The Inland Empire multifamily market will retain its solid foundation of positivity this year as the economy again provides a healthy supply of new jobs and freshly formed households seek apartments to rent. The number of new multifamily units scheduled for delivery is a fraction of what it was last year, and this will place downward pressure on vacancy. Tightening vacancy will support another year of above-trend rent growth.
Cody Cannon, Marcus & Millichap
Strong job growth in wholesale trade, government and transportation and warehousing positions has drawn many new employees to the Inland Empire in recent years. The number of 20- to 34-year-olds, who typically favor rental housing, has steadily increased. Growth in wholesale trade, government and warehousing will continue to attract Millennials in 2017, and the region’s employers are expected to add 27,500 new jobs overall.
The Inland Empire’s employment boom has led to an increase in household formation, which has stimulated new multifamily construction. Developers fruitfully delivered 2,600 new units to the market in 2016. This exuberance, however, may well have been the peak for the current real estate cycle. This year, the projected number of apartment completions is just 500. This much more measured level of development will be quickly absorbed and place downward pressure on vacancy, which may fall to a near-historical low.
Vacancy is expected to contract 60 basis points to 2.5 percent in 2017. This will mark the fifth consecutive year of decline. Vacancy fell to a 15-year low in the third quarter of last year. It finished the year 80 basis points lower than in 2015. This continued run of tight vacancy will support another year of above-trend rent growth and drive average effective rent up 7 percent to $1,430 per month.
This level of sizable rent growth fuels the sale of value-add assets and, accordingly, investors throughout the region will be busy upgrading units and expanding amenities to maximize rent gains. Value-add properties in the most popular locations typically change hands with initial yields in the mid-5 to low 6 percent range, with first-year returns averaging in the low-6 percent area. However, the Inland Empire’s tight market conditions and competitive bidding environment may place further downward pressure on the average first-year yield and boost property values this year.
Opportunistic investors will be drawn to the region’s multifamily assets by the low vacancy and a limited supply of Class A stock. Class B and C properties in western locales, including Ontario and Rancho Cucamonga, will also attract a number of interested buyers. Properties near California State University, San Bernardino will be popular too as stabilized assets near the school can trade with returns as low as 4 percent. Buyers in search of higher yields will find opportunities in the eastern portions of the Inland Empire where returns are in the high 6 percent to low 7 percent range.
— By Cody Cannon, Regional Manager, Marcus & Millichap. This article first appeared in the April 2017 issue of Western Real Estate Business magazine.