Encouraging Multifamily Market Fundamentals Drive Investors to the Inland Empire
A steady supply of job opportunities and the growing population in the Inland Empire are supporting household formation, raising demand for housing and bolstering the performance of the area’s multifamily property market.
Nearly 22,420 households were formed in the Inland Empire over the past four quarters that ended in September, while 48,500 individuals were added to the local population. By year’s end, area employers will have expanded the workforce by 2.2 percent with the addition of 30,000 positions. Hiring this year was driven by the government sector, which climbed 4 percent, or by more than 9,400 workers during the past 12 months that ended Sept. 30. The trade, transportation and utilities sectors also performed well, contributing 8,950 jobs over the same period. These strong hiring trends resulted in the unemployment rate falling 20 basis points to 6.2 percent — nearing the pre-recession five-year average of 5.7 percent — over the year-long period that ended in the third quarter of 2016.
The Inland Empire’s growth and solid economic fundamentals are key factors behind the observable rise in construction activity we’ve witnessed this year.
Apartment construction is booming, and builders are expected to more than double the units that were brought into service last year. Demand remains robust despite high levels of construction and is outpacing the delivery of new supply. The planning pipeline is extensive and, over the yearlong period ending in September, builders pulled 1,175 multifamily permits. While issuances of single-family home permits also crept up over the same period, higher homeownership costs and consistent year-over-year population gains will drive multifamily housing demand.
More than 1,700 apartments were brought online in the first three quarters of the year. Of these deliveries, 500 units were located in Corona. Construction activity will continue at a break-neck speed for the remainder of the year as builders race to complete a total of 2,600 apartments, the highest pace of deliveries since 2007. One of the largest projects is Homecoming at the Preserve II, a 500-unit mixed-use luxury apartment community located in Chino. The complex offers amenities geared toward Millennials, such as a massage room and gaming center.
Moving forward, nearly 900 apartments are under construction in the Inland Empire, with completion dates scheduled through 2018. More than half of these deliveries will be located in the Ontario/Chino and University City/Moreno Valley submarkets.
While levels of new construction were high this year, vacancy did not go up as demand kept pace with apartment deliveries.
Despite the jump in construction, strong tenant demand will decrease the vacancy rate 80 basis points this year to 3.1 percent. Vacancy declined across all apartment vintages during the year ending in September. The largest decline was in properties built after 2010 where vacancy fell 190 basis points to 3.1 percent. The lowest rate was in pre-1970s-era apartments at 1.3 percent, after a 170-basis-point decline in the same year-over-year period.
As occupancy continues to improve, so, too, will the Inland Empire’s average effective apartment rents.
As we consider the sales activity outlook for 2017, healthy market demographics and higher first-year returns, compared with other Southern California metros, will continue to draw investors to the Inland Empire as buyers compete for assets near large employment hubs.
— By Kevin Boeve, Vice President, Regional Manager, Marcus & Millichap. This article first appeared in the December 2016 issue of Western Real Estate Business.