Double-digit rent increases in Orange County have hit the wall.
Rent hikes as steep as 30 percent in OC since 2020 have plateaued, with average apartment rents sliding 2.5 percent over the last four months to $2,540 per month, the Orange County Business Journal reported, citing CoStar.
Landlords and investors have braced for the shift, with this year likely to reset the market as it works to maintain gains since the dawn of the pandemic.
“It’s going to be a bumpy year, with lower pricing and fewer construction starts,” Bill Shopoff, CEO of Irvine-based Shopoff Realty Investments, told the Business Journal. “There will be some owners who are stretched a bit. Overall, many will look at 2023 as a year to catch their breath.”
Capital markets will take a hit as well, with a limited buyer pool for OC multifamily projects.
“The cost of debt has gone up so much, it’s essentially stalled the transaction market,” Dan Blackwell of CBRE said, adding that capitalization rates for the sector shot up from 3 percent and 4 percent to nearly 6 percent. “That negative leverage has sidelined a lot of investors.”
Orange County saw double-digit rent increases in 2020 and 2021, as residents benefitted from stimulus incentives and concessions implemented as a result of the pandemic.
Occupancy growth was negative for the final three quarters of last year, in part because of eviction increases as pandemic-era incentives have ended. OC renters are also dealing with high inflation and interest rates, and a troubled labor market.
Orange County’s luxury rental properties may be somewhat insulated from the rent drops, Shopoff said, adding that occupancy levels are in the high 90s.
“Those renters are renters by choice,” said Shopoff, whose firm manages housing and mixed-use projects in Newport Beach, Huntington Beach, Westminster, Fountain Valley and Fullerton.
“Most of our renters could own as well as rent, and with the cost of buying having essentially doubled in the past year, it’s been a net good for the luxury rental market,” he said.
Helping to insulate Orange County’s rental market is a somewhat limited development pipeline.
John Drachman, co-founder of Newport Beach-based Waterford Property, estimates new apartment projects coming online in the next year represent 2.5 percent of the region’s total inventory.
“Markets like Austin will deliver 8.5 percent of overall apartment stock in new units over the next 15 months, while Phoenix is delivering closer to 11 percent,” Drachman said.
The Irvine Business Complex has the most new projects in the pipeline, according to CBRE’s Blackwell, with several premium projects expected to complete more than 1,000 units next year.
As cap rates rise and rents fall, apartment investors are scouting discounts, a trend that hasn’t borne out on the seller side.
“There’s a gap between pricing expectations as buyers manage new financing conditions and sellers continue to enjoy strong fundamentals,” Blackwell said. “Both camps are right.”
The number of deals has dropped at least 50 percent year-over-year, Blackwell said, with many buyers in a wait-and-see mode. This presents opportunities for those looking to make deals. “With less competition, there will be buying opportunities in the next six months,” he said.
Orange County’s largest cities were among the priciest rental markets in the nation last year.
— Dana Bartholomew
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