Inland Empire Regional Intelligence Report
This edition traces the Inland Empire economy’s ongoing recovery from the COVID-19 pandemic. The latest report examines the current resurgence of the virus, the pace of recovery in the regional labor market, the robust performance of the IE’s residential housing market, and looks at healthy increases in local consumer spending.
EMPLOYMENT AND WAGES
The Inland Empire’s labor market has fully recovered from the COVID-19 pandemic and continues to show strength. The Inland Empire’s unemployment rate, at 3.7%, is now lower than its pre-pandemic level of 4.1% in February 2020. More than 280,000 jobs have been added since the national lockdown in April 2020, surpassing the 228,000 jobs that were lost at that time. Employment growth in the Inland Empire outpaced the state and nation during this period. By contrast, California’s overall labor force has declined by -1.5%, or -299,600 workers.
The pandemic’s impact on consumers has favored some local industries. For example, the surge in e-commerce has helped boost payrolls in the Inland Empire’s Transportation and Warehousing sector. This sector boasts a major presence in the region and has increased 39% since February 2020, outpacing sector growth in the state by a wide margin. Moreover, with 60,300 local jobs added since February 2020, Transportation and Warehousing has been the driving force behind the region’s economic recovery.
Other sectors with significant job gains have occurred in Administrative Support, Professional, Scientific, and Technical Services, Retail Trade, and Financial Activities. In stark contrast to other regions of Southern California, the Leisure and Hospitality sector in the Inland Empire has recovered all jobs lost due to the pandemic.
Despite the overall gains in Inland Empire payrolls since February 2020, a handful of sectors still have a ways to go to recover all jobs lost due to the pandemic. Job losses have been most pronounced in Government, which decreased payrolls by -14,700 since February 2022, a -5.5% decline. Other significant job losses have occurred in Manufacturing, Other Services (a sector including hair and nail salons and other personal care services), Information, Wholesale Trade, and Natural Resources and Construction.
With lower-paying industries such as Leisure and Hospitality and Retail Trade adding back the most positions, wage growth in the region has been modest this year compared to 2020. Still, overall wages in the Inland Empire have been steadily rising. From third-quarter 2020 to third-quarter 2021 (latest data available as of this writing), wages grew 2.3%, trailing the 4.2% pace in California overall. Local wage growth was strongest in Riverside County where it increased 3%, while wages in San Bernardino County grew 1.7%. However, real wages decreased during the year due to high inflation
COVID-19 TRENDS AND BUSINESS ACTIVITY
The number of active COVID-19 cases in the Inland Empire remain relatively low. In the absence of a resurgence, the public health mandates put in place to halt the spread of the virus are beginning to disappear quickly. Hopefully this is the beginning of the end of a tumultuous two-year period in California’s history, marked by tens of thousands of virus-related deaths, great strain on the state’s health care infrastructure, and transformations in venues ranging across Education, Leisure and Hospitality, and so many other occupational sectors.
As a result, consumer spending has rebounded strongly. From fourth-quarter 2020 to fourth-quarter 2021, taxable receipts in the Inland Empire increased 23.8%. This has been driven by more Business and Industry spending, higher fuel prices, and increased spending in categories impacted by government health mandates and consumer reservations related to COVID-19.
Business and Industry was the fastest growing consumer spending category in the Inland Empire over the last year, jumping 57%. This is also the category expanding the most over the past three years, up 68%.
With more people traveling for work and leisure, spending at Fuel and Service Stations increased 56% over the last year. With fuel prices still near record highs, this category should continue to experience increases. Spending also grew rapidly at Restaurants and Hotels, with levels up 37% over the last year. This was one of the hardest hit categories from the pandemic, and spending levels are now exceeding pre-pandemic levels.
Other consumer spending categories posting significant gains over the last year were General Consumer Goods (19.4%), Autos and Transportation (16.0%), and Building and Construction (7.4%). As more consumers ate more meals away from home, gains were more modest at Food and Drug Stores, which was up just 5.4%.
With more consumers spending money at traditional locations like Restaurants and brick-and-mortar retail stores, the County and State Pool (the category for e-commerce sales) has experienced a decline in spending over the last year, falling -1.8%. However, this category is still up 56.6% over the past three years, well above the 38.7% increase across all categories over the same period.
Passenger traffic at Ontario International Airport is continuing to recover. A total of 1.6 million passengers passed through the airport during the first four months of 2022, an 88.7% increase over 2021. Airport activity has nearly returned to pre-pandemic levels, with passenger traffic now just -0.8% below 2019 levels.
RESIDENTIAL REAL ESTATE
The housing market was by far the brightest spot in the Inland Empire’s economy over the last two years. The supply fundamentals driving strong price growth since the outset of the pandemic have not changed, although today’s elevated mortgage rates will constrain future demand.
With this backdrop, home prices in the Inland Empire continue to increase rapidly. From first-quarter 2021 to first-quarter 2022, the median single-family home price rose 19.4%. This represents stronger growth relative to Los Angeles (12%) and San Diego (19.1%) Counties, yet slower growth relative to Orange County (25%).
Part of the reason the Inland Empire is experiencing more rapid growth is because it is one of the last relatively affordable housing markets in Southern California. At a median price of $544,000, the region’s existing single-family homes are significantly more affordable than those in Los Angeles ($895,000), Orange ($1.16 million), and San Diego ($904,000) Counties.
While more affordable than neighboring counties, buying a home is becoming more costly. Only 31% of local households can afford to purchase a median-priced home in Inland Empire, down from 39% in the first quarter of 2021. This also makes the region more affordable than California (24%), but less affordable than the United States overall (47%).
With limited available inventory, the number of homes sold has decreased slightly despite homebuyer demand remaining high. Existing single-family home sales declined -2.1% in the Inland Empire from first-quarter 2021 to first-quarter 2022, outpacing sales growth in Orange (-17%), San Diego (-6.3%), and Los Angeles (-5.1%) Counties.
The pandemic-driven economic stimulus from the federal government has increased demand for housing throughout California. However, supply has not increased to meet demand. In April 2022, there was only 1.7 months of housing supply available for purchase in Riverside County and 2.2 months in San Bernardino County. A balanced market typically equates to six to seven months of supply, with a buyer’s market being seven months of supply and above and a seller’s market six months of supply and under. 1 Moreover, the strong fundamentals at the start of this hot market imply there is still headroom to grow, and with inventory so low, it will take years for builders to catch up with high demand.
Demand for apartments in the Inland Empire has also surged. The apartment vacancy rate fell to 3% in the first quarter of 2022, a -0.4 percentage-point decrease from one year ago. In addition, the number of occupied units grew 0.9%. Asking rents jumped by more than 21% to $1,807 per unit, per month. But even with that increase, the Inland Empire remains a more affordable rental market than Los Angeles ($2,236), Orange ($2,335), and San Diego ($2,226) Counties.
In step with the hot housing market, residential construction in the Inland Empire has increased 40% from first-quarter 2021 to first-quarter 2022. The region issued 1,008 multi-family building permits and 3,832 single-family building permits in the first quarter of 2022, an increase of 171% and 24% (respectively) compared to the first quarter of 2021.
While national economic conditions remain uncertain and threaten a recession, the short-term economic forecast for the Inland Empire is currently very strong. With solid job growth and increased business activity, household incomes should remain strong in the region for the foreseeable future. One question is whether these growing incomes will lead to untenable price increases as well.
COMMERCIAL REAL ESTATE
The increase in demand for e-commerce goods has caused a surge in demand for Warehouse and Distribution space in the Inland Empire. The vacancy rate among Warehouse properties fell to 3.2% in the first quarter of 2022, a -6.5 percentage-point decrease from one year earlier. This decline in vacancy occurred even as 34.6 million square feet of new space came online, an 8.8% increase in available Warehouse stock. In addition, asking rents grew 6.3% to an average annual rate of $6.26 per square-foot. Still, Warehouse space in the Inland Empire remains more affordable than Los Angeles ($8.53), Orange ($8.15), and San Diego ($9.94) Counties.
After a decline due to the pandemic, demand for Office properties in the Inland Empire is beginning to increase. The Office vacancy rate hit 17% in the first quarter of 2022, down -1.1 percentage points from one year earlier. In addition to the decrease in vacancy rate, occupied stock increased 1.3%. Asking rents grew a modest 1.4% to an annual rate of $24.02 per square-foot, keeping Office space in the Inland Empire more affordable than Los Angeles ($41.04), Orange ($33.95), and San Diego ($34.99) Counties.
The vacancy rate among Flex/Research and Development (R&D) properties in the Inland Empire fell to 2.7% in the first quarter of 2022, a -2.7 percentage-point decrease from one year earlier. Asking rents grew 4.6% to reach an annual rate of $9.36 per square-foot, keeping Flex/R&D space in the Inland Empire more affordable than Los Angeles ($13.97), Orange ($12.98), and San Diego ($15.44) Counties.
Demand for Retail space in the Inland Empire is beginning to stabilize; however, it remains below pre-pandemic levels. While the vacancy rate dropped to 9.9% in the first quarter of 2022 (a 0.1 percentage-point decline from one year earlier), asking rents fell -0.2% to an annual rate of $22.52 per square-foot. As with other commercial property types, Retail space in the Inland Empire remains more affordable than Los Angeles ($33.55), Orange ($34.31), and San Diego ($32.33) Counties.
Non-residential permitting in the Inland Empire has increased over the last year. Building permit values in the first quarter of 2022 totaled $817 million, a 93% increase from the first quarter of 2021. The largest increases were in Retail properties, which totaled just $282 million in the first quarter of 2022, up 233% from the first quarter of 2021. Industrial properties, totaling $205 million in building permits, were also up 78.6%. Office permitting continues to be tepid, totaling just $9.4 million in the first quarter of 2022.