Apartment-Building Frenzy May Bring Trouble for Landlords, Researchers Say

So many apartment complexes are planned and under construction in Orange County that some owners could be in for trouble just around the corner.

That’s the conclusion of the latest annual study released by Research Network Ltd., a Laguna Hills consulting firm. The findings are based on a recent survey of 82,000 of the estimated 177,000 apartment units in the county.

“Although the county’s apartment market looks strong and vibrant on the surface,” said Pamela Wooldridge, a Research Network consultant, “a deeper look finds several indicators that the good times may soon come to an end.”

For renters, that means apartments will probably be easier to find in most cities and that rents will not go up much, if they do at all.

According to the survey, nearly 16,000 units were either under construction or in the planning stages.

That figure is a record for the county, the firm said. If all of those units are built, the owner of a new apartment complex may have a tough time filling it up with tenants. The owner of an older complex may have problems keeping tenants. And both could have a tough time raising rents.

“Sometime this year we’re going to get to a place where we can use the term soft to describe the market,” said Matt Disston, another Research Network consultant.

That view runs counter to the prevailing wisdom, which sees buying rental units in Orange County as a good move because vacancies are expected to become scarcer and rents, therefore, would soar.

The tax reforms enacted 2 years ago removed some major tax incentives to build apartments, and high land costs in the county make it more difficult to build a complex that renters could afford.

Pension funds, insurance companies and foreign investors are said to be scouring the county for complexes to buy. Hardly anyone is selling.

But unless those investors can find a well-occupied building in one of the few cities where rents are rising faster than inflation, they may be severely disappointed, Disston said. The apartment construction boom of the last few years has continued unabated, and average occupancy rates have dropped from a tight 99% in 1985 to 96.9% last year, the researchers said.

Those situations will “aggravate the current market situation even more, and will certainly take the shine off the investment value of apartment development as we move into the 1990s,” Wooldridge said.

In fact, if inflation is factored in, rents have actually dropped across the county over the last year, the survey found, and a similar drop is expected again this year.

Some of the findings:

- While actual monthly rents rose from an average of $702 in 1985 to $725 last year, inflation-adjusted figures show a drop, from the equivalent of $802 to $758.

- Whether rents went up or down depended on the city. Even after adjusting for inflation, rents were higher for most units in Irvine, Newport Beach, Rancho Santa Margarita, Stanton and Seal Beach. They were flat or fell everywhere else.

- Last year, developers built 6,700 apartment units, a record for the county. That represents a 15% increase over 1987, although it is close to the figure for 1986. The researches project that about the same number will be built this year.

- The greatest number of units--1,800--were built in the unincorporated areas of the south county, where the majority of the county’s undeveloped land is. Costa Mesa was second with 900 units. “The city’s redevelopment has been pretty successful, and it’s been actively pursuing apartments,” Disston said. Placentia was third with 800 units.

- Occupancy rates for the north county used to be lower than those for the south, but this time the situation was reversed. The reason is probably that north county’s generally lower rents drew more tenants, the researchers said.

- The cities with the highest average occupancy rate were Brea, with 98.8%; El Toro, 98.1%; and Cypress, 97.9%. Lowest occupancy rates included Laguna Niguel, 94.1%, and Mission Viejo, 94.2%.

- Highest average rents were found in Seal Beach, $1,172 a month; Newport Beach, $986 a month, and Laguna Beach, $956. Lowest were in La Habra, $598; Los Alamitos, $612, and Stanton, $622.

COUNTY APARTMENT RENTAL AND OCCUPANCY RATES Percentage of available apartments occupied, and weighted average monthly apartment rental rates in Orange County.

Avg. Monthly % of Apts. Year Rental Rate Occupied 1985 $702 99.0 1986 698 97.7 1987 750 97.8 1988 725 96.9 1989 *751 *96.3

* Projection

Source: Research Network Ltd.