Ongoing apartment construction in Orange County totals just over 7,100 units, with 4,498 of them found in properties scheduled to complete in 2015. This year’s deliveries, then, will mirror the 4,428 units added in 2014, with both of these annual tallies way above the 2,300 or so units of new supply typical on an annual basis in the metro during the past couple of decades.
Changes to Orange County apartment supply
Can Orange County handle a second consecutive year of comparatively aggressive deliveries?
The market enters the year with performances at very healthy levels. Occupancy now averages 96.9%, and annual rent growth is at 4.3%. Even with significant new product moving through initial lease-up during 2014, existing class A communities managed to push effective rents for new leases a little more than 4%. These results are encouraging signs for the metro’s near-term outlook: Underlying demand influences in 2015 appear likely to register at about the same levels seen in during 2014, and the coming year’s deliveries likewise will match the 2014 volume.
But exactly where the next round of new supply will come on stream complicates the picture a little.
Whereas most of Orange County’s apartment construction tends to occur in the city of Irvine submarkets, a whopping 83% of 2015’s deliveries will be in the East Anaheim/Orange, Huntington Beach, South Orange County, and Mission Viejo/Lake Forest submarkets. These generally are areas that have gone almost a decade or more without adding significant new supply.
That’s great news for the individual properties on the way. There’s likely to be pent-up demand for new units that will help accelerate lease-up volumes, even with rents set at very high levels.
How new construction could affect behavior
What’s unclear is the behavior patterns that will be exhibited by owners and operators of the best existing projects in the new pockets of construction.
There is some potential loss of residents in the existing product base to the new deliveries, and Orange County is a place where operators typically are very occupancy-sensitive. Compared to the behaviors seen in most metros, there’s some tendency to rein in prices even if the dip in occupancy is mild and likely to be brief. Under that scenario, which is a component of MPF Research’s base case outlook, rent growth should slow in the metro. Thus, we are expecting that overall rent growth for Orange County as a whole will cool to around 3% in 2015, versus 2014’s jump of just over 4%.
However, if there’s a situation where owners and operators could justify remaining aggressive in their pricing stances in the face of new supply, this is it. The new communities coming to market are going to have a product advantage over the existing stock; and, in turn, they are going to push the ceiling for rents in these neighborhoods. Within today’s existing product, then, there could be room to continue to drive up rents at a rapid pace while still maintaining a price differential from the brand-new units, despite that occupancy in the existing units could backtrack a little.
Sometimes the exact point-in-time performance in a given apartment market isn’t primarily about the fundamentals. Instead, it’s about owner and operator behavior. The Orange County market could fall into that behavior-driven performance category during 2015.