Orange County Multifamily Market Update

Published: February 11th, 2025

By Anthony Annunziata & Jimmy Leach

Executive Summary

The Orange County multifamily market continues to evolve, presenting both opportunities and challenges for investors. As interest rates fluctuate, cap rates shift, and economic conditions adjust, it’s essential to stay informed on market trends and emerging investment strategies. This report dives into key factors influencing Orange County multifamily real estate, including cap rate movements, submarket performance, and financing strategies tailored to today’s investment climate.

 Market Trends & Key Insights

Cap Rate Trends: Expansion vs. Compression

Cap rates are a critical factor in determining asset valuations, and recent shifts in Orange County reflect a rebalancing of pricing expectations. While some segments are experiencing cap rate expansion due to financing challenges, others remain compressed due to high demand and limited supply. According to CBRE’s 2024 Multifamily Market Report, Orange County’s overall cap rate trends are mirroring those seen in other high-demand coastal markets.

Cap Rate Expansion: Higher Yields for Buyers

With interest rates rising, financing has become more expensive, forcing investors to demand stronger returns on acquisitions. This shift is most evident in Class A properties in prime locations such as Irvine and Newport Beach, where rent growth has slowed, and landlords are offering concessions to attract tenants. As a result, cap rates in these areas have climbed from 4.0% a year ago to 4.5%–5.0% today, as reported by CoStar’s Q4 2024 multifamily research.

For value-add investors targeting Class B and C properties, cap rates have expanded to 5.5%–6.5%, creating an opportunity to acquire properties at more favorable price points. In markets like Anaheim and Fullerton, older multifamily assets that previously traded in the low 5% cap rate range are now available at closer to 6% cap rates, offering better cash flow potential. Smaller multifamily properties, particularly in tertiary locations, are seeing cap rates push into the 6%–6.5% range as financing constraints impact buyer affordability, per Marcus & Millichap’s Southern California Apartment Market Report.

Cap Rate Compression: Where Prices Remain High

Despite financing headwinds, some submarkets continue to experience cap rate compression, particularly in workforce housing. Class B and C properties in Santa Ana and Garden Grove remain in high demand, as investors prioritize stable occupancy and steady rental income. These markets benefit from strong tenant retention, making them attractive despite higher borrowing costs. Data from CBRE’s Orange County 2024 Multifamily Report indicates that properties in these areas still trade at 5.25%–5.75% cap rates, significantly lower than comparable assets in Los Angeles or San Diego.

Another trend impacting valuations is the growing focus on office-to-multifamily conversions. Developers are actively seeking underutilized office properties in areas such as South Coast Metro and Costa Mesa, repurposing them into apartments to meet the increasing demand for rental housing. Properties with zoning that allows for residential conversions are commanding premium pricing, as investors anticipate strong long-term returns, according to a JLL research brief on adaptive reuse trends.

Example Properties & Market Activity

• A 50-unit Class C apartment complex in Santa Ana recently sold for $12.5 million at a 5.75% cap rate, reflecting strong investor demand for affordable workforce housing (CoStar, January 2025).

• A 120-unit Class A multifamily asset in Irvine, initially listed at a 4.25% cap rate, saw price reductions as interest rate hikes led to buyer pushback, ultimately trading at a 4.8% cap rate (CBRE, Q4 2024).

• A former office building in Costa Mesa is currently being redeveloped into a 200-unit mixed-use residential property, a growing trend in Orange County as cities encourage adaptive reuse (JLL Research, 2024).

Investment Opportunities in OC Multifamily

Santa Ana and Garden Grove continue to be favored for their combination of affordability and high rental demand. Costa Mesa and Anaheim are also key investment hubs, benefiting from strong employment centers and new infrastructure improvements. According to CoStar, these areas saw a 7.3% increase in multifamily transaction volume in the past year, signaling continued investor interest.

One of the most promising areas of growth is transit-oriented developments. Properties near the OC Streetcar project in Santa Ana and the Anaheim Regional Transportation Intermodal Center (ARTIC) are attracting increased interest, as investors look to capitalize on improved accessibility and urban renewal efforts.

Another key opportunity lies in value-add properties. Many Class B and C assets in areas like Orange and Tustin were built in the 1970s and 1980s and are now in need of modernization. Investors willing to make strategic renovations can boost rental income while maintaining competitive pricing relative to newer developments. Value-add strategies, such as upgrading interiors, improving amenities, and optimizing operational efficiencies, have proven successful in increasing net operating income (NOI) for these assets.

Smaller multifamily developments in suburban pockets such as Mission Viejo and Aliso Viejo are also providing steady returns, as tenants priced out of core Orange County markets seek high-quality rental housing with suburban conveniences. These areas tend to have lower vacancy rates and higher tenant retention, making them attractive for long-term investment plays.

While some investors are looking outside of Orange County for higher cap rates, those who remain focused within the county are finding success in targeting underutilized properties with strong potential for long-term appreciation. As rental demand remains robust, multifamily properties in well-connected, high-demand areas are expected to maintain solid fundamentals despite current economic headwinds.

Office-to-Multifamily Conversions: A Major Opportunity

One of the most significant trends in Orange County real estate is the growing number of office-to-multifamily conversions. With office vacancy rates remaining elevated, developers are taking advantage of zoning changes and city incentives to repurpose outdated office properties into residential units.

In Santa Ana and South Coast Metro, city leaders are actively promoting adaptive reuse projects, fast-tracking approvals for developers willing to transform older office stock into housing. In Anaheim and Costa Mesa, mixed-use projects that integrate residential units with commercial amenities are gaining traction, positioning these submarkets as emerging hotspots for redevelopment. CBRE’s Adaptive Reuse Report estimates that at least 1.8 million square feet of office space in Orange County is currently under review for conversion.

For investors exploring this strategy, key considerations include zoning allowances, construction costs, and entitlement timelines. While office conversions require significant upfront investment, they offer long-term value creation in a market where housing supply remains constrained.

Financing Challenges & Strategic Investment Moves

Rising interest rates have made traditional financing more difficult, leading investors to adapt their approach. Seller financing and assumable loans have gained popularity, allowing buyers to take advantage of lower debt costs from existing loans rather than securing new financing at higher rates. Some investors are also leveraging joint ventures and private equity partnerships to maintain deal volume despite tighter lending conditions, per the Marcus & Millichap Q1 2025 Capital Markets Update.

Cash buyers have an advantage in today’s market, as they can close deals quickly and avoid financing-related contingencies. This is particularly useful for distressed or time-sensitive transactions, where sellers may be more willing to negotiate in exchange for a faster closing timeline.

Conclusion

The Orange County multifamily market remains one of the most resilient and attractive investment landscapes in California. While economic shifts and rising interest rates have created challenges, they have also opened up new opportunities for savvy investors. Cap rate expansion in certain submarkets is presenting better entry points for buyers, while the strong demand for workforce housing continues to drive value in Class B and C properties.

The trend of office-to-multifamily conversions is reshaping urban centers, offering long-term potential for those willing to navigate entitlement and redevelopment processes.

Investors should focus on high-growth submarkets with strong rental demand, strategic transit-oriented locations, and well-located value-add opportunities. While financing hurdles exist, creative strategies such as seller financing and assumable loans can help navigate the current lending environment. As always, a disciplined approach, strong market knowledge, and strategic asset selection will be key to success in 2025 and beyond.

Contact Us

Strands Realty Group

Jimmy Leach & Anthony Annunziata

www.strandsrealtygroup.com