Lead Story…. The Inland Empire (aka the IE) has been the primary growth market in Southern California for years. As coastal areas soar in price, it has historically been one of the few markets in the region that is attainable to blue collar workers and first home buyers. During the last cycle aka “The Housing Bubble,” housing production boomed in the Inland Empire as people who were priced out of the expensive coastal markets drove until they qualified for a home loan. Back then living in Southern California was primarily a question of renting close to the coast versus owning further inland. For as insane as coastal home prices got in the bubble, rents were actually relatively stable. For those who couldn’t afford to rent (or buy) near the coast or buy inland, there was always the lowest cost option of an Inland Empire rental. Then, in 2007/2008, the bottom fell out of the market and all hell broke loose in the IE as well as pretty much everywhere else.
The Inland Empire was hit as hard as any region in the US when the housing market collapsed. It’s employment base was highly concentrated in residential real estate and homeowners there took on a disproportionate share of subprime loans, leading to massive foreclosures, shuttered subdivisions and a stubbornly high unemployment rate.
Fast forward 10 years or so and the coastal markets have recovered. Both rents and home values have soared, thanks to an improving economy and little new construction outside of the luxury segment of the market. However, the Inland Empire never really recovered, at least as far as housing is concerned. Starts have remained stubbornly low even compared to the depressed levels along the coast and urban areas. This can be attributed to several factors but stubbornly high impact fees and a low FHA limit are among the leading ones.
Since FHA limits are low across the massive Inland Empire region, it’s become very difficult for blue collar workers to afford a home, leading to a growing population of renters. This is problematic since little new rental product is being built in the region. The result is that the last bastion of relative affordability in Southern California – the Inland Empire Apartment – is becoming both scarce and more expensive. From Ben Bergman of NPR (emphais mine):
Though rents in the Inland Empire are still far cheaper, they’re rising as fast or faster than in Los Angeles and Orange Counties, according to a new report from the Center for Economic Forecasting and Development at UC Riverside’s School of Business It also found that the Inland Empire has a lower vacancy rate.
Only 2.4 percent of rental units in the Inland Empire were vacant compared to 3.3 percent in Los Angeles County and 3.2 percent in Orange County in the fourth quarter of last year, the study says. Meanwhile, the average rent went up by 5 percent in the Inland Empire, the same growth rate as in Los Angeles County and nearly twice as much as in Orange County.
The Inland Empire’s low vacancy rates are the result of not enough apartments being built. Traditionally, as people moved inland they bought single-family homes, but as people have gotten priced out of those, they’ve turned to a apartments.
“The inability of people to become homeowners there has meant more people are putting pressure on the rental market, and there’s not been a supply response, “ said Robert Kleinhenz, executive director of research at the Center for Economic Forecasting and Development.
If Inland Empire rents keep going up, Kleinhenz says workers will move somewhere cheaper.
“At some point those households have to think about whether they want to stay here,” he said.
If workers do not stay, all of those warehouses and logistics centers in the Inland Empire could have a harder time finding workers.
“There is a genuine need for more housing across much of California, and nowhere is the severity of the situation more apparent than in the Inland Empire,” said Kleinhenz.
This isn’t an issue of no one wanting to build apartments in the Inland Empire – developers would if they could (especially with the level of demand in today’s market) but it’s often difficult to get approvals and ever-rising impact fees and construction costs often mean that rents don’t justify the cost. In short, even with rising rents projects often don’t make sense financially. As such, they aren’t being built in anything close to the scale needed to meet demand.
Once people are priced out of the Inland Empire rental market, there really isn’t anywhere left to go in Southern California. As Robert Kleinhenz noted above, eventually they are going to move out of the state, not because they want to but because they don’t have a choice. As I’ve noted previously, an economy cannot run on white collar executives alone. Someone needs to drive buses, clean floors, wait tables, etc. Sadly, the state of California doesn’t seem to realize this and is going in the opposite direction. We’ve already driven blue collar workers inland by not building enough near the coasts to keep a lid on costs, leading to more freeway congestion and sprawl. Now the state is fast-tracking the misguided and destructive AB199 through the legislative process which would impact relatively affordable regions like the IE disproportionately. Unfortunately, this is one problem that looks like it is going to get worse before it gets better.
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Chart of the Day
This is incredible
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