Inland Empire Apartment Market Will Continue to Prosper

California's Inland Empire, an area hit particularly hard by the Great Recession and its aftershocks, is seeing an intensification of demand for rental properties, according to a new report by real estate investment specialist Marcus & Millichap.

San Bernandino, Calif.—California’s Inland Empire, an area hit particularly hard by the Great Recession and its aftershocks, is seeing an intensification of demand for rental properties, according to a new report by real estate investment specialist Marcus & Millichap. Much of the impetus for apartment rental growth is coming from the still-shaky for-sale housing sector, which continues to be affected by a relatively high jobless rate, uncertain prices and tough mortgage underwriting standards.

All of those conditions tend to make would-be homebuyers think twice about buying, or at least delay their decision, and in the meantime they have to live somewhere. There has also been some job growth in the region lately—a modest 0.9 percent during the first three quarters of 2011, and probably only 1 percent at the end of this year, but still those new workers also need to live somewhere.

Marcus & Millichap is predicting that by the end of 2011, apartment vacancies in the Inland Empire will have dropped 130 basis points to 5.2 percent compared with the end of 2010. That follows a vacancy decline of 150 basis points in 2010. Meanwhile, asking rents for apartments will have risen 2.4 percent for the year by the end of December, and effective rents will have done even better: a 2.7 percent increase to an average of $975 a month. Asking rents and effective rents barely moved in 2010.

“Metrowide vacancy fell in line with the long-term average, which will provide a foundation for stronger rent hikes heading in 2012,” the report predicts. “Properties located near job centers along the western boundary will continue to outperform, though a recovery in operations is filtering into most of the region.”

Development will not catch up with demand, the report also predicts. Some 1,275 apartment units came on line in 2010, but because of the vagaries of multifamily finance and the time lag involved in development, when all is said and done in 2011, only 220 market-rate apartment units will have entered the market. Next year might see a modest increase in new apartment properties, Marcus & Millichap believes, but not enough to slake the demand.

These are conditions that are attracting investors to the region, “while relatively low cap rates are prompting some owners to divest in light of this heightened buyer demand,” according to the report. Cap rates for higher-end assets range from mid 5 percent to low 6 percent, and interest rates remain low. Thus institutional investors in particular are snooping around the market, looking for well-located assets.