Inland Empire Regional Intelligence Report
The Inland Empire continues to drive economic expansion in California. Employment growth is still surpassing statewide gains, with increases led by the Health Care, Government, and Transportation and Warehousing sectors. Job growth lowered the Inland Empire’s unemployment rate, and perhaps more important, the region’s labor force continues to expand despite statewide declines overall. Wage growth over the past year has fueled activity in many sectors, reflected in steady increases in taxable sales. Sustained demand has also fueled growth in residential and commercial real estate.
Employment in the Inland Empire is continuing to expand at a steady pace, according to California’s Employment Development Department. From October 2018 to October 2019, the region added 30,900 nonfarm jobs, a 2.0% increase. This edged out the 1.8% gains in the state and the 1.4% gains in the nation. Although employment growth remains steady, a tight labor market has slowed it compared with recent years; total nonfarm employment grew 3.0% from October 2017 to October 2018 and 3.8% from October 2016 to October 2017.
Wages are also increasing steadily. Overall nominal earnings grew 3.8% from the first half of 2018 to the first half of 2019, increasing 3.7% in Riverside County and 3.9% in San Bernardino County. Over the period, nominal wages in the state overall grew 4.2%, surpassing the Inland Empire. With labor markets tightening across Southern California, there should be upward pressure on wages in coming months as employers clamor for talent from a limited pool.
The region’s labor force is growing more slowly. From October 2018 to October 2019, it expanded just 0.4%, increasing by just 8,100. Even so, this outpaced Los Angeles (-0.1%) and Orange (-0.4%) counties. The Inland Empire is also outpacing the state, with the labor force in California contracting 0.3% over the period. With steady gains in household employment (16,200), which outpaced labor force gains, the employment rate in the Inland Empire fell to 3.7% in October 2019, a 0.4-percentage-point decline from a year earlier.
The At the industry level, job growth has been broad-based, with most Inland Empire sectors having expanded payrolls over the last year. Education and Health Care provided the largest number of new jobs; payrolls grew by 14,100 (5.8%) positions from October 2018 to October 2019. The Government sector was second, adding 6,200 (2.4%) jobs. Most of the new Government positions came from Local Government (5,100), with Local Government Education (3,500) driving much of the growth. The Transportation and Warehousing sector also continued to provide a significant number of jobs, with payrolls growing by 4,200 (3.3%). This was followed by Leisure and Hospitality, which added 3,900 (2.3%) positions, and Administrative Support’s 3,800 (3.8%).
A few sectors lost positions over the last year. Losses were most prominent in Natural Resources and Construction, which shed 3,100 jobs (-2.9%). Other sectors posting losses were Other Services, which reduced payrolls by 900 (-2.1%), Professional, Scientific and Technical Services, which lost 200 jobs (-0.6%), and Manufacturing, which cut 200 payrolls (-0.2%).
Continued gains in employment levels and wages has helped boost local spending. From the second quarter of 2018 to the second quarter of 2019, taxable sales in the Inland Empire increased 4.1%, outpacing the state overall (3.7%). Riverside County’s overall taxable sales increased 5.5% during the period, and within the County, the cities of Perris (31%) and Jurupa Valley (16.7%) had considerable gains, while taxable sales grew steadily in Riverside (2.0%), Corona (4.6%) and Temecula (2.4%). In San Bernardino County, taxable sales increased 2.7%, and within the County, Ontario (5.4%) and Fontana (3.4%) led the way.
Every spending category in the Inland Empire has grown over the last year. Business-to-business spending was the standout, with Business and Industry sales tax receipts increasing 4.2% from the second quarter of 2018 to the second quarter of 2019.
Consumer spending at Restaurants and Hotels increased 3.5%, followed by General Consumer Goods, growing 2.2% over the period. Economic trends have been good for Hospitality and Tourism. Following the gains in Leisure and Hospitality employment and Restaurant and Hotel spending, passenger traffic at Ontario International Airport continued to expand. A total of 4.57 million passengers passed through the airport in the first nine months of 2019, an 8.3% increase over the same period in 2018.
Despite the decline in Construction payrolls over the last year, construction activity throughout Southern California boosted Inland Empire sales tax receipts 0.8% in the Building and Construction category from the second quarter of 2018 to the second quarter of 2019. The increase indicates that developers are using local suppliers for projects and, more important, are building at least some of the housing stock needed for sustained growth in the region.
Trade through the Ports of Long Beach and Los Angeles totaled $313.1 billion in the first nine months of 2019, a 7.9% decrease over the same period in 2018. Total trade with China had the steepest decline, falling 16.9% to $141.1 billion. But this decline was partly offset by a significant increase in trade with Vietnam, rising 17.5% to $23.3 billion. Even if the trade war with China persists, however, it would not be enough to end the current economic expansion in the United States or the region. Further, growth in transportation and warehousing space in the Inland Empire is compensating for some of the trade losses, with freight activity through Ontario International Airport up 3.5% in 2019.
RESIDENTIAL REAL ESTATE
As in much of the state, Inland Empire home sales slowed noticeably in the first half of 2019, but rebounded in the third quarter of 2019. Just over 41,800 homes were sold in the Inland Empire in the first three quarters of 2019, a 2.3% decrease from a year earlier. Rising interest rates at the start of the year pushed first-quarter home sales to their lowest level since 2015, but the recent downward pressure on interest rates has helped increase sales over the last several months.
The Inland Empire remains one of the last bastions of relatively affordable real estate in Southern California. Still, the region’s combination of space, amenities and affordability has helped drive continued gains in home prices. The median price of an existing single-family home in the Inland Empire was $371,920 in the third quarter of 2019, a 4.7% increase from a year earlier. Year-over-year price gains in the region surpassed those in California (2.2%), Los Angeles County (3.1%), Orange County (0.3%) and San Diego County (0.1%).
Affordability remains a strong selling point for real estate in the Inland Empire and should continue to lure buyers. This demand should also lead to modest price appreciation over the next year. Additional housing stock will be critical in attracting residents and helping strengthen the Inland Empire’s employment base.
With homeownership out of reach for many Inland Empire residents, demand in the rental market remains strong. Although new units pushed up apartment vacancy rates from recent lows, the rate stood at 3.4% in the third quarter of 2019, lower than in Los Angeles (3.8%), Orange (3.9%) and San Diego (3.8%) counties. Average asking rent was $1,405 in the third quarter of 2019, up 3.5% from the same period a year earlier. Renters enjoy significant cost savings over the coastal markets, with average asking rents significantly higher in Los Angeles ($2,070), Orange ($1,981) and San Diego ($1,878) counties.
Residential construction activity remains tepid in the Inland Empire. Only 10,210 residential units were permitted in the first three quarters of 2019, a 3.8% decrease over the same period in 2018. Most are for single-family units, which fell 14% to 7,066 units in the first three quarter of 2019. Multifamily permitting increased relative to last year, with 3,472 permits issued in the first three quarters of 2019, a 35% increase over the same period the previous year. Given that population growth in Riverside County (1.1%) and San Bernardino County (1.0%) outpaced that of the state (0.5%), Los Angeles County (0.0%) and Orange County (0.3%) from 2018 to 2019, construction will need to increase to preserve the region’s affordability and enable sustained growth.
COMMERCIAL REAL ESTATE
Continued gains in employment levels, population and consumer and business spending have given way to sustained gains in commercial real estate. New stock continues to come online, vacancy rates remain stable, and rents remain affordable relative to Los Angeles, Orange and San Diego counties.
The Inland Empire’s expanding Logistics sector is driving demand for warehouse and distribution space. New stock, rather than declining demand, caused the vacancy rate to increase to 8.6% in the third quarter of 2019, a 0.7-percentage-point increase from the third quarter of 2018. In addition, the 4.4% gain in asking rents from the third quarter of 2018 to the third quarter of 2019 reaffirms that demand for warehouse and logistic space remains strong. This pace of growth led Southern California; asking rents grew 2.9% in Los Angeles, 2.3% in Orange and 3.1% in San Diego counties. Despite the uptick in vacancy rates, businesses have clamored for warehouse and distribution center space in the Inland Empire, with occupied warehouse stock growing 3.4% from the third quarter of 2018 to the third quarter of 2019.
Research and development industrial space is also in high demand. Vacancy rates held steady to 5.2% in the third quarter of 2019, the same as a year earlier. Asking rents are also rising steadily, increasing 2.8% to an annual rate of $8.68 per square foot from the third quarter of 2018 to the third quarter of 2019. Asking rent has grown more rapidly in the Inland Empire than in Orange County (2.6%), but slower than in Los Angeles County (3.6%) and San Diego County (3.7%). More important, asking rents remain significantly more affordable, with Inland Empire companies getting a roughly 33% savings relative to Los Angeles and about 28% over Orange County.
Demand for retail space has remained fairly stable over the last year. Retail vacancy rates inched up from their lowest point since before the recession, increasing to 9.8% in the third quarter of 2019, a 0.4-percentage-point increase from a year earlier. This increase, however, occurred as 438,000 square feet of new retail space came online over the last year. Strong demand drove the average asking rent to an annual rate of $23.41 per square foot in the third quarter of 2019, a 2.0% increase over the third quarter of 2018.
Rising employment is driving demand for office space in the Inland Empire. Vacancy rates remained steady at 16.9% in the third quarter of 2019, unchanged from a year earlier. At the same time, the average asking rent for office space increased to an annual rate of $23.11 per square foot, up 1.4% from a year earlier. Businesses get significant cost savings in the Inland Empire relative to Los Angeles and Orange counties. Moreover, asking rents grew more rapidly in these coastal markets over the past year, increasing 4.4% in Los Angeles County, 2.9% in San Diego County and 2.5% in Orange County.
After several years of steady increase, nonresidential permitting activity has slowed in the Inland Empire, particularly in the third quarter of 2019. Nonresidential permits values fell 6.2% during the first three quarter of 2019 relative to a year earlier, reaching just over $1.9 million in total value. A significant portion of the permitting was for industrial space, with valuations totaling over $725 million through the first three quarters of 2019, a 7.4% decline from 2018. Permitting activity for retail space also pulled back, with $320 million in permits issued during the first three quarters of 2019, roughly 6.1% lower than during the first three quarters of 2018. Permitting activity for office space sustained the largest decline, with valuations totaling just $65.6 million during the first three quarters of 2019, a 27% decrease from the same period a year earlier.