After playing second fiddle to home and condominium construction during the boom years of Orange County’s housing market, apartment development is starting to grab more attention as of late.
In Anaheim, block-sized developments, totaling more than 1,000 apartments, are moving to completion in the former industrial area of the Platinum Triangle. More apartment developments are in the pipeline, even while condo projects planned for the region are stalling.
Likewise, in the commercial area around John Wayne Airport, two projects have opened in the past year, while a backlog of additional projects are on the drawing board or under early stages of construction.
The Irvine Company opened an upscale, 890-unit complex in Costa Mesa’s South Coast Plaza in March. It’s the first OC apartment project it has built off the Irvine Ranch. Back on the ranch, the Newport Beach-based developer is starting early-stage grading work for more apartments next to its already sizable Village at Irvine Spectrum Center complex.
At the onset of 2008, about 1,250 apartments were expected to open during the course of the year, according to Marcus & Millichap Real Estate Investment Brokerage Co. Now, that total’s looking likely to exceed the roughly 2,000 apartments that were built in both 2006 and 2007.
That said, the development isn’t indicative of a red-hot local apartment market, industry watchers say.
“The rental market here is good,but it’s not spectacular,” said Michael Hayde, chief executive of Irvine-based apartment investor and operator Western National Group. The company counts about 28,000 apartments under management nationally.
By good, Hayde notes that the company’s OC properties are seeing rental growth of 3% to 4.5%, below the 6% to 7% growth of prior years.
“Rents may have gotten ahead of themselves for the short term as the market adjusts to the housing slowdown,” according to a recent study by the University of Southern California Lusk Center for Real Estate.
Lusk Center officials are predicting about 2,875 new units to be completed this year, compared with 2,163 last year. That level of development, along with the slowing local economy, should push OC apartment vacancy rates up from 3.8% in 2007 to 4.6% in 2008.
With vacancy rates increasing, it’s not the best market to build into, according to Hayde. His company’s acquisition and development arm, Western National Properties, has no plans to break ground any time soon in the region.
Instead, the company,flush with a $200 million investment fund,is looking at buying land that condo developers are selling at a discount, or taking over “broken” condo developments that now could work better as apartments. Projects in Anaheim’s Platinum Triangle could prove to be a potential investment, he said.
So far, those condo developers haven’t dropped their prices enough to justify a buy, Hayde said.
“Sellers are still holding on to 2007 prices,” he said.
It wouldn’t be unlikely to see a project or two in Anaheim go back to the bank, he said.
The slowdown in the condo market during the past two years is largely behind the increase of apartments coming onto the market now.
Of the roughly 2,600 apartments now under construction or planned within Anaheim’s Platinum Triangle, close to half had been envisioned at one point as condominium projects.
Among the first projects to switch to apartments was the 251-unit 2100 at Platinum Triangle project on Katella Avenue, currently under construction. The project’s being built by AvalonBay Communities Inc. and should be completed this fall.
Other big Anaheim apartment projects moving ahead include BRE Properties Inc.’s $89 million Park Viridian project on Katella Avenue. The 320-unit project, formerly known as Stadium Park, is expected to open early in 2009.
The largest apartment project under way in the Platinum Triangle is Archstone-Smith’s 884-unit Archstone Gateway, which is nearing completion on State College Boulevard. The project, tentatively scheduled to open this summer, is one of the few projects not originally envisioned as condos,the development is built on land that’s leased, and the land ownership requirements prohibit for-sale development at the site.
Apartment developers wrapping up projects next year are likely to face the same issues that their condo-developing colleagues are seeing for new buildings,slow leasing and the need to offer big concessions in order to land residents.
When Allure, a 278-unit complex just over the Anaheim line in Orange opened more than a year ago, rents started at about $1,500 for one-bedroom units, up to more than $3,200 for some two-bedroom units.
Now, the most expensive apartments being listed for rent run closer to $2,800 per month. Concessions being offered at the complex are said to be running close to $5,000 per year in some cases.
The apartments, along Chapman Avenue just off the Santa Ana (I-5) Freeway, were originally set to be sold as condos by K. Hovnanian Homes, but the company backed out of the deal in 2006 because of the housing slowdown. The apartments now are owned by UBS Financial Services Inc., which paid $91.5 million for the project in late 2006.
