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The Inland Empire apartment market improved slowly since the end of the recession, as apartment demand received little help from the local job market. In the past year however, an economic recovery finally began to take shape, boosting expectations for accelerated improvements in apartment fundamentals.
Prior to 2012, local payroll growth significantly lagged state and national gains. After the U.S. shed more than 8.7 million jobs, employers rehired nearly 66 percent of workers so far nationally. Meanwhile, as 53 percent of laid-off Californians returned to work, the Riverside-San Bernardino metro recouped just 31 percent of the jobs lost.
Despite the slow overall recovery in the employment market, Inland Empire job creation surged in 2012. Metrowide employment increased by 34,400 workers last year. This represented a gain of 3 percent and was the largest 12-month rise since September 2006. In comparison, state and national headcounts expanded just 2.3 percent and 1.7 percent, respectively.
Hiring has accelerated so far in 2013 with both public and private employers announcing hiring plans. The Riverside County Sheriff’s Department will add 500 deputies, while AT&T plans to add 500 California workers. Many of these workers will be based in Riverside. With job creation expected to build momentum throughout the year, improvements to apartment fundamentals will similarly quicken.
Although apartment vacancy ticked up at the end of last year, the current rate of 6.5 percent is below the peak of 8.4 percent during the recession. Limited supply growth will further support vacancy improvements and moderate competition for renters. The 400 units delivered at the Artisan at Main Street Metro earlier this year will be the only major completion in 2013, and just 385 apartments are slated for next year at the Paseos at Montclair development.
Steadier operations are supporting rent gains. Marketwide asking rents advanced 1 percent in the past year to $1,095 per month and are up 5 percent since the recession’s low point. Operators also cut back on renter incentives. Since concessions peaked in mid-2009, owners cut out more than a week of free rent, with concessions currently averaging 2.8 percent of asking rents.
Apartment investors have already moved to capitalize on the improving market. In 2012, investment dollar volume surged 54 percent to $710 million. Alex Mogharebi, a partner in Hendricks-Berkadia’s Ontario office, observes the resurgent investor interest.
“Supported by low interest rates, the lack of yield alternatives brought an increasing number of investors back into the market,” he notes. “Investors are realizing the value of assets on a replacement-cost basis and values are still well below replacement cost in many submarkets. As improving market fundamentals become more obvious, investors are feeling more confident about the prospects for future growth.”
Mogharebi also believes local investment demand will remain strong for Class B assets in infill areas with easy access to transportation and employers. This should be especially true since construction is significantly below historical levels, allowing well-located B assets to provide a good alternative for investors.
— David Delich, senior director of research, Hendricks-Berkadia