The Inland Empire emerged as a nearly ideal setting for the resurgent demand that was seen in apartment markets throughout the nation in 2010 and that has persisted since. A crucial contributing factor has been the virtually unsurpassed weakness in the inland single-family market, with its soaring foreclosure rates, crumbling values, and uncertainty over the future. Cutting the other way to some extent, however, are the very same weaknesses: some areas of the Inland Empire, notes Marcus & Millichap in its third quarter 2012 report on the local market, have “a large shadow inventory of single-family rentals.” “As a result, operators will find it difficult to fill units and raise rents above the rents of repositioned homes.” And while the return of job growth benefits apartment market fundamentals in some areas, others do less well. “[I]ndividuals who work in Los Angeles or Orange County are flocking to areas such as Chino and Corona in order to cut commutes but maintain affordable rents,” adds this source.
Still, this mix of positive and negative indicators, in combination with a sharp cutback in market-rate apartment development, accrues overall to the benefit of the market. By Reis’ measure, net absorption has enjoyed wide margins over same-term new supply additions since 2010. Indeed, while the 618 units of market-rate positive net absorption recorded for the first half of 2012 represent a slowdown from the recent pace, no market-rate units completed construction during the period. While July followed with no new supply and no net absorption, August brought the completion of 192 units—in the Santa Barbara Apartments in Rancho Cucamonga—along with 151 units of positive net absorption. Demand should hold sway over the remainder of the year. Reis’ late September report on individual construction projects lists only one other project expected to deliver in 2012: the 404-unit North Main Apartments is under way in Corona for completion this December. While Reis anticipates a gradual increase in annual market-rate construction completions—some 1,350 units are expected to deliver in 2013—no other projects of this type were under construction per report date.
Vacancy, declining since 2009, has dropped to rates not reported by the firm for this market since the mid-2000s. The vacancy rate for the latest quarter was 4.4%, down 10 basis points for the period, down 110 year-over-year (no further change in the rate was indicated as of the end of August). Following a period of loss and flatness, rent growth surged ahead in 2011 with gains at about 2.0%. Larger gains are expected for 2012. At $1,069 and $1,038 per month, asking and effective averages for the latest quarter were up 1.0% and 1.2% for the period and were up 1.5% and 2.2% year-to-date. Increases of 0.4% followed for both measures over the two-month July–August period.
Reis expects vacancy to end the year at 4.0% as absorption remains positive and in excess of new supply. Rates in the vicinity of 3.0% to 3.5%, roundly speaking, are expected for 2013 and after. Rising volumes of new supply, accordingly, are not expected to alter the market’s very tight profile. Large gains—3.0% and 4.2%—are projected for the mean asking and effective rents for 2012 all told. Rent growth should be strong thereafter as well.