Inland Empire Regional Intelligence Report
This edition traces the Inland Empire economy’s recovery from the COVID-19 pandemic. The report examines the bounce back in employment, including the uneven recovery among industries, and looks at parts of the economy that have boomed during the crisis such as residential real estate.
EMPLOYMENT AND WAGES
The Inland Empire labor market has continued to steadily recover from the COVID-19 pandemic, adding 145,100 jobs since it hit bottom in April 2020. Despite the ongoing jobs market recovery, total payroll employment is -4.9% (or -77,200 jobs) below the pre-pandemic peak in February 2020. Even so, employment growth in the Inland Empire is outpacing the state (-8.6% below its pre-pandemic peak) yet has trailed the nation (-5.5%) over this period.
While the local economy has experienced a fallout within various industries in the labor market, the declines are not as severe as headlines would have you believe. More importantly, the declines are likely to be temporary in nature. The majority of declines have been driven by the response to COVID-19, whether public health mandates or changes in consumer behavior to help mitigate the pandemic’s impact. The fundamentals of what will drive long-run growth remain strong, with households experiencing minimal losses in income and some even able to bolster their savings over the last year. As a result, there is significant pent-up demand for consumer consumption. Once businesses start to fully open and COVID-19 health concerns begin to wane, the economy (and thus the labor market) should recover rapidly in 2021.
The Inland Empire’s unemployment rate has improved from the lows of last year. It is now 7.4%, a far cry from 4% in February 2020. This rate is lower relative to California (8.3%) and higher relative to the United States (6%).
Unsurprisingly, the largest job losses have been concentrated in the region’s Leisure and Hospitality sector, with -44,600 fewer workers compared to February 2020 (a -25.3% decline). Other significant job losses have occurred in Government, Manufacturing, Other Services (a sector that includes hair and nail salons), Administrative Support, and Education/Health Care. These are the sectors most impacted by government mandates and consumer reservations. The stay-at-home orders implemented in December have begun to ease in many parts of the state, which should help alleviate much of the slowdown occurring in December and January.
The Center for Economic Forecasting remains optimistic. With more and more people receiving the COVID-19 vaccine daily, containment of the virus is in sight, and these sectors should experience significant job gains as companies ramp up production to meet surging consumer demand.
Although local job losses have been widespread, a few bright spots exist. The surge in e-commerce has helped boost payrolls in the region’s Transportation and Warehousing sector over the last several months. Payrolls in Transportation and Warehousing expanded 22.1% since February 2020, outpacing growth in the state by a wide margin.
Wages in the Inland Empire have been steadily rising, although some of this is due to the loss of jobs in lower-paying industries like Leisure and Hospitality and Retail Trade. From the third quarter of 2019 to the third quarter of 2020, wages grew 5.7%, trailing the 6.7% pace in California overall. Wage growth in the Inland Empire was strongest in Riverside County, where it increased 6.3%. Wages in San Bernardino County grew 5%.
COVID-19 TRENDS AND BUSINESS ACTIVITY
Containing COVID-19 will be essential to sustaining the economic recovery in the Inland Empire and the nation. The surge in cases that occurred in the Inland Empire in December and January have fallen dramatically in recent months. In the middle of April, the seven-day moving average for new daily COVID-19 cases in the Inland Empire was just under 400, a significant improvement from the more than 7,000 new daily COVID-19 cases earlier this year. With these improvements, public health mandates have begun to ease and businesses are able to return to more normal operations.
The decline of COVID-19 cases in the Inland Empire has also eased the strain on hospital beds. In mid-January, there were over 3,400 patients in local hospital beds who tested positive for COVID-19, a number falling to approximately 172 recently. This is a welcome sign for local hospitals that won’t have to shift resources to COVID-19 patients.
Vaccinations will play a key role in the Inland Empire and California’s re-opening efforts in the coming months. As of April 18, the Inland Empire had supplied over 2.2 million doses of the COVID-19 vaccine. The state is slated to open vaccinations up to a wider pool of people in the coming weeks, which should help move the region closer to herd immunity and business and social re-openings.
From the fourth quarter of 2019 to fourth quarter of 2020, taxable receipts in the Inland Empire expanded 5.5%. The pandemic has led to a surge in spending at some locations. E-commerce has surged during the pandemic, and spending is up 46.5% year over year for the County and State Pool (the category collecting taxes for e-commerce sales).
The Inland Empire’s Construction sector has also been aided by the pandemic. As people spend more time at home, many have started or finished home upgrades in recent months, with spending at Building and Construction stores growing 15.5% year over year. More people eating meals at home has also led to an increase in spending at Food and Drug Stores, which is up 12.6% over the last year. Declines were most pronounced at Fuel and Service Stations, which fell -25.4%. This is due to less car travel during the pandemic.
Declines were also pronounced at Restaurants and Hotels, which fell -16.4% over the last year. This shouldn’t come as a surprise given that these were the sectors most impacted by stay-at-home orders and public health mandates. General Consumer Goods (-5.5%) also declined over this period.
RESIDENTIAL REAL ESTATE
The housing market is by far the brightest spot of the Inland Empire’s economy in 2020. Strong performance within the region’s residential real estate is likely driven by three factors. First, typical homebuyers (higher-income earners) have been less affected by the labor market downturn. Second, mortgage rates are at historically low levels, spurring purchasing activity. Third, inventories are near historic lows in many parts of the state.
Home prices in the Inland Empire continue to steadily increase. From the fourth quarter of 2019 to fourth quarter of 2020, the median single-family home price rose 16.3%. This was in line with growth in other parts of Southern California, with Los Angeles (17.2%), Orange (12.9%), and San Diego (14.3%) counties also posting sizable gains.
The Inland Empire remains one of the last markets for relatively affordable housing in Southern California. At a median price of $440,000, its existing single-family homes are significantly more affordable than those in Los Angeles ($770,000), San Diego ($726,000), and Orange ($895,000) counties.
Economic stimulus and low interest rates have increased demand for housing throughout California; however, supply has not increased to meet these demands. In March 2021, there were just 1.4 months of housing supply in Riverside County and 1.6 months of supply in San Bernardino County. For context, a balanced market typically equates to 6 – 7 months of supply, while a buyer’s market equates to seven months of supply and above and a seller’s market is six months of supply and under.1 These historic low levels of inventory have pushed home prices up by considerable margins over the last year despite the weakness in labor markets and low levels of inflation. That said, local growth in home prices this year is unsustainable, and the Center for Economic Forecasting expects interest rates to tick up at some point in 2021.
Demand for homes in the Inland Empire also remains relatively strong. After sales dropped during the second quarter of 2020 because of the pandemic, they surged in the third and fourth quarters. Indeed, the third and fourth quarters experienced the highest level of home sales in the region since 2010. With this resurgence, existing single-family home sales increased 5.5% in the Inland Empire from 2019 to 2020, outpacing growth in Los Angeles (-3.9%), San Diego (3.3%), and Orange (4.6%) counties.
The apartment market in the Inland Empire also had a solid year. Vacancy rates grew to 3.7%, a 0.4 percentage-point increase from a year earlier (but this was driven by an increase in multi-family construction). Indeed, the number of occupied units increased 1.0% over the last year. Asking rents grew 2.5% to $1,467 per-unit per month, but that figure still keeps the Inland Empire more affordable than Los Angeles ($1,973), San Diego ($1,860), and Orange ($1,954) counties.
2020 has been a mixed bag for residential construction in the region. The Inland Empire issued 1,667 multifamily permits and 12,302 single-family permits in the first three quarters, a change of -59.8% and 15.4% respectively.
COMMERCIAL REAL ESTATE
Vacancy rates for warehouse properties in the Inland Empire increased to 9.9% in the fourth quarter of 2020, a 0.1 percentage-point increase from a year earlier. This increase was driven by new stock coming online rather than a decline in demand, with occupied stock increasing 3.1% over the last year. In addition, asking rents grew a modest 1.6% over the last year to an average annual rate of $5.85 per square foot, but that still keeps warehouse space in the Inland Empire more affordable than in Los Angeles ($7.98), San Diego ($9.26), and Orange ($7.66) counties.
Demand for office properties has grown in the Inland Empire over the last year. Office vacancy rates in the Inland Empire fell to 17.1% in the fourth quarter of 2020, up 0.6 percentage points from a year earlier. Asking rents grew a modest 0.5% over the last year to an annual rate of $23.34 per square foot, keeping office space in the Inland Empire more affordable than in Los Angeles ($40.57), San Diego ($34.33), and Orange ($34.04) counties.
Vacancy rates for flex/R&D properties in the Inland Empire fell to 5.5% in the fourth quarter of 2020, a 0.4 percentage-point increase from a year earlier. Asking rents grew a modest 0.9% over the last year to an annual rate of $8.92 per square foot, keeping flex/R&D space in the Inland Empire more affordable than in Los Angeles ($13.33), San Diego ($14.63), and Orange ($12.26) counties.
Demand for retail space in the Inland Empire has fallen over the last year as a result of the government mandates and consumer reservations amid the COVID-19 pandemic. Retail vacancies in the Inland Empire grew to 10.0% in the fourth quarter of 2020, a 0.1 percentage-point increase from a year earlier. However, asking rents fell -2.9% to an annual rate of $22.59 per square foot, which keeps retail space in the Inland Empire more affordable than in Los Angeles ($33.52), San Diego ($32.28), and Orange ($34.21) counties.
Non-residential permitting has fallen considerably over the last year. Permit values during 2020 totaled just $2.05 billion, a -15.1% decline from 2019. The largest declines were in industrial permitting, which totaled just $538 million during 2020, off -41.2% from 2019. Permitting for office properties, totaling just $45.8 million, was -54% lower than 2019 levels. But permit values for retail properties fell -13.3%, totaling $427 million.