Orange County apartment rents are likely to stay at or near record levels in the coming months as a slowdown in construction impacts a market with a 96% occupancy rate.
There were no multifamily deliveries in the fourth quarter in OC and no significant construction starts in the second half of 2024, according to Colliers’ latest market report.
Rents in OC have leveled off at nearly $2,600 a month, with an average effective rent of $2,598 in Q4. After torrid rent growth during the pandemic, Orange County rents remain nearly 28% above pre-pandemic levels.
The occupancy rate in OC rose to 96.1% in Q4, up from 95.8% in Q3. Occupancy in the Newport Beach submarket hit 97.6% in the fourth quarter.
Record-high rents are unlikely to put a dent in the demand for apartments in OC, as first-time buyers of single-family homes increasingly are shut out of the market by monthly mortgage payments that are three times higher than the average apartment rent.
A typical OC buyer in November had a monthly payment of $7,700, assuming a 20% down payment, representing a 126% increase from the average payment five years ago, the Orange County Register reported.
Most of the new construction in OC is centered in one of the county’s 10 submarkets, Irvine. Of the 5,624 units under construction in Orange County, 4,257 units are being built in Irvine. The largest multifamily development under construction in the county is Garden Homes’ 876-unit project, known as The Trilogy.
Developers in California who have struggled to pencil out new multifamily projects due to rising construction costs and high interest rates will have even higher hurdles to overcome this year.
In the wake of the wildfires in Los Angeles, building costs and insurance rates are expected to surge throughout California, with some analysts predicting that the onslaught of cost increases may induce multifamily developers to scrap projects in the pipeline that are no longer financially feasible.
The construction industry anticipates years of disruption from the L.A. fires that could make it much harder to build across California due to shortages of construction workers and building materials, the San Francisco Chronicle reported.
The rebuild in Los Angeles is expected to draw contractors from surrounding areas, including Orange County, and other parts of the state. The labor crunch will be amplified by California laws requiring contractor licensing, limiting contractors' out-of-state ability to work in The Golden State.
In the wake of the Tubbs Fire, which tore through parts of Napa, Sonoma and Lake counties in 2017, labor costs doubled within three years as building materials prices soared, pushing up overall building costs by about 20%.
The demand for building materials, labor and other construction services following a natural disaster typically increases costs from 15% to 30%, according to a CoreLogic analysis based on public records.
Allied Framers, a Vacaville-based company that focuses on carpentry for multifamily affordable housing projects across the Bay Area, is bracing for the kind of prolonged scarcity that occurred during the pandemic when lumber mills temporarily shut down and developers incurred costly project delays.
The coming months and years could “look a lot like pandemic-area scarcity,” Jesse Carter, VP of operations at Allied Framers, told the Chronicle.