SoCal Apartment Fundamentals Create Opportunities

Shane Shafer featured in Connect California

Southern California continues to be a market that is highly sought after. The first half of the year saw fewer sales than in recent years. This has created an even larger increase in demand from buyer and capital to buy, as investors see Southern California as a market with great fundamentals that continues to improve each quarter. We have seen that those that have a presence in So Cal want to expand their portfolios, others that do not have a presence are aggressively bidding on properties to build scale and have a presence in one of the most sought-after markets in the county.

Investors are attracted to the stability, quality assets and consistent returns they find throughout Southern California. People believe that the region is poised to withstand a correction that could possibly occur down the road better than some other areas of the country, and they also like the renter demand drivers. Job growth remains strong through the region, and people who are attracted to the Southern California quality of life continue to support a robust renter market.

Recent NorthMarq research shows consistently high occupancy levels and rising rents, both of which support continued growth in net operating incomes. Vacancy rates are hovering at 4% in Orange County; 3.6% in Greater Los Angeles and 3.3% in the Inland Empire. Los Angeles, in particular, saw annual rent growth surge to 6.1% in the first half of the year.

Investors looking to buy in Southern California understand that assets come with a pricing premium, due to the highly competitive nature of the market. Cap rates are averaging 4% in Orange County, 4.5% in Los Angeles and the low 5% in the Inland Empire. The low cap rates are a testament to just how well the market is performing, and the further drop in interest rates is likely to put even more downward pressure on cap rates.

The current climate that includes low interest rates, strong fundamentals and a competitive buyer pool are all signs that suggest the second half of the year is shaping up to be a very active investment marketplace.

There continue to be good opportunities for both buyers and sellers. Sellers are enjoying the competitive bid environment. Every assignment that NorthMarq is working on these days is generating multiple bidders.

Buyers like the continued strength they see in fundamentals, which is supporting greater confidence that the market is not at the peak for rents, and there is still opportunity ahead to increase rents and net operating income.