By NIDAL M. IBRAHIM
Orange County apartment owners are optimistic about prospects for the rest of this year, citing the high cost of construction, constrained supply and escalating housing prices.
Sares-Regis Group pushed rents up 7% last year at its roughly 2,000 OC apartments, where vacancy is 4.3%, said Geoffrey Stack, managing director.
Stack’s Irvine-based development and management company is one of the bigger apartment operators in the Southern California area, controlling and managing roughly 13,000 apartments.
Stack expects rents to rise 7% this year.
“The apartment market has never slowed down and will continue to be strong,” said Stack, who is past chairman of the National Multi-Housing Council. “The biggest problem is that costs have risen precipitously and it’s hard to make numbers work for new construction.”
Real estate analysts also are bullish on the county’s apartment market.
OC recently was ranked No. 1 in the country for potential growth, supplanting the Inland Empire, which held the top spot last year, according to a Marcus & Millichap Real Estate Investment Brokerage Co. survey.
Local rents are expected to rise 5.6% to $1,445 per month this year, according to the Marcus & Millichap study. Overall vacancy, which already is a tight 3.5%, is expected to dip further to 3.2%.
Stack said the county’s job creation and tight land supply will continue to make the market attractive for residents priced out of the stratospheric housing market,one of the priciest in the nation.
Even developers attracted by market conditions are finding it difficult to do business in the county.
The same tight land issues that have driven much of the gains in the new-home market also are pinching apartment development.
In fact, apartment developers today find themselves competing against their more aggressive condominium development counterparts, who are willing to pay more for the same parcel of dirt.
“It’s almost impossible to buy apartment land today unless the city says, ‘This will be apartments and we won’t allow you to do condos,'” Stack said.
For The Irvine Company, OC’s largest landowner, such issues aren’t a problem. However, the company continues to hew to its rather conservative development schedule.
The Irvine Co.’s biggest apartment project under way is The Village at Irvine Spectrum Center, which is set to include 1,550 units starting from $1,400 and ranging to more than $2,500 per month when it is completed next year.
The company recently started leasing its first phase of 517 apartments, said Bill Rams, Irvine Co. spokesman.
Rams said the Irvine Co. expects “modest rent growth” this year, but said that “rents have remained relatively stable, particularly when compared to the for-sale market.”
Steve Duffy, chief operating officer of Irvine-based Western National Group, believes the rental market will remain tight as more families are squeezed out of home ownership.
“Southern California is a very strong apartment market for the simple reason that the housing market is so tight,” Duffy said. “Whether you call them single family units, attached for sale units, apartment units, whatever you call a residential housing unit, there’s not enough of them in this economic environment. As such, it’s a strong business and it looks like it will continue to be strong.”
Western National manages more than 23,000 apartments and owns roughly 13,000 of them. With OC holdings of about 10,000 apartments, Western National is the second-largest apartment owner in the county behind the Irvine Co.
Irregular Market
Duffy expects rents to rise 3% to 4% this year, but cautions that the OC market has unique pockets.
“It’s really a submarket strategy,” he said. “If you divide Orange County in terms of north and south South Orange County is still seeing the introduction of a significant amount of class A apartment communities and that will have an impact on rent appreciation.
“North Orange County is a different story. It’s effectively developed. We’re not adding any material new units to North Orange County at all and as such, rent increases are probably going to exceed 5% on a general basis.”
As with Stack and Sares-Regis, Western National is scouring the county for development opportunities. “The condo converters who have assaulted the apartment marketplace in Southern California, particularly in San Diego County, they’re going to cool off in the near future,” Stack said.
Sares-Regis, which is one of many companies that have taken on condo conversions,buying up apartment properties and selling them as condominiums,recently completed another such deal.
The company’s Watermarke development in Irvine sold out in 12 months, with the last sale being recorded in December.
The company developed the 535 units as condominiums, but chose to lease a portion as apartments. It launched its sales program last year in an effort to take advantage of the frenzied state of the for-sale market. It also was wary of the thousands of new units slated to be developed in the Jamboree Corridor area.
“I think along the Jamboree Corridor, there are enough units that could potentially cause some problems,” Stack said.
Stack defended condo converters against critics who have chastised them for cutting the county’s apartment stock.
“The majority of conversions tend to be lower priced for-sale units,” he said. “Ninety-six percent of our buyers in the conversions we’ve done over the last four years have come from the apartments.”
Ibrahim is publisher of Arab-American Business in Huntington Beach.
