The Orange County Asset Market in 2020 | Multi-Family Buildings
Updated: Jan 17, 2020
Household growth and high median home costs drive rental demand.
A flourishing corporate base in Irvine and a pronounced tourism backbone in Anaheim continue to bolster the economy. With employers consistently bringing labor into the metro, the household growth rate over the past year ended in September was the most rapid pace since 2013. Much of this growth has been tied to high-wage job creation in financial and technology fields linked to the hundreds of Fortune 500 companies with offices in Irvine. As home prices remain out of reach for many, residents have looked toward rental housing. This strengthening luxury apartment demand has swayed construction to be primarily focused on high-end development. Although Class A inventory has been expanding, it is being quickly absorbed, as vacancy within this class dropped 50 basis points year over year to 3.7 percent as of the third quarter.
California’s multifamily sector grapples with regulatory changes. In early October, Assembly Bill 1482 was signed into law by Gov. Newsom, making California the third state to implement statewide rent control.
Effective January 2020, the legislation will limit rent increases at pre 2005-built properties to 5 percent plus inflation or 10 percent, whichever is lower. While average rent growth in seven of the state’s eight major metros was at or below 5 percent during the past 12 months ending in September, it is probable each market’s stock of lower-cost apartments could be impacted by the implications. Spanning the past year, Class C rent in the eight-metro group rose an average of 8 percent. Limited rate increases at these properties moving forward could increase the appeal to renters of an already limited stock of vacant units. Though tight conditions tend to increase investor interest, rent control could alter returns on some investments, particularly properties that still have value-add potential.
Investors looked to northern Santa Ana neighborhoods for value-add opportunities.
The average entry cost for apartments in Willard and French Court was $225,000 per unit, and the average cap rate was relatively buyer-friendly in the high 4(%) percent area.
In Newport Beach, transaction activity doubled as sellers came off the sidelines with the average cap rates dipping into the low-2 percent range. This region continues to have some of the metro’s highest entry costs at an average of $470,000 per unit.
The average cap rate slipped 20 basis points year over year to 4.0 percent. This was due to increasing sales values as the average price per unit rose 5.4 percent to $311,000.
Deal flow regressed by nearly 25 percent over the past 12 months; however, Class C apartments built pre-1980 received increased investor interest and were traded 25 percent more often during that span. Outlook: Preparing for rent control caps, opportunistic investors are heavily targeting lower-entry-cost assets. As competitive bidding boosts prices on these properties, owners will be enticed to sell and transfer their return into larger investments.
The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no representation, warranty or guarantee, express or implied, may be made as to the accuracy or reliability of the information contained herein. Note: Metro-level employment growth is calculated based on the last month of the quarter/year. Sales data includes transactions valued at $1,000,000 and greater unless otherwise noted. This is not intended to be a forecast of future events and this is not a guaranty regarding a future event. This is not intended to provide specific investment advice and should not be considered as investment advice.
Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; Experian; National Association of Realtors; Moody’s Analytics; Real Capital Analytics; RealPage, Inc.; TWR/Dodge Pipeline; U.S. Census Bureau