Why O.C. apartment rents are rising

Leon

Suryan

Baldridge

Apartment rents are on the rise in and around Orange County. We chose to ask the “Why?” question to three keen observers of the marketplace: Joe Leon, a managing director at brokers Jones Lang LaSalle; Kevin Baldridge, apartments chief at landlord Irvine Co.; and Frank Suryan Jr., CEO of landlord Lyon Communities.

What’s driving rents?

Leon: Former renters who moved in with roommates or home with parents are returning to the rental pool. A smaller percentage of households have the required savings to qualify for home ownership. Occupancy has started to rebound leading to some rent growth in the market.

Baldridge: The market has improved and we are clearly off the lows, but rents are still below those found in 2008. … The economy is showing signs of improvement. Were seeing more families who moved in with relatives due to job losses or other economic hardships decoupling and moving back out on their own.

Suryan: Rents have risen in Orange County at single-digit rates. That said, they are still below levels experienced prior to the recession. Attractive rents even at the new rates combined with the opportunity to live in a high-quality community are a large reason our portfolio continues to experience positive activity despite a challenging economy. Ultimately, the market determines the rents, and we have to meet the market.

How high can rents go before they nudge folks to buy?

Leon: Rents would have to increase by 22% to match the average mortgage payment of $2,100 … 3% rent increases over next year to 18 months; greater increases when unemployment dips below 9%.

How long will this landlords market last?

Leon: In 2008 and 2009 landlords reacted to decreased renter demand by reducing rents and introducing concessions and dropping rents reducing renters monthly payments by 10-20%. Starting in mid-2010, apartment owners/managers in some of the more desirable apartment markets eliminated concessions and started push rents higher, but rents are still 5-10% less than the peak. We are seeing rent growth projections of 1-3% in the near term, with estimates of 4-7% rent growth in 2012 and 2013.

Baldridge: The market today is better described as balanced; its not quite a landlords market when you compare todays rents to those of a few years ago. There are several factors fueling demand: lack of new supply despite continued population growth, Gen Y entering into its prime renting years, residency decoupling, the quality lifestyle opportunities in Orange County and the number of high-quality communities available here.

Suryan: I think there are a couple of key factors. First, very few new units have been added to our market due to the lack of construction the past couple of years. That lack of supply contributes greatly to rising rents, especially as the economy improves. Additionally, many residents who were living with roommates are gaining enough economic confidence to move out on their own, but are choosing to remain in the same communities they currently enjoy.

When new apartment construction add supply?

Leon: It already has begun, but O.C. is still a fundamental undersupplied market, with average annual delivery of only 2,200 units a year for the last 9 years. Investment in apartment development started in late 2010 when apartment developers resumed their acquisition of development sites in choice markets. In the near term, we should see the development of well-situated apartment sites.

How are you handling the many potential renters who had bad credit markers to problems with recent homeownership foreclosures, etc.?

Baldridge: A foreclosure in and of itself does not prevent someone for renting one of our apartments. We look at an individuals overall credit history and ability to make their rent payments.

Suryan: The recent credit market has forced us to reevaluate credit standards for apartment living, and we have made exceptions for potential residents that have experienced foreclosure-related problems.

Which way will O.C rents go in 18 months?

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