If its first quarter report on the Orange County apartment market, Marcus & Millichap is reporting that the county's population base grew to 2.83 million last year, a 1.42% increase from 2.79 million the prior year. Although the per capita income has continued to increase by an average 5% annually, allowing tenants to pay higher rents, the gap between income and inflation are apparently narrowing.
Job growth in the county, which outpaced the nation, increased 3.4% last year. Currently there are almost 1.5 million workers employed here. Between the 7,000 new employees added by Disney to work at its new California Adventure theme park and an expected resurgence in defense spending promised by the Bush Administration, the county's job growth is expected to be healthy again this year, but at a slower growth rate than in 2000.
The city of Irvine and the south county submarket in general are expected to gain the lion's share of the 4,200 new units to be built this year. However, the amount of vacant land available, even in that submarket, is not expected to be enough to meet future demand for housing.
"Everything you're seeing built right now is Class A either in Irvine or south county. Rents in those sectors are getting to where they are not affordable, plus people have to deal with traffic problems. So people are moving closer to work," says John Przybyla, regional manager of the Marcus & Millichap's Irvine office. "People who own apartments in those markets can keep them full and increase rents."
After a slight increase in the vacancy rate to 3.5% in 2000 from 3% the year before, vacancies are expected to go even lower this year, given the expected high demand and insufficient construction of new product. Job growth will also factor into the equation, however, higher rents may damper demand some as renters seek less expensive options perhaps in the Inland Empire.
Rents increased 8% for the county as a whole last year up to $1,050 from $974 per month, and further increases are expected this year, although at a slower rate due to affordability. Still, many property owners have waiting lists of potential candidates, so they will be able to increase rents throughout the year.
Apartment investors enjoyed surging demand in 2000 as sales prices increased 16.2%, outpacing rates of return on most other investment opportunities. With many owners choosing to hold onto their investments last year, only 150 properties changed hands in Orange County compared to 209 transactions in 1999.
"What we need more of is development of B and C properties in B and C areas," Przybyla says. "What we've seen developers do is buy the value-added deals, buying older buildings and rehabbing and refurbishing them and then offering them at a pretty strong rent."
Capitalization rates also declined last year to 7.80%, down substantially from the 8.06% average capitalization rate in 1999 for properties in excess of $500,000. As for 2001, the report anticipates a stabilization of capitalization rates for 2001 rather than a further downturn, as buyer confidence wanes due to the projected national economic slowdown.
Overall, Przybyla sees the central submarket including Anaheim, Buena Park, Fountain Valley, Fullerton and Garden Grove as the hottest market in the county because the owners of those buildings have traffic on their side.
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