Land, home costs paint different pictures for two Southern California multifamily markets
By Tim Ahern | December 22, 2016
Economic outlooks for two leading multifamily housing markets in California – San Diego and the Inland Empire – appear relatively healthy, according to Fannie Mae’s Multifamily Economics and Market Research (MRG) group.
While the national and metro area economies tend to set the pace for apartment activity in general, it’s the local details that make the difference. That’s especially true for multifamily housing.
There are literally thousands of distinct housing submarkets around the country, each with its own story. Fannie Mae’s multifamily economists focus on the leading metro markets coast-to-coast to glean insights on where local multifamily activity is headed. They produce reports on several markets each quarter.
While they look fairly close to each other on a map, San Diego and Riverside-San Bernardino – the heart of the Inland Empire – have unique local characteristics shaping their multifamily performance, notes Kim Betancourt, the MRG’s director of economics.
“There are opportunities for apartment development and some potential headwinds in both places,” she says. And these days that mix is typical, with overall conditions usually working in favor of the multifamily sector.
Sunny Outlook for San Diego
Fannie Mae research finds that San Diego generally has an undersupply of apartments to meet the needs of new residents drawn by jobs and sunshine.
Data from commercial real estate researcher Axiometrics show that apartment vacancies were a tight 2.8 percent at the end of this year’s second quarter.
As tends to be the case up and down the California coast, the high cost of buying a home is directing many households to the rental market. San Diego’s average home price is in the neighborhood of half a million dollars. And 24.6 percent of the metro’s population are renters, compared to 20.7 percent nationally. That number receives a boost from the six colleges and universities in the area.
The local job market is slowing, MRG reports. But even so, according to estimates from Moody’s Analytics, San Diego stands to add more than 90,000 jobs to its employment base from 2016 to 2018.
High-tech is a key economic driver, accounting for a full 8.4 percent of the city’s job base. That’s compared to 4.7 percent nationwide. Data science, biotechnology, medical devices, and software engineering provide a good number of well-paying jobs. Defense also figures prominently in the job mix, with particular strength in military information technology. Alternative energy – think solar – also plays a role in the metro’s continued economic expansion.
With jobs up, “the rental market should remain healthy given the moderate level of multifamily supply underway,” Fannie Mae says.
San Diego has built 5,600 rental units since 2012 and another 5,300 units are currently underway. Downtown is the base for almost half of the new construction. Apartment supply is expected to pick up at the end of this year.
The MRG’s bottom line for San Diego: Rents have been growing strongly the past couple of years, with affordability becoming more pressing. But “longer term, warm weather, high-paying jobs, and above-average growth will continue to attract residents to the metro region.”
Notes the outlook, “Limited supply will keep the apartment market healthy. However, high business and living costs prevent the metro’s apartment market from having a breakout performance.”
The Inland Empire – Where Land is Bountiful
Traveling north to Riverside-San Bernardino, the higher business and housing costs of nearby coastal areas are working to the advantage of the metro’s economy.
The area has an abundant amount of land to offer, and it’s relatively inexpensive. That has created local business for warehousing and distribution of goods from the busy ports of Los Angeles and Long Beach.
The creation of 200,000 jobs from 2010 to 2015 drew new people to the area looking for all kinds of rental housing. This population growth happened at a time when construction of new rental housing was at a drip. Consequently, the rental market tightened.
As of the first quarter of 2016, the vacancy rate was an estimated 3.25 percent. Moody’s Analytics estimated that the region will receive almost 95,000 new jobs from 2016 to 2018.
Demographics are also favorable. The Inland Empire’s population is projected to grow by 1.1 percent on average annually over the next five years. That’s 30 percent higher than the national rate.
And 21- to 34-year-olds – who account for a large percentage of renters – make up 22 percent of the Inland Empire’s population, compared to 20.7 percent nationally. Over the next five years, Inland Empire Millennials are likely to grow at twice the national average.
On the downside, the area’s dependence on shipping makes it susceptible to both global and domestic economic slowdowns, as well as labor disputes.
In a place where home prices are among the most affordable in Southern California, local residents also find the cost of owning a home less burdensome. The California Association of RealtorsÒ says that 66 percent of households in Riverside and 78 percent of households in San Bernardino can afford a median-priced home.
The Inland Empire looks like it would be a good place to build multifamily housing, but it has attracted few institutional investors, the Fannie Mae outlook points out. Since 2012, the rental stock has grown by only about 2,400 units, with 1,000 units underway.
Limited new supply and continued above-average job growth “will ensure demand for apartment rentals,” says MRG.
“As a result, the apartment rental supply should remain tight into 2017. Over the next five years, households in the Riverside-San Bernardino metro area will form at double the national rate. Given the low level of multifamily development over the past few years, there is likely need for additional supply,” says the outlook
Tim Ahern is a writer in Fannie Mae’s Corporate Communications department.
Opinions, analyses, estimates, forecasts, and other views of Fannie Mae’s Multifamily Economics and Market Research Group (MRG) included in these materials should not be construed as indicating Fannie Mae’s business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the MRG bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the MRG represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.