A Shift to Renterdom
A Shift to Renterdom
Just about everywhere you look nowadays, housing makes its way into the headlines. And whether the topic is rents, market values, new development, buying or selling, columnists and economists are generally alike in their shared enthusiasm that something “big” is happening. But what’s going on today in 2015 is not the earthquake. It is the aftershock of 20 years of exceptional growth across economic and population measures in a County once identified more as a bedroom community than business center. Today, we are a commerce capital, tourist destination, entertainment hub and an international point of entry. Yes, our little Orange County is growing up.
More People Making More Money
Census numbers show that Orange County’s population has grown by 48.56% in the decades since 1980. For comparison purposes, this exceeds the growth occurring in neighboring Los Angeles County by over 12% for the same time period. As the population has grown, so too has the Area Median Income (AMI), a number used by the Department of Housing and Urban Development to best represent an area’s median household income. In 1995, the AMI for Orange County households was $59,100. Today, in 2015, this number is $85,900. The increase in $26,800 over 20 years represents a 45% increase in household income. But with population and economic growth setting the table, fundamental shifts in the consumer outlook and preferences for housing have owners, operators, investors and developers scrambling to accommodate a growing demand for rental units.
For Sale and For Rent By the Numbers
All too often, the relationship between the for sale and for rent markets is overlooked in understanding the function of the housing market. And in failing to understand the for sale market, one can only speculate as to what is happening in the for rent market. So while market home values have grown by 198% since 1995, but are off of peak values of 2005-2006 by 9.7% with interest rates near record lows at 3.75%, or more than 200 basis points (2%) lower than previous lows of 5.8% in 2005, there is an easily recognizable shift. We have seen homeownership rates peak at 55% in Orange County in 2005, but drop to 48.5% today in 2015, which is well below the national average of 63.4%. With cheaper money, discounted prices and increased buying power, we are not seeing consumers buying, but are instead seeing investors or speculators purchase to rent or to flip. Driving investor demand is the white-hot SFR rental market. Families and others who were once driven to own or to buy are now choosing to rent. And their demand is not for multifamily housing, but for single-family residential housing.
Not Just For New Grads
During the economic downturn, we saw it all: from grown adults moving back home with mom and dad to families doubling up. But now, with jobs coming back and the economy improving, we are starting to again see the creation of new households. College graduates and young professionals are back in the market for their first place, growing families are choosing to pursue SFR rental opportunities and baby boomers are downsizing and perhaps opting for a pied a terre or second place. These are normal, natural occurrences within society that had been stifled by our lack of recovery following the great recession. But now, with a return to normalcy comes the to accommodate or respond to the growing need for rental housing that actually fits the needs of today’s renter.
The Numbers Behind the Needs
Multifamily occupancy rates are up from 94% in 1995 to 95.4% today. And while this incremental growth is positive, it does not reflect the roller coaster ride that was 2007-2011. Today, we see a 4.6% vacancy rate, which translates to more than 11,000 apartment homes in Orange County sitting vacant and ready for rent today, tomorrow, next week or next month. But the market occupancy rates and annualized rent growth of 3.9% also suggest that the market is ready and waiting for new units to be brought online. While there is a glut of high-end, luxury product, we need the good old, garden style product that is most associated with Orange County. You know, somewhere between subsidized/affordable and high-end luxury, which is where most OC households are.
Smart building will also continue to incorporate public transit, specifically the train lines available from San Clemente in the south to Fullerton/Buena Park in the north of Orange County, making trips to and from Los Angeles or San Diego on a daily basis and allowing for ease of commute. TOD or transit oriented development, as it is known, has long been the norm on the east coast but is fairly new to the southland. The LA to OC and OC to LA traffic flow is among the largest in the United States and so one would hope that developers have finally recognized the opportunity not just to meet their financial pro-forma but to help create workforce housing in transit oriented locations that will generate a true, high return for society for years to
As a society, we have shifted to renterdom. And it’s not creating a housing crisis, more an epiphany for developers and consumers alike. But stop looking so surprised. After all, it’s been 20 years in the making.
*This was published in article form in the December 2015 issue of Apartment News. Get your copy today by logging on to: http://www.aaoc.com/ .