Orange Appeal

ALTHOUGH ALL MULTIFAMILY MARKETS across the United States are contending with the pressures of a distressed economy, Orange County, Calif., remains on the investment radar thanks to its strong fundamentals and housing demand that's fueled by the desire of so many to live there. Together, these factors will go a long way in stabilizing this market in 2009, even as the nation continues its journey into unpredictable financial waters.

According to the Center for Demographic Research, by 2010, the population in Orange County is expected to reach more than 3.3 million people. This is up nearly 18 percent compared to a population of 2.8 million in 2000. After all, who can argue with 42 miles of breathtaking coastline, 357 miles of trails and bikeways, and 34 distinct cities, each within close proximity to a host of mountain activities? Plus, there's the ideal, year-round weather filled with sunny days and an average temperature of 70 degrees. Orange County also offers one of the most diverse business climates in the state, if not the country, and is home to top companies from several industries, including biotech, real estate, and financial services.

HOPE ON THE HORIZON

While there is no question that the national multifamily investment market slowed to a crawl during the past 12 to 18 months, the coastal submarkets in Orange County have actually experienced an uptick in activity. There is also great speculation that the area, thanks to its strong fundamentals, may be one of the best buyers' markets beginning in 2009. Orange County's slowdown can be attributed almost entirely to constrained capital markets and deterioration of investor confidence. Loans and equity have become extremely hard to access and, when accessible, are much more expensive, putting pressure on yields.

However, sellers who got comfortable with “boom market” values have continued to list their properties at unreasonable prices. During this time, many investors have been sitting on the sidelines, waiting for the market to bottom out and for the gap to shrink between sellers' asking prices and buyers' price valuations.

Over the past 12 months, multifamily cap rates in Orange County have increased 40 basis points for Class A properties, 50 basis points for Class B properties, and 75 basis points for Class C properties. Yet even with rising cap rates, Orange County apartment values have remained high. New York City-based research firm Reis reports that the median cap rate for completed transactions in the market, based on a 12-month average, is 5.4 percent. This remains much lower than the national average of about 5.82 percent and also keeps per unit prices in Orange County near their top. The area's median per unit price of approximately $177,000 during the past 12 months compares to approximately $100,000 per unit for the country and approximately $130,000 for the West Coast.

During 2009, however, expectations are that more banks will move to take back properties. When this happens, expect to see more properties come to market at true market value based on risk and with a marked urgency to sell this much larger selection of listings. For opportunistic buyers looking to acquire distressed multifamily assets at bargain prices, this may well be the time to jump off of the fence and into the investment waters of Orange County.

Though many seasoned multifamily developers believe in the inherent strength of Orange County, they are—for the most part—still fearful of oversupply. In 2008, there were approximately 1,000 units completed. An additional 1,689 were under construction and 2,858 units were planned or proposed.

For those who are actively building, the cities of Irvine and Anaheim continue to be the hottest areas for development. This is due in large part to the strong local economy and job growth of these cities. Both have an affluent, educated workforce; a dynamic and broad-based technology sector; and high-end corporate tenancy. Additionally, Anaheim has an established leisure and hospitality sector revolving around Disneyland. Irvine, on the other hand, benefits from its close proximity to John Wayne Airport and the University of California, Irvine.

Currently, The Irvine Co. is Irvine's primary developer. Recently, The Irvine Co. completed The Enclave Luxury Apartments, totaling 890 units in Orange County's South Coast Metro area. The community features two resort-style swimming pools with cabanas, three spas, and a 2,440-square-foot fitness center.

<B>WEST COAST WONDER:</B> Opus West Corp.'s recently completed 3000 The Plaza in Irvine, Calif., features two 15-story condo towers with luxury amenities such as natural stone and slab granite master baths as well as Euro-style cabinetry.

Also in Irvine, Opus West Corp. recently completed development of 3000 The Plaza, two 15-story high-rise condo towers. The residences feature gracious entry foyers, floor-to-ceiling windows, and a balcony or terrace. Kitchens are equipped with premium appliances, polished granite, and Euro-style cabinetry; master baths boast natural stone and slab granite.

In 2008, CIM Group completed Center Street Promenade in downtown Anaheim. The mixed-use project features 276 loft-style apartments, 129 condos, retail space, and office space. This urban environment is within walking distance to local restaurants, the futuristic Disney Ice Arena, and a Farmers' Market.

Also in Anaheim, BRE is currently developing Park Viridian, a 320-unit apartment community. Located in the Platinum Triangle area of Anaheim, the community is just minutes from The Honda Center, home to the Anaheim Ducks; Angel Stadium of Anaheim, home to the Los Angeles Angels; Disneyland and Disney's California Adventure; and the Downtown Disney District, which features ESPN Zone, House of Blues, specialty shops, and restaurants.

With Orange County a major hub for the sub-prime home mortgage crisis, it is ripe with cases of foreclosures and related fallout from tightening credit markets. As a result, many homeowners have returned to the rental arena. This is keeping multifamily landlords happy with a stable, average projected year-end vacancy of 4.5 percent, according to Reis. Vacancy is expected to climb slightly during 2009, to about 5.7 percent, and eventually level off by year's end. By 2012, landlords can expect the Orange County multifamily vacancy rate to be at roughly 5.3 percent versus 5.8 percent in the West and a national average of 6.7 percent.

Like the rest of the country, unfortunately, rent growth continues to slide. The good news is that very few owners are offering concessions. According to Reis, Orange County was expected to finish at 3.1 percent annualized rent growth in 2008. This compares to 3 percent across the country and 3.5 percent in the West. However, it may get worse before it gets better. As the country flights its way out of financial crisis, many expect to see Orange County bottom out at 2 percent rent growth by the end of 2009 before starting to recover and climb to approximately 4.5 percent in 2012, according to Reis. By 2012, Orange County will separate itself from the West and the rest of the nation when it comes to rent growth, with an expected improvement to approximately 3.5 percent, as compared to 3.1 percent growth in the West and 2.9 percent nationwide.

As Orange County continues to plot its recovery, there is one thing that is almost certain: The long-term investor who times his market entry right in 2009 will reap great rewards as this market not only recovers, but does so at a rate that will outperform most other markets in the United States. Investors have seen Orange County do so in the past, and they believe it will do so again in the future.

Orange County, Calif. (January) Riding Southland waves

Austin, Texas (February) Sunbelt safe haven

South Florida (March) Opportunities on the shore

Detroit (April) Motor City madness

Boston (May) High hopes in higher learning

Portland, Ore. (June) Rose City blooms

St. Louis (July) At home in the Heartland

Greenwich, Conn. (August) Northeast gem

Charlotte, N.C. (September) Queen City shakeup

Washington, D.C., Metro (October) Steady as she goes

Phoenix (November) Highs and lows in the Valley

Brooklyn, N.Y. (December) Taking in Manhattanites

Orange County, Calif.

POPULATION: 3.1 million (as of January 2008)
OCCUPANCY: 95.5%
MEDIAN AGE: 33
MEDIAN HOUSEHOLD INCOME: $78,950
AVERAGE RENT: $1,521
UNEMPLOYMENT: 4.8% (as of May 2008)
NOTABLE: Orange County's economy is larger than all but 31 nations in the world. The area is home to the world-famous Disneyland Resort and Knott's Berry Farm; Newport Beach's Fashion Island, an outdoor shopping center encircled by gardens, palm trees, and a huge koi pond; and Huntington Beach (Surf City USA), featuring the longest recreational pier in the state.