Although the Inland Empire is well-known as a low-cost locale in Southern California, the region’s growing employment base and new retail offerings are luring condo converters and residents away from the coastal areas.
“The Inland Empire is starting to become more attractive because it’s now more of a self-sustaining region and not just a bedroom community,” said David Jankowski, a principal with Cerritos, Calif.-based Revere Investments. “There are many more jobs locating to the Inland Empire and a lot more retail, which makes the region an even better place to live.”
Over the past five years, the Inland Empire, which consists of Riverside and San Bernardino counties, has achieved job and population growth greater than 3% annually, according to regional economist John Husing, Ph.D.
Today, the Inland Empire boasts an unemployment rate of less than 5% and a population of 3.8 million people who fill 1.19 million jobs. The Southern California Association of Governments expects the region to add 1.8 million more residents and 805,000 jobs from 2000 to 2020.
With single-family home prices increasing an average of 21% in the Inland Empire, according to the California Association of Realtors, buying a condo in the region is one of the few ways that renters can transition to homeowners. Though condo conversions and development have been ongoing in Los Angeles and San Diego counties for years, the trend is just now gaining momentum in the Inland Empire, said Bill Roblero, a senior associate in the apartment services group of Lee & Associates’ Ontario office.
Buyers crave apartments of all classes
Last year, 11 apartment properties totaling 1,700 units were converted into condos, compared to six properties totaling 1,135 units in 2004, according to Pierce Eislen, a Phoenix-based apartment research firm. San Diego-based Hammer Ventures, for example, purchased the Crossing, a 296-unit apartment complex in Corona for $53.9 million from Archstone-Smith in November 2005 and is in the midst of converting the 17-year-old property into condos.
“I expect more condo conversions in 2006,” Roblero said. In fact, he currently has two large properties in escrow to condo converters, although he declines to disclose the names and locations of the assets.
In 2005, $1.1 billion worth of apartment transactions closed in the Inland Empire compared to roughly $800 million in 2004, according to Real Capital Analytics, Inc., a New York-based research firm. Many properties were scooped up by condo converters, who can afford to pay higher prices.
Recent numbers from Real Capital Analytics show that the average price per unit in 2005 was $218,000 with a low of $177,000 and a high of $288,000 per unit. Aggressive pricing continues to push cap rates down to the 4% range.
“There’s an incredible appetite for apartment properties,” said John Kalmikov, a senior vice president in Grubb & Ellis Co.’s Ontario, Calif., office. There’s so much demand that newer, Class A properties are achieving record pricing, he added.
For example, BRE Properties, Inc., acquired the 432-unit Mission Grove Park in the Canyon Crest area of Riverside for $75.8 million. The San Francisco-based real estate investment trust paid $175,000 per unit for the five-year-old complex, setting a new benchmark for Class A properties in the area, according to Kalmikov, who brokered the deal with John Daciolas. Coming off a record 2005, Kalmikov expects investment sales volume this year to be even stronger; in January alone, he closed six transactions for $30 million and has another $100 million in escrow.
Demand for apartment properties isn’t limited to Class A assets, either. Revere Investments, for example, prefers to acquire Class B, value-added properties in the Inland Empire. With its most recent acquisition of North Woods Apartments in Moreno Valley, the firm now owns six properties totaling almost 600 units throughout the region.
“A lot of buyers go in and do some deferred maintenance so they can push rents,” Kalmikov said. “At these prices, they need to push the rents in order to make the properties’ cash flow.”
That’s exactly what Revere Investments plans to do, Jankowski said, adding that rental rates in the Inland Empire have been increasing faster than income. In fact, over the past two to three years, rent hikes have ranged from 6% to 8%, according to M/PF YieldStar, a Carrollton, Texas-based apartment research firm.
New construction dampens rent growth
“There’s no question that you can get more for your money both as a renter and an investor in the Inland Empire,” said Ron Brock, president and CEO of Pierce Eislen. “The thought is that owners can drive rents in the Inland Empire at a faster rate than in other markets because they start off lower.”
However, in 2005 owners weren’t able to achieve rental rate increases like they had in the past. Marking a 15-year record, the Inland Empire added 3,639 units, according to M/PF YieldStar, and despite the robust absorption of 2,890 units in 2005, effective rental rates expanded by just 5.2%.
Newer communities are having a harder time leasing up empty units and raising rents, said Karen Fricke, executive director of the Apartment Association of the Greater Inland Empire. For properties built since 2000, rents rose 2% in 2005 and occupancy dropped to 93.3%, according to MP/F YieldStar. “At that level of rent, a lot of renters will choose to buy,” she explained.
The Inland Empire’s marketwide occupancy decreased in 2005 to 95.8% from 96.2% at the end of 2004, according to MP/F YieldStar. As a result, the region no longer ranks as one of the tightest markets in the nation, and it’s no longer classified as a Grade A market by MP/F YieldStar, primarily because of the plump pipeline of new properties.
Nearly 6,000 apartment units are scheduled to come online in 2006, according to MP/F YieldStar, while demand is forecast at 4,400 apartments. However, Grubb & Ellis’ Kalmikov estimated that more than 1,800 units will be pulled off the market because of condo conversions. “Supply has already been diminished by condo conversions, and I think more will follow this year,” he said.
Despite the new construction, most apartment owners in the Inland Empire are expecting another strong year. “I haven’t heard anyone tell me that they’re worried about the amount of development,” Fricke said. “People are still moving here from other parts of Southern California, and there’s no reason to think that they won’t continue to.”
