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MARKET HIGHLIGHT: ORANGE COUNTY 34 • January 2017 • Western Real Estate Business www.REBusinessOnline.com Rent an apartment or buy a home? That is the question now posed to many Millennials as they face the facts about the high barriers to homeown- ership that generations before them, at the same stage of life, could easily overcome. But since the Great Reces- sion and the loose homeownership qualifcations that helped spawn it, banks and other home-lending institu- tions have been under the tight-fsted control of government regulators who have demanded, rightly or wrongly, that prospective homeowners meet strict and often daunting qualifca- tions to buy a house. While that’s bad news for a genera- tion that was raised by families who owned homes and where a home was the primary fnancial asset for inheri- tance, it’s good news for multifamily investors, developers and contractors. The demand for apartments has risen to levels eclipsing demand for home- ownership in one of the few times in modern history. This is especially true in Orange County where home prices have always been among the highest in the nation. In fact, demand among multifamily investors is so strong that nearly every recent ofering for well-located apart- ment properties has garnered mul- tiple ofers, creating a perfect-storm situation for the sellers. One sale that involved an investment portfolio of four apartment buildings in Orange County brought in 10 or more ofers on each of the four buildings. In each of the four sales, not only was the ask- ing price met, but was exceeded, and the sellers didn’t have to worry about the deal falling out of escrow since there were so many qualifed backup ofers. Since it was our team that man- aged and negotiated the sale, it could only be described as “frenzied” at times, demonstrating the continued demand for such properties. This sale also demonstrates, in tan- gible terms, the confdence investors have in the multifamily investment market in Orange County as we head into a new year. But the question has to be asked: is this a short-sighted in- vestment strategy, or one that will be viable well into the future? Our only concern is on the supply side — will there be enough prop- erties available for sale to meet the strong investor demand? It certainly will be more challenging to fnd good investment properties here, but our strategy is, and has always been, to broaden our search base. This is not just in geographic terms, but in terms of population growth and its impact on the multifamily market. Interestingly, this latest four-proper- ty Orange County transaction did not involve new apartments, but apart- ments that had been well maintained over as long as 30 years, having been renovated, in some cases, multiple times. What they did have in common was their solid neighborhood loca- tions with good schools, low crime rates, and all of the qualities home owners desire. But these were not houses. They were large family apart- ments and that’s what the Millennials seek because they have become re- signed to the fact that they may never be able to aford a home in those parts of Orange County where they work, play and want to live. Recent numbers show an Orange County average annual rent growth of 6.3 percent, but having about 10,800 new apartments under construction in Orange County now, that type of rise in rental rates will signifcantly drop in the next few years as supply and demand reach equilibrium. Col- liers research shows that 2015 was the highest year yet for rental rate in- creases at 7.7 percent. This year that rate declined to 4.9 percent, or almost half of what it was a year earlier. Fur- ther decreases in annual rental rates are expected in Orange County at 3.5 percent in 2017 and at 2.6 percent in 2018, all of which will be good news to renters. This shouldn’t afect investors much from what we’re seeing on the ground. Southern California and, Orange County in particular, will continue to be among the strongest rental markets in the country, but there are qualifca- tions to that statement. Well-located and well-maintained properties that can house families will be at the top of investor lists as long as capitaliza- tion rates remain at a level where re- turn on investment is acceptable and stable. We see no change there in Or- ange County. Our most recent experi- ence proves that — when you can in- form your selling client that you have multiple ofers in hand, it alters the whole dynamic of the sales process. It puts the client in the driver’s seat and that’s what all brokers are attempting to do whether it’s multifamily, indus- trial, ofce, retail or mixed-use retail/ residential. But, it should be empha- sized, that we would never have had so many ofers if the cap rates didn’t pencil out. There is also a fip side to this entire equation. As Millennials enter middle age, their parents are impacting the multifamily market in a big (or even bigger) way as well. One look around Orange County shows that while the standard, family sized apartment market is going strong in terms of development, investor interest, con- struction and return on investment, there is a growing market for seniors, many of whom live on fxed incomes. However, while demand for these types of units is growing at a record clip, investor interest is not. OC’S APARTMENT MARKET CONTINUES EXPANSION Patrick Swanson SVP, Colliers Irvine Brett Bayless Senior Associate Colliers Irvine Brett Bayless Senior Associate, Colliers Irvine HOOK RETAIL ASSOCIATES | #1 RETAIL INVESTMENT SALES TEAM IN SO. CA A LEADER IN PRIVATE CLIENT REPRESENTATION AND INVESTMENT SALES OF BOTH SINGLE AND MULTI TENANT RETAIL ASSETS IN SOUTHERN CALIFORNIA. 30 YEARS AND OVER A BILLION IN SALES OF STRICTLY RETAIL PRODUCT . Scott Hook Executive Vice President 949.954.3724 [email protected] Lic# 00914392 www.hookretailassociates.com VIEW OUR LISTINGS & CLOSINGS AT DON’T JUMP OFF THE CLIFF INTEREST RATES ARE RISING continued on page 36
