Potential regulatory changes surrounding the repeal of the Costa-Hawkins Act are weighing on investor sentiment in both Orange County and San Diego, adding another level of concern to transactions in front of a possible shift in the legal framework surrounding rent control, according to Q2 reports from Marcus & Millichap (M&M). While the potential changes would likely take years to fully implement, the possible impact of this regulation in the marketplace is being felt today, the report states.
In Orange County, M&M says Anaheim and Huntington Beach received the vast majority of deal flow as buyers targeted assets with average transaction prices in the $2 million to $5 million tranche. The typical property is under 25 units, providing opportunities for private investors.
The report also states that institutional buyers mostly targeted Orange County properties in Newport Beach, Costa Mesa, and Tustin, where larger complexes and higher asking prices allowed for a greater pace of capital deployment. Targeting long-term holding periods, M&M says these properties will exchange ownership with cap rates in the high-3 to low-4 percent range.
In San Diego, the class-C cohort witnessed the largest increase in listings, translating to a nearly 30 percent rise in year-over-year sales activity, according to M&M. Well-located complexes trade at sub-3 percent minimum yields. Investors seeking higher returns for comparable assets have been targeting El Cajon, Vista, and Chula Vista, home to low-4 percent initial cap rates.
Chances to acquire higher-quality rentals in San Diego have dwindled for local buyers amid a decline in class-A and -B listings and an influx of Bay Area-based buyers willing to pay top dollar for assets.