By NIDAL M. IBRAHIM
Sares-Regis Group’s Geoff Stack is bullish on the Orange County apartment market.
Still, the company’s last apartment buy in OC was in 2000.
“There is so much capital that people are willing to pay really crazy prices,” said Stack, managing director at Sares-Regis. “To buy something today, at these unrealistic cap rates,the 5.5% to 4.5% range,it will be a long time before you start making money off these deals.”
His Irvine-based development and management company is one of the bigger players in Southern California, owning and managing roughly 13,000 apartments, 2,000 of which are in OC.
As for development opportunities, “there’s very little land available here and obviously most of it is owned by two large landowners,” said Stack, referring to The Irvine Company and the Rancho Mission Viejo LLC.
As with the housing market, lack of land and demand for housing will continue to drive the apartment market.
The high cost of housing and the correspondingly low affordability rate,in December only 13% of OC households could afford a median-priced home, down from 18% the year before,has investors looking strongly at the apartment market.
Many of those searching for deals are betting that higher interest rates will push more families into the rental market, leading to higher rents.
The numbers bear that out.
Apartment occupancy in OC last year generally was above 95%. And apartment owners interviewed reported rental increases of anywhere from 3% to 5% last year, with similar hikes expected this year.
The average OC apartment rent at the end of 2004 was $1,317 per month, up 4.5% from a year earlier, according to Phoenix-based apartment brokerage Hendricks & Partners Inc.
Investors still are betting on apartments, despite their relative low cap rates right now, said Brian Hawkins, an associate partner with Hendricks’ Newport Beach office. (Cap,or capitalization,rates represent the return on real estate investment. The higher the cap rate, the better the income.)
“The thing that’s interesting to me is prices have gone up faster than rents have increased,” Hawkins said. “I think a lot of it has got to do with interest rates being as low as they are. There’s a lot of things, looking down the road, that makes apartments look attractive even though their returns are low right now.”
Among those trends is the condo conversion craze, where investors have bought apartment complexes only to re-entitle them for sale as condos.
Conversions have cut the stock of apartment units in OC, helping to boost occupancy to the high 90% level.
Steve Duffy, chief operating officer of Irvine-based Western National Group, sees several factors helping apartment owners.
“There’s a whole conflux of dynamics that include the affordability problem, condo conversions and supply constraints on apartment development,” Duffy said. “They’re all squeezing both the supply of apartment units and keeping demand at very high levels.”
Western National manages more than 23,000 apartments and owns roughly 13,000 of them.
With an OC portfolio consisting of about 10,000 units, Western National is the second largest apartment owner in the county, trailing only the Irvine Co.
Duffy said he expects Western National will be able to hike rents “at least” 4% annually during the next three to five years.
“Apartments are inexpensive housing and in a county where housing is extremely expensive, apartments are very solid fundamentally,” he said. “We believe they will remain that way over a long period of time.”
The Irvine Co. also senses an opportunity in a strengthening rental market. The huge landowner is in an envious position, holding large parcels of developable land in some of OC’s fastest-growing areas.
Overall, the Irvine Co. has more than 26,000 apartments in some 80-plus complexes. Occupancy is upwards of 95% at its apartment buildings.
The Irvine Co. recently completed that last phase of its latest OC complex, the 1,500-unit Villa Siena apartments in Irvine.
It’s also moving forward with more development, including another 1,500-unit project in the Irvine Spectrum Center, the residential complement to its Irvine Spectrum office park.
The first units in the Irvine Spectrum development will be available in November, said Bill Rams, a spokesman for the Irvine Co.
“The job market here continues to be among the strongest in the nation and that is creating more demand for apartments,” Rams said.
He declined to speculate on future rental rates. Despite the Irvine Co.’s dominant position in the market, Rams said “rents are determined by the market and not by us.”
Sares-Regis’ Stack believes future apartment development opportunities in OC will be hard to come by outside of land owned by the Irvine Co. and Rancho Mission Viejo. Still, for those that are creative, there will be some opportunities, he said.
“I do see some redevelopment starting where people are going and buying older industrial buildings and tearing them down and building new apartments,” Stack said. “Long-term, if there will be apartment development in Orange County, it will be through redevelopment sites that were formerly military sites, office buildings, industrial buildings, etc.”
Given the sparse acquisition opportunities in OC, Sares-Regis has pulled back on the conversion of some of its apartments to condos, having been one of the leading developers in this trend.
“We’re a long-term investor and we like to hold apartments for the long-term,” he said. “Besides, where am I going to put my money if I sell them?”
