Transactional cap rates tracked by CoStar for Orange County multifamily assets have averaged less than 4.5 percent since the start of 2016. That year, they averaged 4.4 percent, while last year tracked at 4.3 percent. In 2018, they have fallen even further in the face of interest rate hikes. Through the first half of 2018, transactional cap rates dropped below 4 percent, averaging 3.9 percent.
Not all areas of the county offer similar returns, however. With Irvine, CA largely out of the running - an arms-length deal has not recorded here since 2015 - cap rates below 4 percent are common along coastal submarkets, including Newport Beach, Huntington Beach and the beach towns of South County. They are also beginning to proliferate throughout the suburbs of central Orange County, in areas from Tustin to Santa Ana.
In fact, while sub-4 percent cap rates have spread across Orange County with more regularity, so too have sub-3 percent cap rates. Since 2016, CoStar has tracked 30 sales transactions with reported cap rates less than 3 percent, with the number of trades gaining steam.
Eight deals, including two in Santa Ana and one in Tustin, fell below that threshold in 2016. Last year, that number jumped to 13 deals, with all but two along coastal areas. Through the first half of 2018, nine sales have recorded with sub-3 percent cap rates.
It is not altogether surprising when a property such as Dover Shores Apartments in Newport Beach sells for $444,000 per unit at a 2.6 percent cap rate, especially when rents are reportedly more than 15 percent below market. That deal closed earlier this year.
It is less common when a property in Orange County sells below that rate, as was the case when Palm Garden Apartment Homes in Tustin sold at a 2.3 percent cap rate in June 2016. The 92-unit complex sold for $304,000 per unit, about $40,000 above the average unit price in Tustin in 2016, with rents several hundred dollars below market. Palm Garden sold a year later at $299,000 per unit, yielding 3.3 percent.
As yields have tightened in Orange County, with some reported cap rates falling below the 10-year treasury, investors continue to show interest in the metropolitan area. Although investment volume has slowed much like the rest of the country, those higher yields more than 5 percent that were common only a few years ago are becoming increasingly rare.
