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End to Pandemic Rental Frenzy?

The overall apartment push seen lately in OC was driven by the pandemic, which stalled many commercial product types—specifically office, hospitality and retail—while shining a spotlight on e-commerce and housing, prompting investors to focus almost entirely on industrial and multifamily construction.

Bolstered by attractive interest rates and a willingness from lenders, thousands of units broke ground across the county in 2020.

“There was a lot of liquidity in the apartment market,” Waterford Property Co. co-founder John Drachman said.

Demand for apartments hit record highs in 2020 and 2021, sending average rents up more than 20% in some local markets. That demand has since cooled, with residents moving out of the county in lieu of more affordable markets.

The increase in inventory combined with that cooled demand has sent vacancy rates in the sector up to 4.4% from 3.7% about a year ago, Drachman said.

Still, he argues Orange County is not at risk of overbuilding, with more housing units needed to meet demand and stabilize rents.

“While we are building more units on the higher end, it’s very low when you look at the amount of deliveries against Orange County’s overall base,” Drachman said, noting the new units added over the past year represent a little over 2% of the county’s total apartment inventory.

The county won’t see a significant impact on pricing until vacancy rates inch higher to double-digit figures, as seen in competing markets like Phoenix or Las Vegas, which has seen an “overindulgence” in apartment development, notes Drachman, spurred by the influx of new residents relocating from higher-priced U.S. metros.

Vacancy rates for Las Vegas multifamily increased to 9% at the end of the first quarter from 8.1% at the end of 2022, according to data from Avison Young.

“All of these surrounding markets would kill to have our vacancy rate,” Drachman said.

Local Portfolio

Waterford’s local workforce housing portfolio, which tops 1,400 units, is nearly 99% occupied.

“When you rent restrict units and charge below market rates, it’s amazing what that will do for demand,” Drachman said.

“Orange County has gotten incredibly expensive, and we need more housing options to keep talent here.”

There’s more than 5,000 apartment units currently under construction in Orange County and slated to deliver within the next two years, but new construction starts are few and far between amidst troubled capital markets.

After that base delivers, “we will see a pause of new development for about two years because of the cost of debt,” he said.

That will prompt vacancy rates to lower once again, and drive renewed demand from developers.

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