Orange County, Calif.—For the first time in more than 15 years, multifamily development is strongly outpacing single-family construction in Orange County, Calif.
Nearly twice as many multifamily building permits as single-family permits were issued between January and May this year, according to the Burbank, Calif.-based Construction Industry Research Board. Reports show about 2,200 multifamily units were permitted during this period compared to less than 1,200 single-family units.
“With the cost of land right now, people and developers are looking to utilize land and build up,” said Sarah Bruckner, communications manager at the Building Industry Association’s Orange County chapter.
Five years ago, the reverse was happening, with more than 2,800 singlefamily permits issued during the same period and only about 1,750 multifamily permits.
Orange County has been one of the top apartment markets in the nation in recent years and is projected to remain among the leaders. However, new wrinkles are starting to crack the surface of even this mighty market.
As in other areas of the nation, multifamily developers should keep an eye on demand and occupancies in the next 12 months to see how the housing industry slowdown will affect multifamily demand in Orange County, said Delores Conway, director of the Casden Real Estate Economics Forecast at the University of Southern California’s Lusk Center for Real Estate.
“In 2006, supply exceeded demand, and they are expected to be in balance for 2007,” Conway said. “But if demand slows, Orange County may experience a second year where supply exceeds demand, resulting in somewhat lower occupancies.”
According to observers, the region could feel the sting of the housing slowdown in two ways. First, there’s the general hit to the economy. Second, Orange County is home to a good number of financial services businesses that could be impacted by the industry’s subprime troubles, tightening credit markets, and reduced job growth. Orange Countybased New Century Financial Corp., a major subprime lender, recently filed for bankruptcy.
In 2006, the O.C. added 14,900 new jobs, with half in the business and professional services industries, and significant additions in education and health care, according to Conway. At the same time, there were 1,900 job losses in the mortgage and financial services industries associated with the housing market decline. The subprime loan crisis has put additional downward pressure on jobs in 2007, Conway said.
The fall of New Century was a psychological blow to the area, said Sam Chandan, chief economist at Reis, Inc.
What’s unique about Orange County is that it has the advantage of “starting from a very strong position and has the capacity to manage a slowdown fairly well,” he said.
Strong fundamentals
The vacancy rate is about 3.5 percent, one of the lowest in the nation. “There’s some room there for vacancy rates to climb a bit and for the market to still be among the strongest,” Chandan said.
As a result, effective rent growth is expected to continue at a good pace.
Average rents in the county have been close to $1,500, or $1.70 per square foot. Rent growth in the county was about 6.2 percent in 2006, said Barry Knudson, a senior associate in Colliers International’s Irvine, Calif., office. He projects that rents will increase by between 5 percent and 5.5 percent this year, with vacancies at about 3.3 percent.
Rent increases likely won’t be as high as they were last year, but are still at levels that owners in most other markets would envy.
Conway reported that almost 4,000 units are under construction, with more than half of those scheduled for completion in 2008.
Out of all the strong Southern California markets, Orange County has one of the lowest, if not the lowest, average cap rates at about 5 percent, according to Knudson. “It is starting to trend upward a bit, but not much,” he said in mid-August.
Brokers doing business in the region report that sales volume is down a little bit from last year. The average price per unit last year was about $188,000.
Owners of Class C properties are looking to upgrade to B or A properties, and owners that have apartments inland are looking for opportunities in coastal communities, added Shane Shafer, vice president at Sperry Van Ness, a real estate investment brokerage firm in Irvine.
Earlier this year, he completed the sale of a 22-unit apartment community in Santa Ana to a California-based private investor for $3.2 million. Built in 1959, the two-building property has two-bedroom, one-bath units, with monthly rents ranging from $1,150 to $1,200.
Shafer was also involved in the $16.1 million sale of a 106-unit property in Anaheim.
“Investors have looked at this market and seen it as stable, and the pricing reflects that,” said Chandan.
Western National Property Management is an apartment owner and manager that oversees about 27,000 units, including 13,000 in Orange County. President Steve Donohue is paying close attention to the economy, in particular where the job growth is taking place and the quality of jobs being created. “We’ve not seen the growth as we have in the past, but it is still positive,” he said. “We’re still bullish about Orange County.”
He noted that people are staying longer in their apartments. This is likely because it is getting tougher to qualify for loans as lending standards tighten.
The affordability issue
Housing affordability has become an issue, with the county having the highest median home price in Southern California, according to Conway. Recent data shows the median price to be nearly $645,000.
“Affordability in rents is also becoming an issue, with rents in Orange County among the highest in California,” Conway said. “Also, neighboring communities in the Inland Empire have significantly lower rents that may provide a more affordable alternative.”
Jamboree Housing Corp., a nonprofit developer, recently broke ground on the future site of Granite Court in the Irvine Business Complex, where nearly 4,000 residential units are under construction or have been approved. Granite Court is the first workforce housing development in the mixed-use complex, and it will have one-, two-, and three-bedroom apartments for 71 families earning incomes maxing out at between 30 percent and 60 percent of the area median income.
Development has also been a hot issue in Anaheim, where developer SunCal Cos. and Disney officials have been feuding over a plan to build homes in the neighborhood around Disneyland. The plan calls for 1,500 units of housing, including 225 affordable apartments. Disney has sued the city over the proposal and called for a referendum.
