metro average and demand is likely to rise further. Lower vacancy in these areas should allow owners to implement rent increases when negotiating new lease terms.

Vacancy is expected to remain steady at 3.2 percent in 2007 as new units are quickly absorbed. Despite a 4 percent addition to inventory, vacancy in the Irvine submarket is expected to post solid occupancy performance this year. Meanwhile, asking rents are expected to gain 5.8 percent to $1,543 per month, while effective rents are forecast to increase 5.9 percent to $1,504 per month this year. Asking and effective rents each climbed 6.7 percent in 2006.

Developers will deliver 1,900 new apartment units this year, almost identical to the total brought to the market in 2006. Much of the new construction is concentrated in the active Irvine submarket. Strong investment fundamentals will continue to attract institutional buyers to Orange County. Investors may target more affordable properties to the north and east, while strong revenue growth should continue to drive prices higher for coastal properties.

Out-of-reach single-family home prices and job gains will bode well for the Orange County apartment market. A healthy amount of development activity will be focused in Irvine, while institutional capital will be searching for well-located, oceanside properties.

John Przybyla is a vice president  and the regional manager of Marcus & Millichap’s Newport Beach office.

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