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.


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.

RECIPE FOR SUCCESS 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.