Orange County’s High-Density Future

Peter Hauser

The Orange County submarket of Southern California is one of the most coveted and competitive regions in the nation for multifamily investment. The county provides access to miles of coastline, retail and dining amenities, entertainment and sporting venues, solid school systems, colleges and universities, health care and a diverse job market. Orange County is viewed by many as the gold standard for both renters and landlords.

Over the past 20 years, new construction activity has been severely constrained, creating limited housing inventory both for renters and homeowners. The tide is turning, however. New California legislation has required that all cities throughout the state meet quotas for the development of multifamily projects with the objective of combatting the substantial housing shortage.

Currently 6,800 new multifamily units are in the process of being delivered and thousands across the county are in various planning stages. With new development activity in the majority of its 40 cities, Irvine, Anaheim, Orange and Santa Ana are seeing the most action. Average rents for new construction assets are averaging $3,200 per unit, and for older construction rents are averaging $2,300 per unit. Even with the positive outlook on new construction, Orange County’s rental market is anticipated to remain hot. As new inventory is absorbed, we will hope to experience a healthy supply-demand balance over the coming years.

This market suffers from a lack of for-sale inventory, creating a huge amount of investor competition. Properties that are put on the market tend to garner many offers and usually sell near or sometimes above the asking price. The diverse investor pool grows every year with a number of private investors and institutional capital groups seeking to buy for the first time or expand their portfolios here.  

Pricing typically reflects average cap rates in the 3.75 percent to 4 percent range. For new construction, we are seeing low- to mid-3 percent cap rates. Interest rates for 10-year fixed-rate debt with 60 percent leverage are currently in the 3.5 percent range—up from their lows in the 2.65 percent range. Average price per-unit is $320,000 with newer construction trading in the $550,000 per-unit range.

Peter Hauser is a principal in Multifamily Capital Markets at Avison Young.