Multifamily Market Overview
Orange County, CA
As of Q2 2022, Orange County’s rent growth of 8.7 percent year-over-year remains among the highest in California. Vacancy is trending near its historic low at 2.5 percent as residents seek out affordable living options that are increasingly hard to come by. Demand has moderated notably, and is most likely due to the sunset of federal stimulus and high inflation. The delivery forecast for the metro is steady and could apply upward pressure to the vacancy rate down the road as those luxury units are set to deliver. According to the latest jobs report released by California’s Economic Development Department, Orange County added 4,900 jobs in June, and its unemployment rate rose from a 20-year low of 2.4 percent to 2.9 percent.
Vacancy & Leasing
The economy is diverse in Orange County, with jobs in a wide range of sectors from high tech and finance, to medical and biotech. Given that the median home price in the county is over $1,000,000 and for-sale inventory is low, homeownership does not act as a tug on demand for apartments. Instead, renters often seek out single-family homes and condos to rent in the region. In the past 12 months, 1,900 units have been absorbed in Orange County, compared to the long-term average of 3,500. Net absorption reached an all-time high in 2021, which has driven the vacancy rate to 2.5 percent during the third quarter, which is better than the five-year average of 4.1 percent.
Annual rent growth currently sits at 8.7 percent, compared with the five-year average of 5.8 percent per year, after peaking at 18.3 percent in 2021. Class A properties are up 7.6 percent year-over-year, as an affluent renter base in Irvine and coastal areas drives the trend. Class B & C properties display the weakest rent growth, at 6.9 percent annually. Many of these units are concentrated in working-class areas of Central and North counties that are filled with a renter cohort that cannot attain homeownership, and who rent by necessity. The average asking rent for these workforce units is $1,890 per month.
National and local investors are attracted to the steady rent growth, strong demand, and new inventory in the region. Market pricing has reached roughly $520,000 per unit across the county, while the market cap rate is one of the lowest rates in the United States. Given the level of inflation and rent growth capped at 10 percent, landlords could see diminishing NOI‘s the longer inflation remains elevated. Value-add and institutional trades make up the highest share of market-rate transactions in Orange County.
Currently, 5,400 units, or 2.2 percent of existing inventory, are under construction in Orange County. Of the units under construction, most are in Irvine or Central Orange County. Development activity in Irvine has been elevated for most of the past decade, but Central Orange County cities like Costa Mesa, Orange, and Santa Ana have emerged as hot spots for building as those luxury units typically offer a discount relative to South County’s new units. Mall space is also being repositioned into housing. At the end of Q1 2022, officials in Laguna Hills approved plans for a $130 million mixed-use redevelopment of the aging Laguna Hills Mall into a two-phase project called Village of Laguna Hills. The developer hopes to have the first phase completed in five to seven years.