Orange County Multifamily Market Report

Market Overview

Since mid-2022, multifamily development has slowed significantly within the Orange County area. A slew of economic concerns, including ongoing inflation, rising interest rates, and some of the highest average rents in the country, are stifling new multifamily construction. Though average rents are much higher than the rest of the nation, rent growth has noticeably slowed in Orange County, along with the decline in demand. Historically, the level of occupancy in Orange County’s apartment market has been one of the highest in the nation. This trend continued into Q1 2023, as new properties provided more choices for high-income renters. Currently, the vacancy rate is at four percent, which is closer to the 10-year average of 4.4 percent than it has been in the past year and a half.

Meanwhile, investment activity remained high, with the sales volume above $1.2 billion. Only a small portion of Orange County avoided the demand slump in 2022; however, some more affordable neighborhoods, such as Central OC East, have displayed greater stability.

Highlights

• Orange County’s estimated population in 2023 is 3,240,017 with a growth rate of 0.55%. Since 2012, Orange County’s population growth is 2.9% higher than the national average. Orange County is the 3rd largest county in California.
• Average price per unit year-over-year is currently $427,000.
• Given the high cost of building here and the difficulties in obtaining debt among developers, financing construction in the foreseeable future is likely to remain challenging.
• With the consistent delivery schedule for Orange County, especially in Central Orange County and Irvine, the vacancy rate is projected to increase as these luxury units are delivered.
• On average, cap rates are some of the lowest in the country at 3.8%.

Orange County is amongst the most stable rental markets in the country.

Vacancy | Rents | Construction

Rent growth slowed to 0.5 percent in 2022, to $2,721, while the renter-by-necessity segment led gains for rent growth. The average asking rent in March 2023 was $2,530, with an asking rent growth of 1.2 percent. Rents fell during the last four months of 2022, which continued into 2023. U.S. rent growth was just above Orange County’s at 0.6 percent. Rents in Class-C units are up 4.4 percent year-over-year. Many of these Class C apartments are comprised of working-class renters, heavily concentrated in the central and northern OC cities. The average monthly asking rent for these workforce units is $1,920. In 2022, the average asking rate increased 13.5 percent to $2,721, outpacing the national rate by 10.9 percent, or $1,718. The average vacancy rate for Orange County is currently 3.9 percent. Since mid-2022, every apartment class has seen demand fall, with 3-star properties accounting for most of the decline since last year.

Orange County has averaged 6,300 units under construction over the last decade while adding a net of 31,000 units during that time. With construction funding becoming increasingly difficult to obtain and projects struggling to break even due to high-interest rates and growing construction costs, deliveries may begin to slow in 2023.

Orange County Deliveries

• 1,232 units became available in Orange County, which accounted for 0.6% of available units, less than half of the 1.3% U.S. rate.
• 2022’s inventory expansion is below the 1,788 units delivered in 2021.
• Current struggles to complete supply stem from rising inflation, rising construction materials costs, supply chain issues, and labor shortages impacting delivery volume.
• Construction starts have softened due to the economic landscape; through August, just 625 units broke ground, well below the 2,512 units during the corresponding interval last year.
• Three submarkets in OC had 1,000+ units in the process of being delivered—South Orange County (1,956 units), Santa Ana (1,692 units), and South Irvine (1,478 units).

Sales

Over the years, Orange County has attracted a diverse spectrum of national and local investors. Companies have historically been drawn to the region because of its stable demand, consistent rent growth, and fresh inventory. The 12-month sales volume for Orange County was $2 billion compared to the historical average of $1.2 billion in transaction volume of multifamily assets. 2023 should see an overall downtick in trades due to economic uncertainty. Price per unit for value-add deals increased by 13.7 percent to $434,025, doubling the U.S. average to $217,196, and cap rates have been among the lowest in the country.

Orange County, by the numbers in the past 12 months

• Properties under construction: 22
• Units under construction: 6,773
• Vacancy rate change YOY: 1.4%
• Average asking rent: $2,530
• Average price per unit: $434, 025
• Sales volume: $2B

Notable OC Transactions Completed by Matthews Real Estate Investment Services™

Christian Espinoza, David Harrington, and Chad Kurz represented the sellers in the 12,508-square-foot multifamily property that offers 12 two-bedroom and eight one bedroom units. The transaction was a 20-unit apartment building from a group of three family trusts at 8361 15th St. in Westminister, California, for $5.3 million, or $265,000 per unit.