A New Generation
Apartment developers weren’t caught by surprise when comparatively affluent renters-by-choice emerged in really large numbers within the Inland Empire recently. Even though moderate-quality product traditionally was the norm here, firms specializing in luxury properties began stockpiling land years ago, and these developers were ready to churn out new upscale apartments once the timing appeared right. Locally based Lewis Apartment Communities has led the charge, and the firm has been joined by national players such as San Diego‘s Fairfield Properties, Dallas‘ JPI Multifamily, and Phoenix’s Alliance Residential Co.
Performances for Inland Empire apartments still look great by national standards, though occupancy has cooled a bit from prior levels because so many new properties are in lease-up. Summer 2006 occupancy stood at 96.2 percent, off about 1 percentage point from the norm established over the previous couple of years and 1 to 2 points under the rates elsewhere in Southern California. Leasing competition is intense at the top end of the market. With operators building the initial resident base at so many communities, developments built since 2000 had an average occupancy of just 92.2 percent in June.
A competitive leasing environment, in turn, has forced owners and managers to throttle back a little on the region’s previously impressive rent growth pace. Annual growth in effective rents stood at 5 percent in June, compared to earlier increases near the 7 percent mark. Again, it’s the newest properties pulling down the overall performance, as prices climbed a modest 3.1 percent during the year ending in June among communities built since 2000. Rent concessions, virtually nonexistent across any product niche in the marketplace a couple years ago, now are commonplace at the newest developments.
For the most striking example of the new Inland Empire apartment market, take a look at the city of Rancho Cucamonga, located about 35 miles from downtown Los Angeles and a 10-minute drive from Ontario International Airport. The city is the prized business and residential address across the vast expanses of Riverside and San Bernardino Counties. Developers have delivered roughly 4,300 apartments here since the start of the decade, and that new stock includes approximately 1,800 units finished between mid-2005 and mid-2006. These are high-end, amenity-laden properties that rank among the best of the suburban-style communities built anywhere in Southern California.
The Haven Avenue corridor, traditionally one of Rancho Cucamonga’s key business districts, is seeing development evolve to include mixed-use properties. Haven Park, located at Haven Avenue and Fourth Street, is one example, as construction soon will complete on sizable blocks of both office and retail space. Some of the new properties in this area feature housing too. Most notably, the heart of Rancho Cucamonga Town Square Center is Fairfield Properties’ Verano, a 414-unit project that offers traditional apartments, townhouse units, and live/work lofts. Retail and restaurant space totaling 43,000 square feet completes the existing portion of the development, while work is scheduled to begin soon on a four-story office building.
Milliken Avenue is another primary thoroughfare for Rancho Cucamonga. This corridor began as a warehouse and product distribution hub, and it includes major employers like the Rancho Cucamonga Distribution Center and an automotive parts operation for Ford Motor Co. Changing the nature of this area, Empire Lakes Center offers a more upscale office park environment, the Arnold Palmer-designed Empire Lakes Golf Course, and several high-end apartment communities. The newest addition to the mix is The Reserve at Empire Lakes, built by JPI Multifamily and recently purchased by Equity Residential. Totaling 467 units, the property features architecture inspired by Frank Lloyd Wright, and the designer interior finishes rank among the most luxurious in the Inland Empire.
Day Creek Boulevard likewise plays an important role in the Rancho Cucamonga development mix. The Victoria Gardens open-air mall, totaling 1.2 million square feet and built in 2004, serves as the area’s crown jewel. In addition to high-end retailers, Victoria Gardens incorporates a movie theater and a cultural center that includes a 536-seat performing arts theater. Right across the street are two brand-new apartment communities, both built by Fairfield Properties. The 319-unit Meritage at Victoria Arbors and the 206-unit Chambray at Victoria Arbors offer features such as state-of-the-art business centers, high-tech fitness facilities, and resort-style swimming pools.
Developing Cities
While Rancho Cucamonga initially was dominant in the Inland Empire’s ongoing apartment construction boom, other cities now are bursting onto the scene. Moreno Valley and Temecula Valley, both located in southwestern Riverside County, are poised to follow the same path blazed by Rancho Cucamonga. The housing base is moving past its initial sole focus on the single-family sector to include considerable block of apartments, and each new development seems to be a little more upscale than the last. Ongoing apartment construction in Moreno Valley was up to roughly 2,200 units as of July, and building was occurring on properties totaling almost 1,200 units in the Temecula Valley.
Moving even farther into new territory, the first wave of development is even starting to hit areas like Victorville in the High Desert and Coachella Valley towns such as Twenty Nine Palms and Cathedral City.
Previously the spillover market for Los Angeles, Orange County, and San Diego, the Inland Empire now looks like an entirely independent metro. But it’s still a young market with both opportunities and growing pains on the horizon. Today’s Inland Empire looks little like the Riverside-San Bernardino area of just a few years ago. We’ll be saying it again in five years … and in 10 … and in 20.
–Joseph Clements is the managing editor at Dallas-based M/PF YieldStar.
Fast Facts
Considering the Inland Empire? Here’s what you need to know:
- 1– Population: 3.9 million
- 2– Occupancy: 96.2% (June)
- 3– Median Age: 33 years (Riverside County), 30 years (San Bernardino County)
- 4– Median Household Income: $44,595 (Riverside County), $43,185 (San Bernardino County)
- 5– Average Rent: $1,048 (June)
- 6– Unemployment: 5.0% (June)
Notable: Moreno Valley recently ranked as the sixth fastest-growing city in the U.S.; Rancho Cucamonga ranked seventh. San Bernardino is the birthplace of McDonald’s and the Hell’s Angels motorcycle club. Route 66 passes through Rancho Cucamonga. The guest register at the 130-year-old Mission Inn in Riverside such names as Theodore Roosevelt and Andrew Carnegie.
Slow Build
Construction spending dips.
Pushed by the single-family housing sales slowdown, overall construction spending fell to a seasonally adjusted rate of $1.2 trillion in July. That’s 1.2 percent below June’s revised numbers, but on a year-over-year basis, 5.1 percent higher than July 2005.
Private residential construction qualified as the main culprit in the spending dip. While private nonresidential construction was essentially flat at a seasonably adjusted rate of $305.5 billion (a 0.3 percent increase from June), the residential construction industry posted a seasonally adjusted annual rate of spending of $627.4 billion in July. That represents a 2 percent drop from June’s revised numbers.
The single-family slump was the biggest reason for residential drop-off. According to Michael Carliner, staff vice president for economics at the National Association of Home Builders in Washington, D.C., multifamily spending was on the rise in July. It went from $55.3 billion in June to $56.2 billion in July, a 1.6 percent month-to-month increase. Year-over-year, multifamily spending jumped 14.9 percent, from just $48.9 billion in July 2005.
“There’s a lot [of multifamily] that was started last year that won’t be completed until late this year or early next year,” Carliner explains. “The period over which construction occurs and products are purchased will take a lot longer for multifamily.”
–Les Shaver
Stat To Watch: Clear Forecast
Market fundamentals stay strong for multifamily.
With an apartment supply in check and strong occupancy and rent fundamentals, research firm Marcus & Millichap is forecasting a sunny outlook for the multifamily industry based on its second quarter analysis. The revenue index continued to climb in the second quarter of 2006, and rent growth replaced occupancy gains as the primary driver of revenue. At the end of the second quarter, average revenue was 95 percent of the year-end 2000 level.
The fundamentals would suggest that the national apartment market could be entering a period of significant expansion, according to the firm’s latest quarterly report.
But ever-rising construction costs and the yet-to-be quantified impact of the shadow rental market continues to suppress new supply. Occupancy gains may ease from the rapid improvement in this measure recorded over the past several quarters, however.
Among the firm’s other predictions: A cooling economy and increased competition from all those privately owned condos-gone-rental will slow occupancy improvement, but there is no indication that the upward or stable trend in occupancy will reverse anytime soon–and rents will continue to climb as a result. Within the next six to 12 months, Marcus & Millichap says, rent growth will push average revenue above the level recorded in 2000.
Completions jumped in the second quarter as well, adding nearly 20,000 units to inventory. Completions as a percent of inventory are running at .2 percent–a whopping 60 percent lower than 2000 levels.