Shane Shafer authors perspective in Western Real Estate Business: OC's multifamily sector remains highly sought after by investors

LOS ANGELES, CALIFORNIA (February 21, 2023) - Orange County remains a highly desirable market for multifamily investors -- and for good reason. It is a flight-to-quality market with a strong employment base and continued expectations of future job growth; this drives demand for rental units and pushes rent growth and occupancy.

Add to that a severe shortage of rental housing supply, more would-be homebuyers remaining renters, and Orange County’s affordability compared with other Southern California markets, and it points to a robust investor market.

The employment market continues showing signs of growth and resurgence, adding 73,000 jobs in 2022. Unemployment is an extremely low 2.5 percent. Long known for its tech startups, tourism, and hospitality sectors, healthcare and bioscience are also expanding industries. For example, Washington-based health system Providence is investing $712 million in Orange County to build two new multispecialty medical centers and a new patient-care tower at Providence Mission Hospital. The centers will be in San Clemente and Rancho Mission Viejo.

This strong job market gives multifamily investors’ confidence in their expected returns as they aggressively pursue assets when they hit the market.

Central Orange County leads in rental gains
Central Orange County experienced a spike in demand due to limited new construction and renters seeking affordable rental levels and good-paying jobs. Average rents here are nearly $950 per month lower than the coastal markets and Class A core sector.

This renter migration is creating high demand and driving continued rent growth while maintaining very low vacancy rates in all sectors, but primarily in mid-market vintage properties. Rents in Central Orange County mainly expanded in first-quarter 2022 and eased in the remaining three quarters. Although rent growth slowed, it still remains stronger than most other markets in the county.

Anaheim/Central Orange County led the market with the highest year-over-year rental growth of 6 percent and the lowest vacancy rate at 3.3 percent. Although rent growth is lower than last year’s increases, new leases being signed are still in the upper teens to 20 percent with growth still very positive, and showing continued momentum.

Expensive cost of homeownership
Challenges of affording a home in Orange County continue, pushing more would-be homeowners to rent. The median single-family home price in Orange County is $1,036,000. Assuming a 20 percent down payment at current mortgage rates, monthly payments average $5,632. Newer construction multifamily product, which would compete for these residents, averages $2,992 per month, making renting more affordable than owning. This trend is fueling demand in all areas, particularly in the coastal, and South Orange County markets and Class A core market buildings.

Flight to quality
Multifamily values in Orange County have maintained one of the highest price per unit, and in many cases, the lowest cap rates of any Southern California market. The median sales price in 2022 was $366,400 per unit with several Class A properties trading in excess of $500,000 per unit.

Orange County is typically a lower-volume transaction market. When a multifamily asset becomes available, there is no shortage of investors bidding to take advantage of the consistent, stable returns. The market’s investor appetite for quality locations that produce expected consistent good returns and lack of inventory could allow for competitive pricing levels in 2023.

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