8TH ANNUAL INLAND EMPIRE ECONOMIC FORECAST …8TH ANNUAL INLAND EMPIRE ECONOMIC FORECAST CONFERENCE...

8TH ANNUAL INLAND EMPIRE ECONOMIC FORECAST CONFERENCE

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Re-Imagining Economic Growth in the IE

CALIFORNIA’S NEXT METROPOLIS?

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Re-Imagining Economic Growth in the IE

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8TH ANNUAL INLAND EMPIRE ECONOMIC FORECAST CONFERENCE

Table of ContentsUnited States Forecast

California Forecast

Inland Empire Forecast

The Urban Empire

Inland Empire Employment

Inland Empire Business Activity

The Rise of the Single-Family Rental

Inland Empire Residential Real Estate

Inland Empire Commercial Real Estate

Densification

Inland Empire Demographics

1

6

9

13

17

23

27

29

37

43

45

It may be tempting to interpret the hurricanes pounding the country, major

earthquakes in Mexico, an increasingly threatening relationship with North Korea,

and President Trump making a budget deal with the Democrats as the four

horsemen of the economic apocalypse. Yet, despite the scary headlines, the U.S.

economy is ticking along at a steady if unexciting pace. Growth came in at 3% for the

second quarter of the year (the best since the first quarter of 2015), making up for a

relatively weak first quarter, and the outlook for the rest of the year remains in the

2.5% range. Overall, the UCR Forecast Center expects the U.S. economy to grow faster

in 2017 than during the last two years. And the outlook for 2018 looks remarkably

similar, short of some major change in government policy.

United States ForecastCruising Through Rough Waters

2

United States Forecast

Here are some of the key economic trends we expect over the coming months.

Businesses Are Investing

US REAL EXPORTS

Source: Institute of Supply Management

ISM DIFFUSION INDEXES

Source: Institute of Supply Management

Disaster Economics

One of the best signs for 2017 is the solid recovery in non-residential investment. Oil prices have stabilized and production and exploration are again on the rise. Globally, the European Union is seeing solid growth, China has stabilized, and commodity economies have started to bounce back, fueling U.S. export growth. The ISM Manufacturing

Index for August had the highest reading in six years. The European Central Bank just announced the end of its quantitative easing program and the U.S. dollar is beginning to depreciate from recent highs, which should help maintain these trends in the second half of the year.

Halfway through hurricane season, Houston is still cleaning up after Hurricane Harvey inflicted unprecedented damage on this enormous metropolis, and the damage Hurricane Irma wreaked on Florida and Hurricane Maria wreaked on Puerto Rico is still being assessed. The human tragedy of these storms is clear, but it is a mistake to think they will have only a negative effect on economic growth. Rebuilding will stimulate economic growth in the short term, particularly in the residential sector, as billions of dollars are be poured into fixing or replacing damaged homes and infrastructure. This certainly does not mean that natural disasters are welcome tools for economic stimulus. Lives are shattered and, on net, we are worse off.

140,000 48

50

52

54

56

160,000Expo

rts

($M

, SA)

Inde

x

180,000

200,000 58

Jan ‘17 Jan ‘17Jan ‘16 Jan ‘16Jan ‘15 Jan ‘15Jan ‘14 Jan ‘14Jan ‘13 Jan ‘13Jan ‘12 Jan ‘12Jan ‘11Jan ‘10

Non-Manufacturing Manufacturing

3


Consumers to Rebalance

Beware the Labor Shortage

Although business spending is heating up, we expect disappointing consumer spending in the second half of the year. Solid growth in consumer spending kept the economy humming through the commodity bust, but spending got ahead of incomes by a good margin. The consumer savings rate has dropped below 4% of disposable income for the first time since before the Great Recession—a very worrisome trend. The UCR Forecast Center believes

that consumers are starting to rebalance their spending, as least as indicated by recent softness in auto and retail sales. The expectation is that savings rates will begin to drift back up throughout the rest of 2017. Even better news is that this rebalancing will occur without many side effects because consumer debt burdens are still near an all-time low and the tightness of the labor markets is driving solid wage gains.

One of the key messages of Donald Trump’s presidential campaign last year focused on the lack of job opportunities for Americans—driven, he claimed, by bad taxes, bad regulations, and the huge number of undocumented workers in the nation. As much as that message resonated with part of the American public, it simply isn’t true. The United States was close to full employment during the campaign and now is not only at full employment but will start feeling the pinch of a labor shortages this year, particularly in relation to the recovery and clean-up efforts that will begin in the areas affected by recent hurricanes. The country’s unemployment rate is now at 4.4%, the lowest since the 1960s with the brief exception of the tech bubble-fueled economy of the late 1990s.

There are a number of benefits to a tight labor market, not least of which is rising wages. This might seem like a contradiction, but that view fails to account for low inflation and various issues with the labor survey. Once we account for these issues in the data, the picture reveals that, on average, wages are rising at almost the fastest rate they have in 25 years.

Rising wages are pulling people back into the workforce, and labor force growth is as strong as it has been in more than a decade. This is a positive for discouraged workers who may have dropped out of the labor force because they will be given opportunities to receive training and experience. But the pool of discouraged workers is small, 2 million to 3 million at most. Soon, even that reserve will be gone, and baby boomers are retiring in large numbers. The solution to this problem is the expansion of immigration, a directly opposite stance from the one the current presidential administration is pursuing.

PERSONAL SAVINGS RATE

Source: Federal Reserve Bank of St. Louis

DEBT SERVICING RATIO


2 4.5

35.0

4

5.55

6.06

6.5

7

8

Rate

(%, S

A)

Rate

(%, S

A)

9 7.0

Q1 ’03

Q1

’90

Q1

’92

Q1

’94

Q1

’96

Q1

’98

Q1

’00

Q1

’02

Q1

’04

Q1

’06

Q1

’08

Q1

’10

Q1

’12

Q1

’14

Q1

’16Q1 ’05 Q1 ’07 Q1 ’09 Q1 ’11 Q1 ’13 Q1 ’15 Q1 ’17

4


The Trump Effect Yellen’s Choice

This brings us to federal policy. When President Trump took office, he promised radical shifts in government policy. Some of those policies could have modestly stimulated economic growth, while others could have put the nation on a path straight into recession. This uncertainty has been a concern for the UCR Forecast Center—if not for the stock markets, which have continued their climb into the stratosphere. Despite our unease, nothing has happened at the Federal level except the most basic functions of state. In many ways, the stasis gripping Washington looks a lot like what occurred under the Obama administration, except that it is ineffectiveness and inability rather than partisanship freezing the wheels of government. At this point, the UCR Forecast Center believes the chance of a major change in policy (positive or negative) is small but real.

And what about equities? Banks have been slowing their lending, commercial real estate markets seem to be plateauing, there is a variety of political and global worries, and rising wages are putting pressure on profits. But despite all this, equity markets break records month after month. In the UCR Forecast Center’s view, the market has become frothy—and apparently, this is the view held by the Fed as well. It has continued to tighten even though bond rates have barely budged and inflation is already slowing from the very brief surge at the start of the year. The Fed is in a tough spot. It needs to figure out how to slow equities before they end up popping on their own with potentially dangerous consequences. Yet to date, raising the federal funds rate and starting to sell off the balance sheet clearly isn’t doing the job. Confounding the issue further is the question of leadership at the Fed in 2018, when Janet Yellen’s term as chair comes to an end. Predictions about what the Fed would do next boil down to a coin toss.

REAL WAGE GROWTH

Source: Federal Reserve Bank of Atlanta

1.5

2.5

3.5

4.5

5.5

Rate

(%, S

A)

6.5

Mar

’97

Mar

’99

Mar

’01

Mar

’03

Mar

’05

Mar

’07

Mar

’09

Mar

’11

Mar

’13

Mar

’15

Mar

’17

Median Wage Average Wage

For most of the post-recession era, the California

economy has been among the fastest growing in the 50

states in terms of both job gains and economic activity.

Credit has largely been attributed to high tech, which has

experienced phenomenal growth since the recession. But

it was also made possible by enormous slack in the labor

market as the state recovered from the highest rates

of unemployment in at least 40 years. From early 2012

through mid-2016, California added jobs at roughly twice

the rate as the United States overall. Job gains at times

exceeded 3% year over year, and the state gradually

chipped away at its double-digit unemployment rate,

which fell from 12.2% in 2010 to 5.4% in 2016.

By the third quarter of 2016, that slack had been

squeezed out: Instead of handily outpacing U.S. job

gains, California’s growth rate slipped to just above 1.5%,

putting it roughly on par with the nation. But by early

2017, slack in the labor force was wrung out as California

saw its unemployment rate hit a 16-year low, effectively

at full employment. Job gains continued in most

industries, but the pace was much slower than in recent

years. Entering the final quarter of 2017, some observers

have worried that the slowdown in the labor market is a

precursor to a stalling statewide economy.

California ForecastLimits to California’s Economic Growth

7

California Forecast

Not So Fast!

Yes, California’s job growth has slowed considerably, but not because the expansion is stalling out. In fact, the state continued to add jobs through the first several months of this year, although at a slower rate. Wage and salary jobs rose by 1.7% year over year in July, adding 276,300 jobs year over year, second only to Texas. In the private sector, the Health Care industry made the largest contribution, followed by Construction, and Accommodation and Food Services (by far the largest sector within Leisure and Hospitality). Professional Scientific, and Technical Services, the source of so much job growth in recent years, was essentially flat, as was Retail Trade. The Government sector saw a significant gain mostly because of local hiring. Otherwise, job losses occurred only in Mining and Logging and in Durable Goods. In all, growth across the state has driven the unemployment rate below 5% in recent months, to the lowest rate since 2000.

Despite the slowdown in job growth California’s gross state product continues to advance nicely, increasing by 3.1% from the first quarter of 2016 to the first quarter of this year. However, taxable sales growth slowed considerably, advancing by just 2.7% year over year in the first quarter of 2017 compared to a 6.7% increase in the final quarter of 2016.

With the state at full employment, job growth and general economic gains will largely be constrained by the availability of workers. This is good for workers who might achieve pay increases in the coming months and quarters, but it poses a challenge for firms that want to grow but cannot because they are unable to hire the necessary workers. Data at the national level indicate that job openings in general have reached historic highs. This holds true for most industries, from professional and business services to manufacturing to food and beverage establishments. There are shortages of skilled workers in well-paying occupations, of unskilled workers in food services and similar industries, and of skilled and semi-skilled occupations in manufacturing and construction.

What is holding back growth and can be anything done about it? There is an easy answer to the first question but the second is a different story.

Industry July 2016 July 2017 YTY YTY %

Total Nonfarm 16507.8 16784.1 276.3 1.7%

NR/Mining 24.4 23 -1.4 -5.7%

Construction 775.8 826.8 51 6.6%

Manufacturing 1307.7 1293.6 -14.1 -1.1%

Durable Goods 818.8 818.8 0 0.0%

Non-Durable Goods 488.9 474.8 -14.1 -2.9%

Wholesale Trade 722.5 735.9 13.4 1.9%

Retail Trade 1684.2 1684 -0.2 0.0%

Transport,Warehouse,Util. 587.9 595.5 7.6 1.3%

Information 523.8 529 5.2 1.0%

Finance and Insurance 545.5 548.6 3.1 0.6%

Real Estate 278.1 282.4 4.3 1.5%

Prof Sci and Tech 1229 1228.9 -0.1 0.0%

Management 226.3199 230.8358 4.5159 2.0%

Admin Support 1089.2 1099.6 10.4 1.0%

Educational Services 354.2 367.6 13.4 3.8%

Health Care 2189.3 2248.8 59.5 2.7%

Leisure and Hospitality 1896.8 1949.4 52.6 2.8%

Accommodation and Food 1597.2 1642.4 45.2 2.8%

Other Services 559.4 577.3 17.9 3.2%

Government 2514.1 2563 48.9 1.9%

JOBS BY MAJOR INDUSTRY

California

Source: CA Employment Development Department

8

California Forecast

Build It … They’re Already Here

For decades, California augmented its home-grown labor force with workers from elsewhere, drawing from both other states and other countries. Through much of the post-World War II era, the state was a magnet for workers from around the country and the world. There were opportunities for aerospace engineers, fruit pickers, and everything in between. In the 1970s and 1980s, California’s labor force grew by an average of 3.1% per year, during which time net migration matched or exceeded California’s internal population gains. But net migration turned negative with the 1990s recession and, in turn, growth in the labor force has slowed to 0.9% annually since 1991. Significantly, in the last decade and a half, consistent state-to-state migration out of California has been offset only by international migration into the state.

It is no coincidence that slower labor force growth has occurred as the cost of living has soared in California. As recently as the mid-1970s, the median price of a California home was just a few thousand dollars higher than the national median. But since 1990, the California median has consistently exceeded the U.S. median by more than 50%, with the state median at least double the U.S. median in 10 of the last 27 years. Meanwhile, rents have reached such heights that rent burdens in many communities across the state are among the nation’s highest.

Countless headlines in recent years have described California as facing a housing shortage and an affordability crisis as construction has lagged demand. This is not a new theme, just the latest chapter in California’s housing story. One need only look back to the early 2000s to find the same storylines:

• The state’s need for housing far outstrips the current pace of building

• The state needs more affordable workforce housing• Even middle- and upper-middle-income households face

affordability challenges

Attempting not to sound trite, it still all boils down to supply and demand. On the demand side, the much-anticipated arrival of Millennials on the housing scene, coupled with recent job and income growth and low interest rates, are driving demand for housing, both owner-occupied and rental. On the supply side, existing home sales have fallen below expectations, given the strength of the economy, while new single-family and multi-family construction has been relatively weak since the recession.

Demand-side solutions to the problem include easier underwriting standards (though not as slack as in the 2000s), reduced down payments, and special finance programs for would-be buyers, along with rent subsidies for qualified households. But in the absence of increased supply, these programs result in more would-be buyers and renters competing for scarce housing. No, the situation must ultimately be addressed by increasing supply, a tall order indeed. But until California does so in earnest, growth of the statewide economy will be constrained.

That is not to say that California won’t grow. It will. The state and its regions should experience continued growth in economic activity and jobs throughout 2017 and into 2018. Most of the job gains will occur in Health Care, Leisure and Hospitality, and Construction. But California will fall short of its potential until it crafts long-term supply-oriented solutions to the chronic problem of high housing costs and low housing affordability.

Although the Inland Empire economy

was one of the hardest hit in Southern

California, it has emerged as one

of the state’s fastest growing in

recent years. While it has grown at a

somewhat slower pace than during

the last five years when measured by

gross metropolitan product, the labor

market has demonstrated robust

growth, outpacing California since

2012 with the fastest rate of job gains

in Southern California. Year-over-

year job growth in the Inland Empire

was 2.7% in July 2017, well above

the state, which registered a modest

print of 1.7%. Employment growth in

the Inland Empire has led the state

in recent years because growth is

shifting from coastal to inland areas.

This is evident when looking at growth

in such neighboring counties as Los

Angeles and Orange, which over that

same time period increased payrolls

1.1% and 0.6%, respectively.

Inland Empire ForecastThe Economic Overview

10

The UCR Forecast expects job growth in the Inland Empire to hold steady over the next couple of years and the labor market continues to show signs of tightening as the nation enters its ninth year of expansion (the longest expansion on record was exactly 10 years). Although there is plenty of room for growth, there is an increasingly diminished supply of available labor. For this reason, the UCR Forecast expects total nonfarm growth to taper moderately into the range of 2.0% to 2.5% in the coming years. The Inland Empire will continue to grow, with the economic motor downshifting a gear as the economy hits cruise control.

As the labor market points to healthy economic activity, other indicators also show that the Inland Empire is on solid footing. Keep in mind, employment is a lagging indicator, tending to change only after the economy has begun to follow a trend. Before companies can hire, they need more spending by businesses and consumers. After incomes rise, household net worth improves, and the demand for products increases,

businesses will expand their payrolls. Most leading indicators point to an economy that is poised for continued growth. Take consumer spending as a prime example. In addition to steady job gains, spending activity in the Inland Empire, as measured by taxable sales, has been growing steadily over the last few years. Taxable sales in the Inland Empire were up by 4.7% in 2016, compared to 3.7% in the state over all. Inland Empire businesses and consumers did not slow their discretionary spending. According to taxable receipts data from HdL Companies, a sales and property tax advisory firm, taxable receipts increased across all categories except Fuel and Service Stations. Strong gains were observed in Autos and Transportation, which, despite a slowdown in auto sales at the national level, grew 6.3% in 2016. Not only does such growth in taxable receipts provide much-needed relief to local government budgets, it also highlights the extent to which consumers are feeling optimistic about the local economy. Cars are long-term durable goods purchases with long shelf lives. These are expenditures that

are typically forgone or postponed in times of economic hardship. That taxable receipts from auto sales are increasing by such a large percentage shows that consumers are feeling more confident about their finances. Taxable receipts growth has not been restricted to car sales, however. The largest increase occurred in Restaurants and Hotels, which grew 6.7% year over year in 2016. Businesses continued their spending as well, with sales tax receipts posting an 5.9% growth rate during 2016.

In light of the strong spending by businesses and consumers and given that the economy is poised for growth, the UCR Forecast is forecasting that spending will continue to trend upward at a moderate pace, with taxable sales continuing to grow from 4.5% to 6% range per year through the next couple of years. Tourism and business travel will continue to have a positive influence on the region’s hotels and restaurants, but domestic and local spending, fueled by a growing population, will start to play a larger role.

SOUTHERN CALIFORNIA EMPLOYMENT GROWTH

Jul-16 to Jul-17


Orange County

Los Angeles

San Diego

Hanford

El Centro

California

San Luis Obispo

Ventura

Percent (Year over Year)

Inland Empire

0 0.5 1.0 1.5 2.0 2.5 3.0

Farm

Retail Trade

Finance/Insurance

Information

Management

Manufacturing

NR/Mining

Other Services

Admin Support

Real Estate

Prof Sci/Tech

Government

Transport,Warehouse,Util.

Jobs Change (SA, Smoothed)

Construction

Leisure/Hospitality

Education/Health

Wholesale Trade

Professional/Business

-5 0 5 10 15 20

JOBS ADDED/LOST BY INDUSTRY

Source: California Employment Development Department

11


The Housing Outlook

A decade ago, the Inland Empire endured some of the worst effects of the housing market crash. Although it has largely recovered on many fronts, the region’s housing market has changed in some very significant ways. Chief among these have been the inflow of households into the rental market, the shift from younger to older householders, and a low level of residential permitting activity, despite an uptick in economic activity. The key to reversing these trends lies in rolling back certain national and state regulations while increasing building activity at the local level.

Despite supply constraints, one key advantage of the Inland Empire over coastal regions is affordability. According to the California Association of Realtors, 43% of households could afford to purchase the median priced home in the Inland Empire in the first quarter of 2017, 14 percentage

points higher than Los Angeles County (29%) and 22 percentage points higher than Orange County (21%). During this time, the minimum qualifying income to purchase the average home was $75,000 in Riverside County and $53,000 in San Bernardino County. In Los Angeles and Orange counties, it was $100,000 and $154,000, respectively.

This affordability advantage will have major implications for the Inland Empire over the years. As Southern California’s population continues to grow, more and more people will east for low housing prices. Herein lies the Inland Empire’s most significant challenge: building enough housing to meet demand. In the years leading up to the housing crash, households and residential building permits were expanding. Between 1995 and 2000, nearly 334,000 new households entered the Inland Empire and 79,000 single-family permits were issued. Over the next five years,

this increased to more than 600,000 new households and nearly 179,000 permits. This began to slow down in the post-recession years. However, it is now almost a decade since the recession officially ended, and permits are still hovering around levels not seen since 1995. With better economic conditions and the affordability crisis on the coast, the Inland Empire is ripe for another population influx if it can build enough units.

At the national level, mortgage lending standards remain too stringent for many potential homebuyers, especially younger families. This has pushed many households into the rental market, which has exploded in the Inland Empire, in part because of the Dodd-Frank Act, enacted by Congress in 2010 in response to the crash. Although many of the regulations created by Dodd-Frank were designed to limit irresponsible lending practices, the effect has been to make it

12


more difficult to obtain a mortgage, to the detriment of would-be homeowners and the housing market.

At the state level, California has its own problems related to housing development. By far the biggest impediment to growth has been public policy, specifically Proposition 13 and the California Environmental Quality Act (CEQA). Proposition 13, approved by voters in 1978, severely limits property tax assessments and thus causes local governments to deter residential construction, encouraging development that generates greater tax revenue. Often, residential units that are built become saddled with various fees by local governments trying to make up for lost revenue.

CEQA, approved by the state Legislature in 1970, increases the cost of residential

construction by requiring developers to mitigate disruptions to the environment. Although this law was passed in good faith and many of its provisions are important, it has been harmful for California’s development. Over the years, special interest groups and NIMBYs (Not in My Back Yarders) have overwhelmed community planning to stop development and serve their own interests. There has been little talk of serious reform to either Proposition 13 or CEQA among state lawmakers. Proposed solutions rarely mention the need to free up the market.

Overall, the Inland Empire’s housing market is doing well but faces challenges. One key issue is making it easier for younger generations to purchase. Tied to this is the building of more residential units in the region, which will pave the way for population growth. Policies at the state and national level will need to be

reformed as well, if long-term growth is to be achieved. Over the next five years, the UCR Center for Forecasting expects the Inland Empire to continue to be a destination for Southern Californians looking for affordable housing close to employment centers. In the face of limited supply and a renter population that is consuming a limited supply of single-family dwellings, our forecast expects the rate of home price appreciation in the range of 5% to 6% over the next two years. The UCR Forecast does not expect overall inflation to trend much higher than 2%. In other words, the inflation-adjusted annual cost of owning a home will not return to levels seen before the last housing bubble, even with the rate of price appreciation expected in the near term.

HOME PRICE & SALES FORECAST

DataQuick and the UCR Forecast Center

4.5

5.0

5.5

6.0

6.5

Rate

(%, S

A)

Q1

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’98

Q1

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Q1

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Q1

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7.0

Q1

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Q1

’16

The Urban

Empire?

Is densification of jobs through the

creation of urban cores the solution

to economic development issues in

the Inland Empire?

With new workforce generation, new tastes are

being imprinted in the Inland Empire’s DNA, causing

modernization of previously forgotten outer urban

areas. After 1960, development raced to build city

cores, with companies planting their flags in towering

skyscrapers in city centers, claiming dominance in their

markets. Competing companies rose nearby, clamoring

for a chance at the top spot. Large cities have primarily

been constructed with large central cores, smaller outer

rims three to 10 miles away, and suburbs beyond.

A recent transition of taste is causing people to leave

city cores in favor of urban pockets in suburban areas,

creating hybrid mix-use urban nodes. The Inland Empire

is in a unique position, still new in its development life,

that allows it to form parallel tastes and trends. It is not

held back by established cores that have been losing

population. Development in the Inland Empire has

continued to sprawl, with growing population pockets

dispersed among the large landscape. As long as costs

are relatively low and there are few building deterrents

such as high fees barring entry, development can

continue at a strong pace.

14

The Urban Empire?

JOB AND POPULATION DENSITY

Source: US Census Bureau, California Employment Development Department, California Department of Finance

Population Density (000s)

Ontario

Riverside

Corona

Rancho Cucamonga

FontanaSan Bernardino

Moreno ValleyMurieta

Victorville

Temecula

10

0.5

1

1.5

2

2.5

3

1.5 2 2.5 3 3.5 4 4.5 5 5.5 6

Job

De

nsi

ty (0

00

s)

15

The Urban Empire?

How does the creation

of dense urban regions

change labor market

dynamics?

What other positive

(or negative) impacts

could arise?

The Inland Empire has 1.9 million jobs, the 15th largest labor market in the

nation. With no identifying urban core, workers commute by car, congesting

local streets and the 91 Freeway. The city with the largest population and

second highest job count per square mile in the third quarter of 2016 is

Corona, with 163,931 people and 2,101 jobs. Without ample public transit,

workers have little option but to find housing that is within a reasonable

drive to work, affordable, and in an area where they generally like to live.

Population change has been affecting labor market dynamics. According

to the U.S. Census Bureau, the married population of the Inland Empire

fell from 53.1% to 46.1% from 2005 to 2016. In 2016, the median age of

marriage in California was 28.7 for women and 30.6 for men. The American

dream of home ownership in the suburbs with a yard and white picket fence

has become renting an apartment or condo in a mixed-use urban node that

offers housing, entertainment, retail, offices, and nearby highways.

Labor markets have adapted, developing office centers closer to housing.

Many companies are investing in Flex/R&D space near the 91 Freeway,

because it is less expensive than conventional offices and allows for office

workers, warehousing, and transport operations in the same location. Many

companies locate near one another to collaborate and foster a city center

work area, enticing retail center developments nearby. San Bernardino is a

perfect example of this; in the third quarter of 2016 it was the city with the

most employees in the Inland Empire but ranked fifth in job density. A large

backyard means land can be developed relatively easily and inexpensively.

A problem with locating urban nodes off of major highways such as the 91

Freeway is that in areas with no extensive public transit system, traffic and

air pollution worsen. With many areas promoting the idea of eventually

going carbon-neutral or carbon-free, sprawling development is a step in the

wrong direction.

16

The Urban Empire?

How would

development agencies

promote such

changes? What are the

major impediments?

Development agencies have the power to implement regulations that will

deter or encourage how development progresses in the Inland Empire. Most

developers take the path of least resistance and want to maximize revenues

and create developments that match current tastes as well as remain viable

in the future. Tastes are moving toward decentralized urban nodes near the

91 Freeway. This type of development will continue as long as there is ample

land, which is not a problem for the Inland Empire. If the region wants to

reduce its carbon footprint and centralize development, it will need to build

adequate infrastructure and public transportation. Public transportation

is very expensive as seen by the recent $1.5 Billion the LA Metro paid to

extend the Expo line 6.6 miles to add service to Santa Monica. Development

tax could be increased to support such endeavors, but many people live in

the Inland Empire because it is much cheaper than nearby counties that

border the coast. The best option for the Inland Empire is to give people

what they want, and right now that is multiple city nodes that offer the

amenities of a full city but without the congestion.

The Inland Empire’s economy has continued the

robust expansion it began more than seven years

ago. In addition, although growth has waned in

other parts of the state and nation, the Inland

Empire continues to show strength across a

broad range of sectors and skill sets, creating job

opportunities for a wide range of residents.


Overview

18


Nonfarm employment in the Inland Empire expanded by 2.7% from July 2016 to July 2017, increasing payrolls by 37,900 positions. With the recent gains, year-over-year growth in the Inland Empire stands above the 1.7% in the state and 1.4% in the nation. In addition, the Inland Empire stands behind only its much larger neighbor, Los Angeles (MD), in terms of its regional contribution to statewide gains.

The declining unemployment rate in the Inland Empire is another bright spot. From July 2016 to July 2017, the unemployment rate in the region fell 0.5 percentage points to 5.5%. Unemployment remains elevated relative to the state (4.8%) and nation (4.4%), but the gap has closed in recent years.

The driving force behind the drop in the

unemployment rate in the Inland Empire is an uptick in household employment, which grew by 1.3% over the last year, compared to 0.8% in the state overall. The drop also came in the face of an expanding labor force, which grew by 0.8% over the last year compared to 0.1% in the state overall.

Perhaps more important, nonfarm employment gains in the Inland Empire are beginning to outshine household employment. Throughout much of the expansion, Inland Empire residents had found employment at a faster pace than local businesses were hiring, indicating that residents were finding jobs in neighboring counties. This trend has shifted in recent years, and now businesses in the Inland Empire are hiring at a faster pace. From July

2016 to July 2017, nonfarm payrolls grew by 37,900 while household employment expanded by 25,100 positions.

Going forward, the UCR Center for Economic Forecasting and Development is optimistic about the economy in the Inland Empire. Although we anticipate a slowdown in growth rate because of labor market constraints, the region offers plentiful opportunities for potential residents and businesses. Home prices remain affordable relative to prices in coastal communities. Office, Retail, and Industrial rents make the region an attractive place for a new or relocating business venture. The availability of land makes the Inland Empire an ideal location to capitalize on future development.

LOCAL LABOR MARKET PERFORMANCE INLAND EMPIRE

Jul ‘12 - Jul ‘17


SOUTHERN CALIFORNIA EMPLOYMENT GROWTH

Jul-16 to Jul-17


800 95

900 100

1,000105

1,100110

1,200115

1,300

1201,400

1251,500

Non

farm

Em

ploy

men

t (00

0s, S

A)

Inde

xed

Empl

oym

ent (

Jan

‘10

= 10

0, S

A)

1,600 130

Jul ‘ 12 Jan ‘10Jul ‘ 14 Jan ‘14Jul ‘ 13 Jan ‘12Jul ‘ 15 Jan ‘16Jul ‘ 16 Jul ‘ 17

Total Nonfarm PayrollUnemployment Rate Household

19

Although local employers are adding to payrolls at a faster pace than local residents are finding work, commuters are still playing an important role in the labor market in the Inland Empire. Many residents who have jobs in the coastal communities are taking advantage of the savings offered by real estate in the Inland Empire, opting to commute to neighboring counties. According to data compiled in 2016, roughly 28.1% of area residents commuted to neighboring jobs centers, a drop from 30.9% in 2011. Although the number of commuters has grown by just over 37,000 from 2011 to 2016, the number of residents working in their county of residence grew by nearly 200,000. Although the number of commuters is still relatively high, the drop in the share of outbound commuters reflects the fact that more residents are able to find job opportunities closer to home.

At the industry level, employment growth continued to be broad-based, with most of the region’s sectors expanding their payrolls over the last year. This broad-based growth has translated to job opportunities for a wide range of local residents across a spectrum of skill sets.

The Construction sector has been having another strong year in 2017, increasing payrolls by 16.5% (15,200 jobs) from July 2016 to July 2017. Strong demand for commercial and residential properties has spurred growth in construction throughout Southern California. Permitting activity for single-family residential properties grew by 43.4% for the first seven months of 2017 over the first seven months of 2016, and multi-family permitting in the Inland Empire was up more than 90% over the same period. The sector still has yet to recover the jobs lost during the Great Recession, with payrolls still more than 26,000 jobs below their heights from early 2006. Construction activity should continue in the Inland Empire, as new homes are built to accommodate the region’s growing labor force and firms expand.

Commuting

Industry


Industry July 2017 YoY Change

Total Nonfarm 1,440.6 2.7% 37.9

Construction 107.4 16.5% 15.2

Leisure and Hospitality 166.1 3.4% 5.4

Transport,Warehouse,Util. 108.9 4.4% 4.6

Government 243.0 1.6% 3.9

Health Care 200.2 1.9% 3.6

Wholesale Trade 64.7 2.9% 1.8

Prof Sci and Tech 40.3 2.8% 1.1

Other Services 46.0 1.9% 0.9

Financial Activities 46.2 1.9% 0.9

Manufacturing 100.3 0.7% 0.7

Educational Services 19.0 2.7% 0.5

Admin Support 98.3 0.2% 0.2

NR/Mining 0.9 11.8% 0.1

Management 9.0 0.8% 0.1

Information 11.6 -1.2% -0.1

Retail Trade 178.7 -0.5% -0.9

JOBS BY MAJOR INDUSTRY


CONSTRUCTION EMPLOYMENT

Jan’ 12 - Jul ‘17


100

120

140

160

Inde

xed

Empl

oym

ent (

Jan

‘12

= 10

0, S

A)

180

Jan ‘14Jan ‘12 Jan ‘13 Jan ‘15 Jan ‘16 Jan ‘17

Inland Empire California

20


The Leisure and Hospitality sector is also continuing to grow steadily in the Inland Empire. From July 2016 to July 2017, the sector grew by 3.4%, adding roughly 5,400 jobs. An uptick in business and leisure travel to the region and an increase in the number of households opting for nights on the town have driven growth in the sector. After a strong 2016, revenue per available room at hotels in the Inland Empire has grown 6.0% during the first half of 2017 from the same period in 2016. In line with this growth, Pechanga Resort & Casino is expected to wrap up its $285-million-dollar expansion, which is projected to boost its workforce by 700, this year.1

The Transportation, Warehouse, and Utilities sector had a strong year as well, expanding payrolls by 4.4% (4,600 positions) from July 2016 to July 2017. It is also poised for continued growth as plans for the World Logistics Center in Moreno Valley are moving forward; under current specs it would bring 40.6 million square foot of warehouse space to Moreno Valley.2 Although the project has faced opposition from several environmental groups, it would further establish the Inland Empire as a logistics powerhouse, in addition to providing additional jobs and tax revenues.

Manufacturing has been a bright spot for the Inland Empire in 2017. Although payrolls have fallen in parts of the state in recent years, Manufacturing payrolls in the Inland Empire have posted steady gains. From July 2016 to July 2017, sector payrolls expanded 0.7% (700 positions), in contrast to the 1.1% decline in the state overall over the same period. The driving force behind these gains have been Non-Durable Goods, which grew by 4.1% over the last year. At the sub-

LEISURE AND HOSPITALITY EMPLOYMENT

Jan’ 12 - Jul ‘17


95

105

115

125

Inde

xed

Empl

oym

ent (

Jan

‘12

= 10

0, S

A)

135



1 Buck, F (2017, April 5). Pechanga’s logo gets an upgrade as hotel, casino expansion nears. The Press-Enterprise, Retrieved from http://www.pe.com/2017/02/28/pechangas-logo-gets-an-upgrade-as-casino-hotel-expansion-nears/2 Ghori, I. (2017, May 3). All you need to know about the World Logistics Center. The Press-Enterprise, Retrieved from http://www.pe.com/

21

sector level, Food Manufacturing was the shining star with payrolls growing by 7.8% (700 positions) from the first quarter of 2016 to the first quarter of 2017. Still, automation will continue to put downward pressure on employment in the long-run, as will state regulations.

With more revenue coming into local coffers, Government payrolls are also on the rise. From July 2016 to July 2017, payrolls increased by 1.6% (3,900 positions). Local governments increased their payrolls by 1.6% (3,100 positions) over the period.; local education was the driving force, with payroll rising by 3.1% over the year. Growth was not limited to local government, however, as the federal (1.2%) and state government (1.8%) also increased their payrolls.

Although most of the region’s job sectors continued to grow steadily over the year, a few sectors decreased payrolls. From July 2016 to July 2017, the Retail Trade sector cut payrolls by 0.5% (900 positions). With brick and mortar retail stores getting a smaller share of consumers’ expenditures in recent years, those stores have had to downsize, increase their use of technology, and rely on smaller staffs. E-commerce accounted for 8.9% of total retail sales in the second quarter of 2017, a 0.9 percentage point increase from the second quarter of 2016 and 3.6 percentage point increase from five years earlier. In addition to Retail Trade, the Information sector lost 1.2% (or 100 positions) and Real Estate sector lost 1.0% (or 300 positions) in the last year.

At the city level, growth was spread across the Inland Empire. From the third quarter of 2015 to the third quarter of 2016 (the latest data available), employment levels in Riverside County’s major cities grew by healthy margins, with Moreno Valley (6.8%), Corona (4.1%), and Riverside (3.3%) all increasing payrolls. The major cities in San Bernardino County saw less robust growth, with San Bernardino at 2.1%, Ontario at 1.3%), and Fontana at 1.0%).

Along with growing employment levels, business formation in the Inland Empire continued to post gains in 2017 across a broad range of industries in the region. The number of establishments expanded by more than 4.4% from the first quarter of 2016 to the first quarter of 2017, trailing the state (4.8%), but outshining nation (2.6%). The number of establishments in Riverside County grew by 4.9% and the number of establishments in San Bernardino County grew by 3.9%.

Growth was spread across all industries. The Information sector led the way with the number of establishments growing by 6.0% from the first quarter of 2016 to the first quarter of 2017. Some of the region’s

largest industries also saw establishments grow by sizeable amounts: Health Care (4.8%), Transportation, Warehouse, and Utilities (4.7%), and NR/Construction (4.2%) all growing at a healthy pace over the period. Establishment growth was more modest for Manufacturing (0.3%), Government (0.4%), and Real Estate (0.7%).

Employment gains in the region were spread across small, mid-size, and large firms. In 2016, businesses with zero to nine employees (other than the owner) increased payrolls by 2.5% (4,280 positions), businesses with 10 to 249 employees increased payrolls by 4.2% (28,240 positions), and businesses with more than 250 employees increased payrolls by 2.6% (6,830 positions).

City-Level Highlights Establishments

MANUFACTURING EMPLOYMENT

Jan’ 12 - Jul ‘17


100

105

110

115

Inde

xed

Empl

oym

ent (

Jan

‘12

= 10

0, S

A)

120




22

Wages

The tightening labor market in the Inland Empire has also given way to wage increases. From the first quarter of 2016 to the first quarter of 2017, the average annual wage across all industries in the Inland Empire grew 6.5% to more than $45,000 on a seasonally adjusted basis, trailing growth in the state (7.7%) and outshining the nation (5.7%). San Bernardino County led the way in the region, with the average annual wage growing by 7.5%, while Riverside County saw average annual wages rise by 5.9%.

At the industry level, growth was spread across all industries in the Inland Empire. The Administrative Support sector led the way with average annual wages growing by 13.6% from

the first quarter of 2016 to the first quarter of 2017. Not far behind, Management (12.9%), Health Care (+11.5%), Manufacturing (11.3%), and Professional, Scientific, and Technical Services (9.0%) also saw robust growth over the period. While still growing, the pace for Government (4.0%), Finance and Insurance (2.2%), and Transportation, Warehouse, and Utilitites (1.1%) was below regional averages over the last year.

More important, with employers competing for a shrinking pool of talent in the region there should continue to be upward pressure on wages over the next year. This should give way to more spending power for residents and an uptick in overall economic activity in the region.


Continued gains in the Inland Empire’s labor market have contributed

to solid growth in local spending, as both residents and commuters

spend their earnings in the region. From the second quarter of 2016

to the second quarter of 2017, taxable sales in the Inland Empire

increased 5.4%, outpacing the state overall (4.1%). Taxable sales

grew at faster pace in Riverside County (8.0%) than in San Bernardino

County (3.0%) over the last year.


Local Spending

24


City growth was mixed, with some cities seeing sizeable gains over the last year. In Riverside County, Corona (+17.0%) and Moreno Valley (+5.0%) grew at a significant pace, while Riverside (+0.5%) grew well below the county-wide average. Fontana (+8.2%) led San Bernardino County, while taxable sales grew at slower pace in Rancho Cucamonga (+1.1%) and San Bernardino (+0.4%).

After seeing significant declines over the last year because of falling gasoline prices, taxable receipts at fuel and service stations have rebounded in 2017. From the first quarter of 2016 to the first quarter of 2017, taxable receipts at fuel and service stations in the Inland Empire grew 7.8%, accounting for significant portion of overall gain in the region’s taxable sales base. However, some of this increase can be attributed to an uptick in fuel prices; at this time last year, taxable receipts at fuel and service stations were showing significant decreases because of a sizeable drop in prices relative to the first quarter of 2015.

Following the gains in the Leisure and Hospitality sector employment levels, taxable receipts at restaurants and hotels in the Inland Empire have grown as well. From the first quarter of 2016 to the first quarter of 2017, taxable receipts at restaurants and hotels in the Inland Empire grew 4.6%. An uptick in business and leisure travel to the region and an increase in the number of households opting for nights on the town have driven growth. This trend should only continue as more restaurants, hotels, and entertainment venues are opened in the region. This includes the Pechanga Resort & Casino, which should boost travel and spending in the region.3 Consumers are also continuing to drive growth for autos and transportation, with taxable receipts growing 3.4% over the last year.

The Building and Construction sector also posted gains for the year, expanding by 1.8% from the first quarter of 2016 to the first quarter of 2017. More tepid than the growth in employment over the last year, the increase in taxable receipts indicates that developers are using local suppliers for projects throughout Southern California.

Taxable receipts were not up across the board, however; taxable receipts for Business and Industry posted a 8.5% decline from the last year. Still, taxable receipts for this category are up nearly 80% from their recession lows, and businesses are continuing to invest in new capital and, more important, in new employees.

Industry Q1 ‘17 YoY Change (%)

Autos and Transportation 31,499,312 3.4

Building and Construction 15,501,844 1.8

Business and Industry 26,771,527 -8.5

Food and Drugs 8,014,317 -0.1

Fuel and Service Stations 15,867,346 7.8

General Consumer Goods 35,380,238 0.3

Restaurants and Hotels 20,253,307 4.6

Total 172,571,662 1.4

TAXABLE RECEIPTS BY CATEGORY

Inland Empire

Source: HdL Companies

TAXABLE SALES

Jan’ 12 - Jul ‘17

Source: California Board of Equalization

80

100

90

110

130

120

Inde

xed

Taxa

ble

Sale

s (Q

2 ‘1

2 =

100,

SA)

140

Q2 ‘14Q2 ‘12 Q2 ‘13 Q2 ‘15 Q2 ‘16 Q2 ‘17

Los Angeles

San Bernardino

Orange County

Riverside

San Diego

3 Buck, F (2017, April 5). Pechanga’s logo gets an upgrade as hotel, casino expansion nears. The Press-Enterprise, Retrieved from http://www.pe.com/2017/02/28/pechangas-logo-gets-an-upgrade-as-casino-hotel-expansion-nears/

25


Production has also grown across the Inland Empire. From 2015 to 2016, real gross metropolitan product in the Inland Empire grew 2.6%, outpacing growth rates in the nation (1.5%) overall, but falling behind growth in California overall (2.9%). More important, real output levels for 2016 in the Inland Empire are an all-time high for the region, finally surpassing levels reached in 2006.

In absolute terms, Financial Activities led the way in real output growth in the Inland Empire, increasing output levels by $936 million from 2015 to 2016, while the Education and Health Care sector led in percentage terms with a 6.3% gain over the last year. Not far behind was the region’s logistics sector, with Transpiration, Warehouse, and Utilities increasing production by 5.2% over the last year. Growth in these sectors is a welcome sign for the region, as they account for a significant number of jobs in the region. Although growth in sectors like Financial Activities is good for the region, it does not have the same stimulative effect as Health Care, Leisure and Hospitality, and Retail Trade, all of which are more labor-intensive.

Manufacturing sector output also rose over the last year, increasing by 4.9% from 2015 to 2016. Perhaps more important, output levels for the sector have grown by more than 18.8% over the last five years Significantly, although payroll employment growth statewide and nationally has been showing some weakness, output levels and employment are experiencing healthy increases in the Inland Empire’s Manufacturing sector. In addition, that sector has bucked the weakness in the state and nation over the last five years.

Retail Trade was the only sector to see output levels fall over the last year. From 2015 to 2016, real output levels for the sector fell14.8%. With e-commerce accounting for larger share of consumer expenditures, this trend will probably continue. Because the Inland Empire is a logistics powerhouse, much of the value that has been lost in the Retail Trade sector is being transferred to the logistics sector, so much the value of consumer expenditures is still circulating through the Inland Empire despite the overall decline in Retail Trade output.

Output

Industry2016

($ Millions)YoY Change

(%)YoY Change ($ Millions)

Education and Health Care 12,399 6.35 740

Transportation, Warehouse, & Utilities 9,330 5.23 464

Manufacturing 11,051 4.93 519

Leisure & Hospitality 5,579 4.91 261

Wholesale Trade 11,990 4.84 553

Financial Activities 20,543 4.77 936

NR/Construction 9,745 4.41 412

Information 2,683 3.55 92

Government 24,457 2.52 601

Professional/Business 9,793 2.21 212

Other Services 4,042 1.66 66

Retail Trade 9,095 -14.85 -1,586

Total 130,716 2.64 3,362

REAL GROSS PRODUCT BY INDUSTRY

Source: Bureau of Economic Analysis

REAL GDP

2001 - 2016

Source: Bureau of Economic Analysis

80

100

120

140

Inde

xed

Real

GD

P (2

001

= 10

0)

160

Inland Empire California United States

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

26


Along with rising output and spending levels, shipments through the ports of Los Angeles and Long Beach have grown over the last year. At the Port of Los Angeles, the value of goods exported during the first seven months of 2017 grew 12.1% compared to the first seven months of 2016. This builds on the gains at the port w in 2016, when exports grew 3.1% from 2015. Similarly, the value of goods exported during the first seven months of 2017 through the Port of Long Beach grew 10.0% from the first seven months of 2016. This growth at Long Beach also builds on the growth from last year, when exports grew 4.3% from 2015 levels.

Imports through the ports of Los Angeles and Long Beach have also grown in 2017. At the Port of Los Angeles, the value of imports in the first seven months of 2017 grew 3.7% compared to the first seven months of 2016. The value of goods imported during the first seven months of 2017 through the Port of Long Beach grew 13.4% compared to the first seven months of 2016.

Growth at both ports is a welcome sign for the Inland Empire’s logistics industry. Although the goods come to and leave the country through the ports, a significant amount is stored in warehouses in the Inland Empire before being shipped to final destinations.

Container counts are also up at the ports in 2017, and are on track to break the records set prior to the recession. For the first eight months of 2017, counts are up 9.0% at the Port of Los Angeles and 6.6% at the Port of Long Beach. Additionally, July was a record month for both ports, with cargo volumes hitting record highs.4

An increase in tourism and business travel to the region has driven growth in passenger traffic at Ontario International Airport. During the first half of 2017, passenger traffic there grew 6.8% over the same period in 2016. Although passenger traffic at the airport is still below pre-recession levels, the Ontario International Airport Authority, which took control in November, has committed to increasing passenger traffic. China Airlines has recently expressed interest in using the airport to provide travelers with more options for Taiwan-U.S. travel and to boost international business dealings.5 This partnership would not only increase business and leisure passenger traffic. it would also benefit local hotels and restaurants.

The latest hotel data also show that business and leisure travel in the Inland Empire is continuing to grow. Revenue per available room in the region increased by 5.0% for the first seven months of 2017 from the first seven months of 2016 as average daily rates rose by 4.9% over the period. Occupancy rates rose just 0.1 percentage points to 78.7% in the first seven months of 2017. Regionally, revenue per available room was up across the region, with Ontario (+4.4%) Riverside/Corona (+4.8%), San Bernardino (+4.6%) and Temecula (+8.4%) posting sizeable gains. These figures show that economic gains are being felt across the Inland Empire, which in turn has provided a boost to local employment and tax revenue.

Ports Tourism

4 Narayan, S (2017, August 11). Cargo Volumes Hit Records at Long Beach, Los Angeles Ports. Los Angeles Business Journal, Retrieved from http://labusinessjournal.com/5 Marquez, L (2017, September 6). China Airlines expresses interest in Ontario Airport. Daily Bulletin, Retrieved from http://www.dailybulletin.com/

The Rise of the Single-Family RentalThe Inland Empire is a very different place from what

it was before the crash. One significant change is the

number of people renting as opposed to owning homes.

Since the turn of the century, nearly 312,000 new

households entered the region’s housing market, with

the majority renting rather than buying. The biggest

change came between 2011 and 2014, when 82,000

new households rented and 28,500 households left the

ownership market. Many households have been priced

out of ownership, to a significant surge in the demand for

rentals.

This increase in rental demand has led to a phenomenon

that is unusual for the Inland Empire: expansion of

the single-family rental. According to the American

Community Survey, the number of renter-occupied

single-family units increased by nearly 64% in the Inland

Empire from 2005 to 2015. In contrast, single-family

rentals increased by 33% in California and 34% in the

nation during the same period. In a region once regarded

as a place where almost anyone could buy a home, half

of all renter-occupied households live in single-family

units, up nearly 25% since 2005. Much of this renter

influx has to do with institutional investors swooping into

the market immediately after it tanked. With reduced

home prices and historically low mortgage interest rates,

investors bought single-family homes and converted

them into rentals.

While renters have taken a large portion of single-family

homes off the market, another reason for the thin

supply is the number of vacation homes. At first glance,

at 12.7%, the Inland Empire appears to have a higher

housing vacancy rate than the state and nation overall.

However, more than half of the vacant units in the

Inland Empire were classified as vacation rentals in 2015.

Subtracting vacant units, the housing vacancy rate in the

Inland Empire fell to 6.5% in 2015, down 3.6 percentage

points from its peak in 2008. The number of vacation

rentals has a large impact on the housing supply; from

2005 to 2015, vacation rentals in the Inland Empire

increased 49.2%.

28

The Rise of the Single-Family Rental

SHARE OF RENTERS IN SINGLE-FAMILY HOMES

Source: US Census Bureau

INDEXED RENTER HOUSEHOLDS


HOUSING VACANCY LESS VACATION RENTALS


Perc

ent (

%)

2005

= 1

00Va

canc

y Ra

te (%

)

Inland Empire Los Angeles Orange San Diego

Inland Empire Los Angeles Orange San Diego

Inland Empire California United States

20

25

30

35

40

45

50

55

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

95

105

115

125

135

145

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

0

2

4

6

8

10

12

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

The rate of home price appreciation continues to

far outpace inflation, which rose by just a little

over 2% from the second quarter of 2016 to the

second quarter of 20176. Growth rates between

the second quarter of 2016 and the second

quarter of 2017 for condominiums (12,0%), new

single-family homes (4.6%), and existing single-

family homes (8.0%) show strong demand for

housing, yet sales fell short of 2013 and 2014,

each of which saw more than 20% growth year-

over-year. Overall, compared to Los Angeles

and Orange County, where nominal median

home prices have surpassed pre-recession levels

(not adjusting for inflation), median prices of

condominiums and existing single-family homes

in the second quarter of 2017 are 83 percent of

median prices in the first quarter of 2007 in the

Inland Empire.


Market Overview

6 The year-over-year inflation rate is based on the average of April-June CPI for all items in Los Angeles-Riverside-Orange County, CA, all urban consumers from the Bureau of Labor Statistics. The data table can be retrieved from https://data.bls.gov/timeseries/CUURA421SA0?amp%253bdata_tool=XGtable&output_view=data&include_graphs=true

30


Overall, the residential real estate market has remained healthy in the sense that foreclosures have nearly returned to the lowest pre-recession levels and median prices for existing and new single-family homes and condominiums have appreciated year-over-year. Home sales are slowly rising, a reflection more of the lack of inventory than of lack of interest from potential buyers.

Sales for existing single-family homes have started to pick up just since the first quarter of 2016 while sales of condominiums have remained mostly stagnant, especially compared to nearby Orange County and Los Angeles County, where sales have been trending up for years. Nevertheless, as more people find the coastal markets unaffordable, the Inland Empire becomes an attractive alternative. In the second quarter of 2017, year-over-year sales of existing single-family homes rose 5.9% and 7.1% in Riverside County and San Bernardino County, respectively, outpacing Los Angeles County (+0.9%) and Orange County (+3.3%). Condominium sales remained steady compared to the second quarter of 2016. There are significant concerns about the supply of housing and, as a result, housing inventory has become very tight in Inland Empire.

The relative affordability of housing in the Inland Empire, even adjusting for median income, has been one of the main factors underpinning growth in demand for housing in the region. Although the region no longer experiences double-digit year-over-year price appreciation, it still had growth of more than 5% for nearly three years. With prices in Los Angeles County and Orange County appreciating at similar paces, the Inland Empire’s affordability advantage remains intact.

Still, the increase in the price-to-income ratio is one of many signs that reflect declining affordability as wage increases have failed to keep up. Without significant new residential construction, this pattern will only get worse. The Inland Empire is not alone in this quandary but unlike its neighbors to the west, it has the space for new home.

Homeownership rates in the Inland Empire, which began to rise in 2015 and 2016, fell in 2017, dipping below 60% for the first time in two years. That is in direct contrast to the Los Angeles, Orange County, and San Diego metro areas, which saw homeownership rate appreciate in 2017. Because home and rental prices are considerably higher in the coastal counties, more families are moving inland. Based on California Department of Finance estimates, the Inland Empire saw a 3.0% increase in the number of households between 2011 and 2016, which outpaced the 2.49% posted by Los Angeles-Orange County metro. The decline in the local homeownership rate suggests that many of those newly arriving households are renting.

RELATIVE HOME PRICE COMPARISON

Inland Empire as Percent of Selected Regions, Q1-2007 to Q2-2017

Source: DataQuick

30

40

35

45

55

60

65

70

75

50

Inde

xed

Taxa

ble

Sale

s (Q

2 ‘1

2 =

100,

SA)

80

Q2 ‘14Q2 ‘12 Q2 ‘13 Q2 ‘15 Q2 ‘16 Q2 ‘17

Los Angeles Orange California

LOCAL LABOR MARKET PERFORMANCE

Inland Empire, Jul ‘12 - Jul ‘17


Trad

ition

al S

ales

(000

s, S

easo

nally

Adj

uste

d)

Fore

clos

ures

(000

s, S

easo

nally

Adj

uste

d)

0 0

5 2

104

156

20

8

25

10

30

12

35

14

16

18

40 20

Traditional Sales Foreclosures

Q1

’97

Q1

’99

Q1

’01

Q1

’03

Q1

’05

Q1

’07

Q1

’09

Q1

’11

Q1

’13

Q1

’15

Q1

’17

Q1

’97

Q1

’99

Q1

’01

Q1

’03

Q1

’05

Q1

’07

Q1

’09

Q1

’11

Q1

’13

Q1

’15

Q1

’17

RESIDENTIAL REAL ESTATE MEDIAN HOME PRICES

Inland Empire, Q1-1997 to Q2-2017

Source: DataQuick

$50,000

$100,00

$150,000

$200,000

$250,000

$300,000

$400,000

$450,000

Med

ian

Pric

e (S

easo

nally

Adj

uste

d)

$500,000

Condos Existing Single-Family HomesNew Homes

31

Many potential homebuyers who find themselves unable to purchase homes in Inland Empire are renting instead. As a result, the rental market has become increasingly competitive and rent increases in there have outpaced increases in Los Angeles County, Orange County, and San Diego County. In the second quarter of 2017, median effective rent was $1,534, up 5.0% year over year. In comparison, rent increased 3.7% in Los Angeles County, 4.3% in Orange County, and 4.3% in San Diego County. The market in Inland Empire remains one of the hottest in the United States. In California, the Inland area’s year-over-year rent increase was outpaced only by Sacramento’s 9.4% increase.8 e

For the second quarter of 2017, vacancy rates of rental housing in Inland Empire stood at 4.5%, almost unchanged from the 4.4%rate in the second quarter of 2016. Given the unchanged vacancy rates and higher rents, an implication is that demand for multi-family housing exceeds supply, even though supply is presumably on the rise. Diverging trends in apartment vacancy rates by class continue.9 Rapid absorption of new units illustrates how hot the market is.

EXISTING SINGLE-FAMILY HOME SALES

California and Selected Counties, Q1-2007 to Q2-2017

Source: DataQuick

0

6,000

4,000

2,000

8,000

16,000

10,000

12,000

14,000

18,000

Exis

ting

SFR

Hom

e Sa

les

(Sea

sona

lly A

djus

ted) 20,000

Los Angeles

San Bernardino

Orange County

RiversideQ

1 ’0

7

Q1

’08

Q1

’10

Q1

’12

Q1

’14

Q1

’16

Q1

’09

Q1

’11

Q1

’13

Q1

’15

Q1

’17

EXISTING CONDOMINIUM SALES


Source: DataQuick

0 0

1,000 2,000

500 1,000

1,500 3,000

2,000 4,000

2,500 5,000

Ora

nge,

Riv

ersi

de, a

nd S

an B

erna

rdin

o Co

untie

sCo

ndom

iniu

m S

ales

(Sea

sona

lly A

djus

ted)

Los

Ange

les

Coun

ty C

ondo

min

ium

Sal

es

(Sea

sona

lly A

djus

ted)

3,000 6,000

Los Angeles

San Bernardino

Orange County

Riverside

Q1

’07

Q1

’08

Q1

’10

Q1

’12

Q1

’14

Q1

’16

Q1

’09

Q1

’11

Q1

’13

Q1

’15

Q1

’17

7 The price-to-income ratio is calculated as median home prices divided by median family income.8 Deatley, R. (2017, July 19). “Inland apartment renters get slammed with one of the nation’s biggest rent increases.” The Press-Enterprise. Retrieved August 18, 2017, from http://www.pe.com/2017/07/19/inland-apartment-renters-get-slammed-with-on-of-the-nations-biggest-rent-increases/

Region Q1-2017 Q1-2016 Q1-2015

Inland Empire 5.0 4.7 4.5

San Diego 6.9 7.0 6.6

Orange County 8.5 8.4 8.0

Los Angeles 8.6 8.3 7.7

PRICE-TO-INCOME RATIO7

Source: Axiometrics


32

HOMEOWNERSHIP RATES

Selected Southern California MSAs Q1-2005 to Q2-2017

Source: U.S. Census Bureau Vacancy Survey

40

3.0% 0.0

55

5.0%

5.0%

50

4.0%

4.0%

3.0%

2.0%

1.0%

45

60

6.0% 6.0%

65

7.0%

7.0%

Hom

eow

ners

hip

Rate

(%, S

moo

thed

)

70

8.0% 10.0%

8.0%

9.0%

Los Angeles-Orange County MetroInland Empire

San Diego Metro

Q1

’06

Q1

’05

Q1

’07

Q1

’07

Q1

’08

Q1

’08

Q1

’10

Q1

’10

Q1

’09

Q1

’10

Q1

’12

Q1

’12

Q1

’12

Q1

’14

Q1

’14

Q1

’14

Q1

’16

Q1

’16

Q1

’16

Q1

’09

Q1

’09

Q1

’11

Q1

’11

Q1

’11

Q1

’13

Q1

’13

Q1

’13

Q1

’15

Q1

’15

Q1

’15

Q1

’17

Q1

’17

Q1

’17

9 In commercial real estate including multi-family properties, a system of building classifications (typically A, B, and C) assigns a class to each building. A general combination of factors such as the aspects of the building, age, location, and rents determine the class assigned. Generally, Class A buildings are newer and command higher rental rates than Class B and C buildings, and Class B buildings are newer and command higher rental rates than Class C buildings.


EFFECTIVE MONTHLY RENT

Selected Counties, Q1-2008 to Q2-2017

Source: Axiometrics

$1,000

$1,300

$1,200

$1,100

$1,400

$1,900

$1,500

$1,700

$2,100

$2,200

$2,000

$1,800

$1,600

Effec

tive

Rent

(Mon

thly

)

$2,300

Inland Empire

Orange

Los Angeles

San DiegoQ

1 ’0

8

Q1

’10

Q1

’12

Q1

’14

Q1

’16

Q1

’09

Q1

’11

Q1

’13

Q1

’15

Q1

’17

RENTAL VACANCY RATE

Selected Counties, Q1-2007 to Q2-2017

Source: Axiometrics

APARTMENT VACANCY RATES BY CLASS

Inland Empire, Q1-2007 to Q2-2017

Source: REIS, Inc.

Rent

al V

acan

cy R

ate

Apar

tmen

t Vac

ancy

Rat

e (%

)

Inland Empire Class A

Orange All Apartments

Los Angeles Class B/C

San Diego

33

Submarket Stock Occupancy Rate Vacancy Rate Effective RentEffective Rent Change (%)

Effective Rent per SF

Occupancy Rate Change

Eastern Region

Perris 3,567 96.1% 3.9% $1,518 6.2% $1.58 -0.37%

Indio/La Quinta/Coachella 4,096 95.1% 4.9% $1,309 7.8% $1.47 -1.06%

Palm Springs/Palm Desert 6,421 95.0% 5.0% $1,197 4.3% $1.34 -0.61%

Hemet 3,316 97.4% 2.6% $1,086 12.7% $1.31 2.60%

Mojave Desert Region

Victorville 3,343 94.2% 5.8% $1,182 3.3% $1.32 -3.50%

Northern Region

Rancho Cucamonga 14,186 95.7% 4.3% $1,762 4.2% $1.88 0.03%

North Ontario 8,854 95.1% 4.9% $1,633 6.2% $1.89 -0.45%

Upland 5,375 96.2% 3.8% $1,543 5.6% $1.67 -0.11%

Colton/Loma Linda 11,838 94.9% 5.1% $1,424 6.1% $1.67 -0.41%

Fontana/Rialto 10,437 97.5% 2.5% $1,329 5.4% $1.57 -0.80%

San Bernardino 12,752 95.1% 4.9% $1,241 6.1% $1.56 -1.32%

Southwestern Region

South Ontario/Chino 6,081 95.7% 4.3% $1,702 5.4% $2.00 -0.53%

Riverside County/Corona 10,815 95.0% 5.0% $1,624 6.7% $1.87 0.29%

Riverside/North Magnolia 10,158 95.5% 4.5% $1,530 6.3% $1.76 -0.12%

University City/Moreno Valley 16,647 95.4% 4.6% $1,337 7.9% $1.46 0.37%


APARTMENT SUMMARY BY SUBMARKET

Inland Empire, Q2-2017

Source: Axiometrics and REIS, Inc.

So far, construction for both single- and multi-family markets has picked up considerably from a year ago and has significantly outpaced the growth in Los Angeles County and Orange County. Demand for single-family homes in the Inland Empire has fueled the strongest building activity in nearly a decade, albeit nowhere near the volume of the pre-recession levels from nearly a decade ago. Single-family construction through the second quarter of 2017 increased by 33% in Riverside County and 81% in San Bernardino County, outpacing the 11.3% and 29.3% increases in Los Angeles County and Orange County, respectively.

Multi-family construction activity in the Inland Empire through the second quarter of 2017 grew much faster than in Los Angeles County, Orange County, and California as a whole, rising 49.8% for Riverside County and 89.6% for San Bernardino County and outpacing the 13.2% in Los Angeles County.

Construction Permit Activities – Barely Playing Catch Up

Location 2016 YTD 2017 YTD Growth Rate (%)

Riverside County 2,671 3,552 33.0%

San Bernardino County 1,366 2,473 81.0%

Inland Empire 4,037 6,025 49.2%

Los Angeles County 2,618 2,915 11.3%

Orange County 2,199 2,843 29.3%

California 24,249 28,152 16.1%

SINGLE-FAMILY PERMITS BY COUNTY

Source: Construction Industry Research Board

Note: Year to date through June

34



Riverside County 273 409 49.8%

San Bernardino County 759 1,439 89.6%

Inland Empire 1,032 1,848 79.1%

Los Angeles County 6,635 7,511 13.2%

Orange County 5,907 3,903 -33.9%

California 25,292 28,772 13.8%

MULTI-FAMILY PERMITS BY COUNTY



However, the surge in permitting has begun only recently; the number of construction permits issued for both markets is still below pre-recession levels and is lagging behind coastal neighbors, especially Orange County. For example, total permits in the first half of 2017 were equivalent in annualized terms to 14,000 units, well below the peak levels of 2005 when permits exceeded 40,000. Thus, although the increase in activity is good news, the region must sustain growth in order to meet single-family and multi-family needs.

SINGLE FAMILY PERMITS ISSUED (INDEXED)



MULTI-FAMILY PERMITS ISSUED (INDEXED)



0 0

120

10080

4050

140150

160200

Inde

x (Q

1-20

07 V

alue

s =

100,

Sea

sona

lly A

djus

ted)

Inde

x (Q

1-20

07 V

alue

s =

100,

Mov

ing

Aver

age)200 250

Los Angeles Los Angeles

San Bernardino San Bernardino

Orange OrangeCalifornia California

Riverside Riverside

Q1

’07

Q1

’07

Q1

’08

Q1

’08

Q1

’10

Q1

’10

Q1

’12

Q1

’12

Q1

’14

Q1

’14

Q1

’16

Q1

’16

Q1

’09

Q1

’09

Q1

’11

Q1

’11

Q1

’13

Q1

’13

Q1

’15

Q1

’15

Q1

’17

Q1

’17

35

The surge in recent single-family permit activities has spread across all sub-regions, with the Mojave Desert Region almost doubling in single-family permits from the same period in 2016.

Consistent with previous permit activity patterns, there were virtually no multi-family permits issued in the relatively sparsely populated Northeast and Mojave Desert regions. Multi-family permit activities are mostly concentrated in the Northwest and Southwest regions, where most of the people in Inland Empire live.

Permit Activities by Sub-Region


Incorporated Cities:

Southwest Region10 1,477 2,216 +50.0

Northwest Region11 877 1,449 +65.2

Southeast Region12 396 551 +39.1

Mojave Desert Region13 185 355 +91.9

Northeast Region14 73 114 +56.2

Non-incorporated Areas 1,029 1,340 +30.2

Inland Empire 4,037 6,025 +49.2


Incorporated Cities:

Northwest Region 754 1,419 +88.2

Southwest Region 244 327 +34.0

Southeast Region 27 80 +196.3

Northeast Region 0 0 .

Mojave Desert Region 2 0 -100.0

Non-incorporated Areas 5 22 +440.0

Inland Empire 1,032 1,848 +79.1

RIVERSIDE-SAN BERNARDINO SINGLE-FAMILY PERMITS



RIVERSIDE-SAN BERNARDINO MULTI-FAMILY PERMITS




10 The following cities are in the Southwest region: Banning, Beaumont, Calimesa, Canyon Lake, Corona, Eastvale, Hemet, Jurupa Valley, Lake Elsinore, Menifee, Moreno Valley, Murrieta, Norco, Perris, Riverside, San Jacinto, Temecula, and Wildomar.11 The following cities are in the Northwest region: Chino, Chino Hills, Colton, Fontana, Grand Terrace, Montclair, Ontario, Rancho Cucamonga, Rialto, San Bernardino, and Upland. 12 The following cities are in the Southeast region: Blythe, Cathedral City, Coachella, Desert Hot Springs, Indian Wells, Indio, La Quinta, Palm Desert, Palm Springs, and Rancho Mirage.

36


13 The following cities are in the Mojave Desert region: Apple Valley, Adelanto, Barstow, Hesperia, Victorville.14 The following cities are in the Northeast region: Big Bear Lake, Highland, Loma Linda, Needles, Redlands, Twentynine Palms, Yucaipa, and Yucca Valley.

Commercial real estate in the Inland Empire

continues to do well, with industrial space

leading the way. Office space remained weak

while retail continues to hang on in the face of

mounting competition from e-commerce, both

following trends that are playing out across

the country. All property types have posted

positive net absorptions in the last year, while

vacancy rates have either decreased or stayed

flat. Rents were stable or rising during this

time, in part because of the Inland Empire’s

major affordability advantage over its coastal

neighbors.

Overall, the UCR Forecast expects the Inland

Empire’s commercial real estate market to

perform moderately well in the next few years.

Because the office and retail markets will hamper

growth a bit, industrial space will experience most

of the growth. Many new industrial developments

have popped up in the last year, and many more

are expected.


38

As is true in many other metropolitan regions, the Inland Empire’s office market has seen small-scale improvement in recent years. Although the region’s office-using, population-serving industries (such as Professional and Businesses Services, Health Care and Financial Services) continue to grow, demand for office space has not been strong enough to spur new development recently. As the regional economy expands, however, and as more households move east for the affordability advantage, the Inland Empire’s office market should see slight improvement.

During 2016, 52,000 square feet of office space was developed in the Inland Empire, about the same as in 2015 and 2014. Through the first two quarters of 2017, there were no new office completions. This caused absorption rates to increase in recent years, hitting 443,000 square feet in 2016. Year to date through the second quarter of 2017, office absorptions have posted negative 12,000 square feet, a negligible amount and somewhat similar to what is happening in neighboring coastal regions.

This lack of new office development has caused rents to increase slightly. During the second quarter of 2017, office rents averaged $22.31 per square foot, 1.6% higher than a year prior. However, rents remain well below those in neighboring regions. Average office rents were $37.05 per square foot in Los Angeles County during this time, 66% more than the Inland Empire. Inland Empire rents were 43% and 42% lower than Orange and San Diego counties, which had office rents of $31.99 and $31.64 per square foot, respectively

Office

18

28

23

33

38

43

Q2 ’14 Q2 ’16Q2 ’13 Q2 ’15 Q2 ’17

OFFICE RENT

Source: REIS, Inc.

$ pe

r Sq

. Ft.

Per

Year

Inland Empire

Orange

Los Angeles

San Diego

0

10

5

15

20

25

30

Q2 ’14 Q2 ’16Q2 ’13 Q2 ’15 Q2 ’17

OFFICE VACANCY RATES

Source: REIS, Inc.

%

Inland Empire

Orange

Los Angeles

San Diego

0

4

2

6

8

10

12

Q2 ’14 Q2 ’16Q2 ’13 Q2 ’15 Q2 ’17

RETAIL VACANCY RATES

Source: REIS, Inc.

$ pe

r Sq

. Ft.

Per

Year

Inland Empire

Orange

Los Angeles

San Diego


39


At the same time, Inland Empire office vacancy rates fell by 0.9 percentage points, going from 22% to 21.1%. Although this is a positive indicator, vacancy rates are still high compared to neighboring markets. This may change in the years ahead, however, if more businesses move to the Inland Empire. and demand for office space rises.

Vacancy rates declined slightly for the region’s Class A office space, dropping from 24.8% to 24.4% from the second quarter of 2016 to the second quarter of 2017. Still, vacancy rates have largely remained flat for these property types, while rents have been steadily growing over recent years toward their pre-recession peaks. Class B and C properties have been experiencing declining vacancy rates and somewhat flat rent growth, indicating a preference for higher-end space by businesses located in the region.

As would be expected, office permitting activity has remained weak in the Inland Empire. Year to date through the second quarter of 2017, office permits have totaled $45.5 million, with $20.1 million in Riverside County and $25.4 million in San Bernardino County. The two counties appear to be headed in different directions, as there was a decrease of 30% in office permits values for San Bernardino County and an increase of 142% for Riverside County, year to date compared to 2016. Even with the decrease, the majority office permitting activity has gone to the Northern Region of the Inland Empire, which includes Redlands, San Bernardino, Upland, and Chino. There, office permitting totaled $21 million for the first two quarters of 2017, although this is a 41% decrease from the same period in 2016. This region has a high concentration of business and professional jobs and will continue to be an important area for office development despite current contractions.

Location 2016 YTD 2017 YTD Chg. (%)

East Region 0.0 1.0 -

Mojave Desert Region 0.3 3.3 884.8

Northern Region 35.7 21.0 -41.2

Southeast Region 5.5 9.7 74.7

Southwest Region 1.4 1.7 17.6

Unincorporated Areas 1.4 8.8 521.9

TOTAL OFFICE PROPERTY

$ millions (YTD through Q2)


OFFICE CLASS A

Source: REIS, Inc.

Rent

($ p

er S

q. F

t. Pe

r Ye

ar)

vaca

ncy

Rate

(%)

24 0

24.55

25

10

25.5

15

26

20

25

30

26.5 35

Price Vacancy Rate

Q1

’09

Q1

’09

Q1

’09

Q1

’09

Q1

’09

Q1

’11

Q1

’13

Q1

’15

Q1

’17

OFFICE CLASS B/C

Source: REIS, Inc.

Rent

($ p

er S

q. F

t. Pe

r Ye

ar)

vaca

ncy

Rate

(%)

16.4

16.6

16.8

17.0

17.2

17.4

17.6

17.8

18.0

18.2

18.4

18.6

0

5

10

15

20

25

Price Vacancy Rate

Q1

’09

Q1

’09

Q1

’09

Q1

’09

Q1

’09

Q1

’11

Q1

’13

Q1

’15

Q1

’17

It’s no secret that the Inland Empire is in the midst of a massive industrial space boom. Affordable and plentiful land, proximity to airports, seaports, and rail lines, a skilled local workforce and a well-positioned highway system make the Inland Empire an ideal industrial spot.

As more expensive coastal areas have been built out, the current expansion has become much more intense, largely because of post-recession changes brought on by e-commerce, which require massive warehouse space to store goods. This will only get better for the region in the years ahead. Although e-commerce harmed the region’s bricks-and-mortar retail market, it has also powered the region’s development of industrial space. As online shopping grows, so will the Inland Empire. This includes warehouse jobs that support online shopping.

Industrial

40


Location 2016 YTD 2017 YTD Chg. (%)

East Region 21.4 18.9 -11.6

Mojave Desert Region 0.0 0.1

Northern Region 218.4 186.2 -14.7

Southeast Region 37.7 162.3 330.0

Southwest Region 0.0 3.2

Unincorporated Areas 10.4 53.1 411.7

TOTAL INDUSTRIAL PROPERTY

$ millions (YTD through Q2)


Q1 ’17

4

2

6

8

10

12

14

Q1 ’14 Q1 ’16Q1 ’13 Q1 ’15

OFFICE VACANCY RATES

Source: REIS, Inc.

%

Inland Empire

Orange

Los Angeles

San Diego

Industrial vacancy rates continue to fall as demand for space exceeds supply. During the second quarter of 2017, the vacancy rate for Warehouse and Distribution properties was 8%, or 0.6 percentage points lower than a year earlier. This narrowed the gap between the Inland Empire and coastal markets, with 5.4% vacancy in Los Angeles County, 6.9% in Orange County and 8.5% in San Diego County.

At the same time, warehouse and distribution rents grew by 3.4% in the Inland Empire for an average of $4.82 per square foot, a major discount compared to coastal markets. In Los Angeles County, warehouse space cost an average of $6.93 per square foot in the second quarter of 2017; in Orange County and San Diego County space cost $6.68 and $8.11 per square foot, respectively. This savings should draw more companies to the region, driving down vacancy rates and boosting rents. In turn, more industrial space will be developed as demand remains strong.

The areas of greatest demand were in the Southwest, Southeast, and Northern regions, which had vacancy rates of 7.0%, 8.4%, and 7.7%, respectively. These regions also had the highest rents, with the Southwest region averaging $5.61 per square foot, the Southeast region averaging

$5.04 and the Northern region averaging $4.72. New developments also popped up in these regions. One major project was the 1million-square-foot Redlands Logistics Center, which was completed earlier this year.17 Also in Redlands, a 750,000-square feet Amazon fulfillment center was completed in the spring.18 This facility will employ around 1,000 workers. Amazon is also developing a new million-square-foot fulfillment center in Eastvale, which will go online in 2018 and employ 1,000 workers. In February, J.C. Penney announced it will close its distribution center in Buena Park and move it to the Inland Empire, although a precise location was not announced.19

Permitting for industrial space grew the most in Riverside County, increasing 365% year to date through the second quarter of 2017. In San Bernardino County, permitting fell 15%. Together, both counties saw nearly $424 million in new industrial permit activity during this time. High concentrations occurred in the Northern and Southeastern regions, which together accounted for 82% of total industrial permit values. Virtually no new permitting occurred in the Mojave Desert and Southwest regions, which together accounted for $3.3 million.

17 Emerson, S. (2017, August 30). Redlands Logistics Center looking for tenant. Retrieved September 08, 2017, from http://www.redlandsdailyfacts.com/2017/08/30/redlands-logistics-center-looking-for-tenant/18 Pamer, Melissa. (2017, April 13). Amazon Now Hiring 1,000 Workers for New Fulfillment Center in Redlands. Retrieved September 08, 2017, from http://ktla.com/2017/04/13/amazon-now-hiring-1000-workers-for-new-fulfillment-center-in-redlands/

41

19 Madans, H., & Register, O. C. (2017, February 25). J.C. Penney to cut 6,000 workers, move Buena Park distribution center to Inland Empire, close up to 140 stores. Retrieved September 08, 2017, from http://www.ocregister.com/2017/02/25/jc-penney-to-cut-6000-workers-move-buena-park-distribution-center-to-inland-empire-close-up-to-140-stores/


Submarket Vacancy Rate (%) Total Vacant Occupied Net Absorption Asking Rent ($)Chg. In Asking Rent Q2-16 to Q2-17 (%)

Warehouses & Distribution Centers

Northern Region 7.7 232,871 17,849 215,022 6,549 4.72 3.6

Mojave Desert Region 14.7 10,176 1,492 8,684 800 4.29 4.4

Southeast Region 8.4 30,248 2,545 27,703 3,580 5.04 3.4

Southwest Region 7.0 54,099 3,772 50,327 408 5.61 2.9

East Region 10.1 3,701 374 3,327 12 5 2.9

Flex/Research & Development

Northern Region 3.9 12,204 478 11,726 85 8.44 2.9

Mojave Desert Region 28.5 319 91 228 1 8.96 1.8

Southeast Region 9.5 3,646 347 3,299 81 7.8 3.1

Southwest Region 7.5 3,750 283 3,467 328 7.56 2.6

East Region 13.8 2,444 338 2,106 58 8.38 2.7

Retail

Northern Region 10.5 19,403 2,030 17,373 -6 22.08 3.8

Mojave Desert Region 6.5 4,457 290 4,167 52 17.76 3.9

Southeast Region 7.0 9,377 661 8,716 135 22.34 2.1

Southwest Region 6.9 10,328 715 9,613 -12 21.95 1.3

East Region 13.5 7,761 1,048 6,713 138 25.99 -0.7

Office

Northern Region 23.4 10,559 2,475 8,084 143 21.74 1.4

Southeast Region 15.4 1,153 178 975 3 22.78 2.2

Southwest Region 19.4 7,643 1,486 6,157 37 23.05 1.5

East Region 16.7 1,124 188 936 -4 22.08 3.6

University City/Moreno Valley 16,647 95.4% 4.6% $1,337 7.9% $1.46 0.37%

APARTMENT SUMMARY BY SUBMARKET

Inland Empire, Q2-2017

Source: Axiometrics and REIS, Inc.

NET ABSORPTION BY PROPERTY TYPE IN INLAND EMPIRE

Source: REIS, Inc.

NET ABSORPTION BY PROPERTY TYPE IN INLAND EMPIRE

Source: REIS, Inc.

Thou

sand

s of

Sq.

Ft.

Thou

sand

s of

Sq.

Ft.

-4000-300

-2000-2000

-1002000

0 4000

100 6000

200 8000

30010000

40012000

14000

16000500

Flex WareOffice Retail

20102010 20112011 20122012 20132013 20142014 20152015 20162016

42


County 2012 2013 2014 2015 2016 2016 YTD 2017 YTDYTD Chg.

(%, 16 to 17)

Los Angeles 3,445,418 3,793,003 6,383,380 5,092,748 4,849,391 2,884,240 3,344,941 16.0

Orange 1,211,470 1,402,622 1,962,073 1,744,127 2,284,105 1,501,282 999,430 -33.4

Riverside 602,637 760,335 849,012 644,329 767,583 487,358 731,544 50.1

San Bernardino 546,053 737,654 983,278 1,062,028 949,185 628,474 558,803 -11.1

San Diego 1,176,431 1,326,642 1,918,688 1,756,509 1,611,488 930,667 1,332,318 43.2

Industrial

Los Angeles 202,883 128,371 120,740 85,468 153,769 97,636 96,548 -1.1

Orange 102,586 47,370 154,841 87,466 48,220 26,990 8,848 -67.2

Riverside 26,433 140,972 161,321 88,971 59,439 46,965 218,512 365.3

San Bernardino 152,047 335,339 265,852 439,903 383,563 240,921 205,242 -14.8

San Diego 24,224 20,784 9,160 77,377 18,367 10,461 58,585 460.0

Retail

Los Angeles 141,675 398,367 731,762 471,694 541,389 272,388 279,465 2.6

Orange 45,273 137,868 367,339 104,997 268,165 236,303 145,370 -38.5

Riverside 173,424 88,248 150,492 94,264 204,617 141,778 275,405 94.3

San Bernardino 102,272 128,363 193,875 163,233 133,597 117,640 68,150 -42.1

San Diego 37,848 59,028 201,425 194,110 121,264 72,694 106,354 46.3

Office

Los Angeles 162,844 246,153 266,630 347,031 345,295 241,562 301,679 24.9

Orange 163,217 34,433 72,341 21,853 254,319 147,467 56,552 -61.7

Riverside 173,743 47,372 16,193 18,480 11,736 8,303 20,080 141.8

San Bernardino 16,394 26,774 20,466 43,190 40,910 36,133 25,400 -29.7

San Diego 219,735 169,336 249,341 84,447 51,286 30,731 4,755 -84.5

Alterations

Los Angeles 2,195,149 2,094,138 3,327,052 2,629,248 2,773,792 1,564,926 1,965,453 25.6

Orange 703,782 924,707 1,032,914 1,075,146 1,008,029 623,609 598,929 -4.0

Riverside 169,499 427,056 457,355 278,426 348,851 179,794 161,978 -9.9

San Bernardino 219,736 214,612 282,155 243,674 308,311 191,572 160,081 -16.4

San Diego 647,051 708,496 890,719 762,658 966,989 599,002 693,773 15.8

NONRESIDENTIAL CONSTRUCTION

Building Permit Values ($ 000)

Source: REIS, Inc.

DensificationAs jobs have become increasingly concentrated in

the nation’s urban areas , the nation’s population has

become more clustered in major metropolitan areas.

Consequently, the share of Americans living in urban

areas has continued to move upward: According to the

Census Bureau, 80.7% of the U.S. population lived in

urban areas in 2010, up from 79.0% percent in 2000.

Although it follows that major metro areas have seen an

increase in population density, population density alone,

as will be seen, can be blunt instrument that may miss

considerable nuance.

Given that 62.7% of the U.S. population lives on just

3.5% of the nation’s land area, population density

metrics severely underestimate density conditions

experienced in a given area. By comparison, population-

weighted density can provide greater insight into

the density experienced by the average resident, as

opposed to the average square mile. To illustrate, the

national population density in 2010 was 87.4 people per

square mile, but the population-weighted density was a

factor of 61.4 times higher, at 5,369.

On examining population-weighted density, it is

apparent that although the nation’s largest metros have

continued to see rapid expansion, within these metros,

growth has not been evenly distributed. Population

gains have generally been the greatest away from

city centers, with growth rates for the nation in the

double digits more than ten miles from city centers.

This trend is consistent with Freemark’s observation

that many of America’s most populous metropolitan

areas saw decreases in population-weighted density;

a phenomenon attributable in large part to increasing

suburban sprawl. In fact, the Urban Land Institute finds

that suburban areas accounted for 91% of population

growth in top metro areas between 2000 and 2015.

However, the Inland Empire was an exception to that

broader trend, and as the region absorbed a 29.8%

increase in population between 2000 and 2010, the

region saw modest densification. The population-

weighted density rate rose from 4,060 people per

square mile in 2000 to 4,299 in 2010, a 5.9% increase.

Still, compared to metropolitan areas with similar

population sizes, the Inland Empire remains relatively

dispersed. U.S. metropolitan areas with populations

ranging between 2.5 million and 4.9 million inhabitants

(including Boston-Cambridge-Quincy, MA-NH and

San-Diego-Carlsbad-San Marcos, CA) had an average

population weighted density of 7,938 persons per

square mile within 10 miles of their largest city’s city hall,

20 Defined by the Census Bureau as urbanized areas of 50,000 people or more and urban clusters of at least 2,500 and less than 50,000 people.21 U.S. Census Bureau. (2012, March 26). Growth in Urban Population Outpaces Rest of Nation, Census Bureau Reports [Press release]. Retrieved from https://www.census.gov/newsroom/releases/archives/2010_census/cb12-50.html22 U.S. Census Bureau. (2015, March 4). U.S. Cities are Home to 62.7 Percent of the U.S. Population, but Comprise Just 3.5 Percent of Land Area [Press release]. Retrieved from https://www.census.gov/newsroom/press-releases/2015/cb15-33.html

44

Densification

compared to a population-weighted density of 5,761 per

square mile within that range in the Inland Empire.

Additionally, population density is higher radiating

farther from the Inland Empire’s urban core, in

comparison to similarly sized U.S. metro areas. This is in

large part a function of the Inland Empire’s proximity to

other densely populated metro areas, and the contrast

is particularly apparent at distances farther than 60

miles from Riverside City Hall, where population-

weighted density is 3,170 per square mile, compared to

302 per square mile in similarly sized cities.

Undoubtedly, the Inland Empire exemplifies suburban

sprawl to a greater degree than any other metro area

in Southern California. This is a product of the extent

to which the Inland Empire has evolved as a satellite

economy and bedroom community to Los Angeles,

Orange, and San Diego Counties. Still, the general

trend toward population densification has enabled the

development of a more diverse and self-sustaining local

economy via mechanisms of agglomeration. Better

linkages between local industries will lead to greater

diversification, a key prerequisite to economic resiliency.

Expanding employment opportunities in the area will

also mean that more residents will choose to work in

the Inland Empire rather than commute to coastal job

centers. The decision to commute is based on many

tradeoffs, but a recent decline in outbound labor flows

provides some evidence that the region is less defined

by its proximity to jobs in coastal Southern California

than in prior years.

POPULATION WEIGHTED DENSITY BY DISTANCE FROM CITY HALL (PEOPLE PER SQUARE MILE)

Source: US Census Bureau and Beacon Economics, LLC

*Metro areas with populations between 2.5 million and 4.9 million inhabitants

Comparison Area Inland Empire Difference

County 2000 2010 2000 2010 2000 2010

10 or less 8110.1 7937.6 5262.0 5761.3 2848.0 2176.4

11 to 20 3965.2 3987.4 5050.9 5205.8 -1085.6 -1218.4

21 to 30 2555.8 2658.5 2605.6 2749.2 -49.8 -90.7

31 to 40 1411.6 1611.5 1784.2 2412.9 -372.6 -801.4

41 to 50 408.2 448.4 1715.6 1836.2 -1307.3 -1387.8

51 to 60 420.6 464.6 2462.6 2732.7 -2042.0 -2268.1

61 to 70 277.5 301.8 2846.7 3170.8 -2569.3 -2869.0

Between 2000 and 2010, a 29% population

growth rate placed the Inland Empire ahead

of any other metro area in the nation with a

population exceeding 2 million. Population gains

were 6.6% between 2010 and 2016, growth

unmatched by any other metro area in Southern

California. Underpinning population gains in the

Inland Empire has been solid economic growth

in addition to overheated housing costs in many

coastal markets. Over the most recent five-

year period, cities demonstrating the strongest

average annual population growth have included

Lake Elsinore (3.2%), Eastvale (2.9%), Chino

(2.1%), and Wildomar (1.6%)—all of which run

along the Inland Empire’s western boundary.

Cities farther inland have also demonstrated

marked gains: Beaumont (3.2%), Indio (2.3%),

and Adelanto (1.9%) all outpaced the Inland

Empire significantly in the last five years, albeit

with relatively small population numbers.


Population

46

Inbound migration was a primary driver of growth for much of the 2000s, but a steady rate of natural increase has since been fueling the majority of growth. In 2016, state Department of Finance data indicate that natural increase accounted for 62% (30,700) of annual population growth, compared to 38% net migration (18,900). The rate of natural increase has been the core driver of population growth since 2008. This is notable, given the fact that at the state level, birth rates hit an all-time low in 2016, the same year that the region saw net migration of 18,900, a fraction of the 100,900 that flooded the Inland Empire in 2004. Even though net migration is substantially lower that it was during years of peak housing construction, levels in 2016 represented a post-recession high.

More recently, the affordable suburban pockets of the Inland Empire have been a strong draw for Millennials who are starting families and have been priced out of nearby counties. The Urban Land Institute finds that the Riverside-San Bernardino-Ontario metro area saw the highest relative increase in the Millennial cohort in the nation between 2010 and 2015, at 16.2%.25 More broadly, although net migration remained positive across all age categories, recent migration heavily skews toward youth. In 2015, U.S. Census public use microdata show that 44.5% of inbound migrants were under the age of 18, and that shares generally decline for older generations. In 2015, Millennials also made up a large share of inbound migration, accounting for 40% of new residents.

Recent demographic data also show that Hispanics/Latinos account for a growing share of the state and local population. As of 2016, Hispanics accounted for 50.5% of the local population, a 2.6 percentage point gain between 2011 and 2016. Simultaneously, the White population shrank 3.1 percentage points to total 32.8% of the

Inland Empire population in 2016. Other ethnic groups have remained relatively stable. Differences in fertility rates across major ethnic groups in the Inland Empire contribute to the shifting racial profile in the region. Based on California Department of Finance data, the fertility rate for all major ethnic and racial groups, excepting Hispanics/Latinos, remained below the 2.0 rate required for self-replacement. Although fertility rates are declining for Hispanic/Latino women in California in recent years, it can be anticipated that population share of the ethnic group will continue to grow, albeit at slowing pace.

It appears that motivations to migrate to the Inland Empire may be strongly economic, as net migration rates have been particularly high among workers who earn less than $40,000 annually. In 2015, the Inland Empire saw a net increase of 24,300 residents in this income bracket, while lower wage earners left Los Angeles (-76,200), Orange (-17,400), and San Diego (-44,000) Counties in droves. The Inland Empire has apparently drawn much of recent population from these counties, Los Angeles in particular. Among inbound domestic migrants in 2015 who made less than $40,000, 33.4% came from Los Angeles County—more than from Orange County (13.0%) and San Diego County (11.6%) combined.

Strong inbound migration from lower income brackets is a function of both push and pull.. Besides personal preference, an individual takes into consideration the relative costs of living as well as economic opportunities. In fact, the UCR Forecast Center determined that once average occupational wages are standardized for regional price parities, the Inland Empire offers better wages than Los Angeles, Orange County, and San Diego for a large number of occupations that pay less than $40,000 annually. Occupations in which a worker

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

Natural Increase Net Migration

1971

1973

1975

1979

1977

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

COMPONENTS OF POPULATION GROWTH

Inland Empire, 1971 to 2016

Source: California Department of Finance

25 Johnson, David. “Millennials: See the Top 25 Suburbs Where They’re Moving.” Time, Time, 2 May 2017, time.com/4748763/suburbs-millennials-moving-cities/. Accessed 21 Sept. 2017.


47

clearly benefits from working and living in the Inland Empire include construction, cleaning/grounds keeping, production, and the protective services.

Los Angeles, Orange, and San Diego counties offer better wages for more specialized lines of work, even when taking costs of living into account. This may be determined via purchasing power of median wages, which measure the median wage income of a given occupation in a given area relative to the cost of living of that area as measured by regional price parities. For instance, purchasing power adjusted wages are still 20% higher in Los Angeles for computer/mathematical occupations than in the Inland Empire. A worker would also be better off living in coastal Southern California if she worked in architecture/engineering, arts/entertainment, and management. Based on ACS data, these groups have continued to grow, albeit at slower rates than five years ago.

Decisions about where to live and where to work also involve choices about commuting. In 2014, U.S. Census data indicate that a large share of residents are maximizing their incomes by living in the Inland Empire and working for higher relative wages in one of the coastal counties. Without considering the costs of commuting, unadjusted wages for all but a few occupations are lower in the Inland Empire than in Los Angeles. This is to some degree a result of slower economic recovery in the Inland Empire. Another reason for high commute rates is that for many, it may be easier to change jobs than to move, as local investment (homeownership, social obligations, etc.) can create disincentives.

However, high commute rates are nothing new, as net labor flows26 in the Inland Empire have historically been negative. In 2014, 279,300 more workers lived in the Inland Empire than worked there, a 15.9% increase since 2009. Only 58% of the civilian workforce was reported to have jobs in the Inland Empire that year, and net labor flows to the Inland Empire are negative in all major industries, except Transportation/Warehousing. Some of the highest labor flow deficits were in Manufacturing (-34,200) and Health Care (-30,600). Still, total net labor flows in 2015 represented a decline from 2013 levels, which had peaked at 282,400. It is likely that because metro area job growth has accelerated in the years since, net labor flow deficits have continued to decline. Still, the benefits of commuting are clear: Long commutes may bear opportunity costs, but these appear to come with strong compensating differentials. For all workers who commuted between 61 and 90 minutes, annual average wages were $48,800 compared to $23,000 for workers who commuted less than 15 minutes.

Despite financial incentives to commute, the literature indicates that workers are likely to underestimate some of the mental and physical

To Commute or Not to Commute?

Race/Ethnicity 2016 2011 5-Yr. Chg

Asian 6.5 6.1 0.4

Black 7.0 6.9 0.1

Hispanic* 50.5 47.9 2.6

Other 0.8 0.9 -0.1

Two or more 2.5 2.3 0.2

White 32.8 35.9 -3.1

Difference (%)

OccupationInland

Empire ($)Los Angeles

CountyOrange County

San Diego County

Architecture/Engineering 57433.3 18.4 5.3 3.5

Arts/Entertainment 12356.9 161.5 16.5 64.3

Business/Financial 39159.1 12.9 1.1 3.7

Cleaning/Grounds Keeping 13053.0 -2.3 -4.6 -11.1

Community/Social Service 31327.3 16.7 -3.5 -2.8

Computer/Mathematical 53082.3 20.1 1.7 9.3

Construction 25235.8 -15.8 -14.4 -28.2

Education 33067.7 2.9 -19.9 -12.3

Farm./Fish./Forrestry 14793.4 10.4 -12.4 -11.8

Food Prep./Serving 13053.0 10.7 -22.8 -8.4

Healthcare Practicioners 49601.5 2.9 -11.5 -12.3

Healthcare Support 18274.2 11.7 -9.4 -12.7

Install./Maint./Repair 27846.5 6.9 -9.5 -3.7

Legal 45250.5 59.7 11.4 -7.1

Management 47861.1 15.5 8.3 3.0

Office/Administrative 22625.2 12.8 -4.5 -3.9

Personal Care 9572.2 3.0 -21.0 -9.1

Production 21755.0 -10.1 -13.9 0.0

Protective Service 34808.1 -12.1 -25.5 -4.2

Sales 15663.6 21.6 24.1 15.7

Science 41769.7 5.9 -22.4 4.1

Transportation 20884.8 0.2 -22.4 -27.1

RACE/ETHNIC DISTRIBUTION, 2011 VS. 2016

Source: U.S. Census Bureau

*”Hispanic” ethnic identity is defined as mutually exclusive of other racial

identities.

REGIONAL PRICE PARITY ADJUSTED MEDIAN WAGES

by Metro Area and Occupation, 2015

Source: U.S. Census PUMS


26 Defined as the difference between the number of workers who are employed in the Inland Empire and the number of workers who live in the Inland Empire. Figures are obtained through Census Bureau longitudinal employer-household dynamics data for primary workers.

48

Industry Net Labor Flow 5 Yr. % Chg. 10 Yr. % Chg.

Agriculture 8439 47.5 184.8

Mining 705 41 502.6

Utilities 3002 18.1 27.0

Construction 15977 10.8 120.8

Manufacturing 34199 -0.9 10.1

Wholesale Trade 14995 -3.8 -12.1

Retail Trade 20444 -1.4 17.7

Transport/Warehouse -1536 229.6 -139.4

Information 10134 5.7 23.0

Finance/Insurance 12486 -3.5 -11.7

Real Estate 6600 26.7 46.2

Prof. Sci. Tech 24544 23.7 41.4

Management 8105 6.9 13.1

Admin Support 19063 80.5 61.9

Education 19361 13.7 69.3

Health Care 30575 28.2 77.9

Arts Entertainment 8298 34.8 63.7

Accom. Food 17708 19.5 58.4

Other Services 7881 -17.8 -4.3

Public Admin 18367 80.2 233.8

Total Jobs 279347 15.9 37.0

costs of time spent in longer commutes. Couples in which one partner commutes longer than 45 minutes are 40% percent likelier to divorce, and miles traveled are a robust predictor of obesity27. Furthermore, long drives are associated with various externalities, including congestion, pollution, and road damage, so it is unlikely that compensating differentials fully cover true costs of commuting. However, recent major advancements in transportation technology may change the calculus. In a recent policy brief, Anderson and Larco28 argue that automation, shared mobility, and electrification will have notable effects on how workers gauge opportunity costs and the extent of externalities inflicted. Specifically, autonomous cars could free commuters to spend hours more effectively, leading to lower costs associated with long drives. This could lead to greater suburban sprawl as workers move farther from jobs as well as greater emissions and road wear.

On the other hand, shared mobility and increased numbers of low/zero emissions vehicles may introduce other benefits (reduced congestion and pollution) as well as new infrastructural needs. Although transportation assets in the Inland Empire have largely evolved around automobile-based transportation, use of those assets will evolve as a result of changes in personal transportation options. At the same time, since analysis shows that the more a person makes, the higher the opportunity cost of time-consuming transit alternatives, public transportation services will largely serve neighborhoods that are disproportionately poor, where residents are more likely to work for local employers, as they have for some time.

Growth in the Inland Empire will inevitably lead to more job opportunities and, in turn, a smaller incidence of commuting outside the region. However, it must be noted that the Inland Empire remains extremely decentralized compared to highly populated urban areas and will maintain a largely suburban character in the foreseeable future. The Inland Empire should find ways to grow industries and businesses within the region that will capitalize on live-work proximity but at a lower cost. Given the disparity between the cost of living in the Inland Empire and that in coastal Southern California, individuals in many careers have been finding that their paychecks go further in the Inland Empire. But the tradeoff may be a longer commute, which is an especially difficult choice for younger members of the workforce who often mix their work and leisure routines, making it attractive to live close to work.

LABOR FLOWS

by Industry, 2014

Source: U.S. Census LEHD


27 Lowrey, Annie. “Long commutes cause obesity, neck pain, loneliness, divorce, stress, and insomnia.” Slate Magazine, 26 May 2011, http://www.slate.com/articles/business/moneybox/2011/05/your_commute_is_killing_you.html. Accessed 21 Sept. 2017.28 Anderson, M., & Larco, N. (2017). 3Revolutions: Sharing, Electrification, and Automation (Publication). Davis, CA: UC Davis Institute of Transportation Studies.

900 University AvenueRiverside, California 92521

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