11:36 AM PDT on Thursday, April 22, 2010 (http://www.thebizpress.com)

Contributing Writer

Construction of new apartments in Inland Southern California is not expected to resume on a large scale any time soon. That’s due to a glut of foreclosed homes that have flooded Riverside and San Bernardino counties over the past three years and now compete with apartments for tenants, according to a new national report by the commercial real estate and research firm Marcus & Millichap.

That trend was especially true in the region’s outlining areas such as Palm Springs, Perris and southwest Riverside County, the report said.

Asking rents are forecast to fall 3.7 percent to an average of $969 a month, while actual rents should fall 5.6 percent to $895. Those numbers will result in the completion of just 520 new apartments this year, down from 1,260 units last year, Marcus & Millichap said.

“There are very few projects on the books. Most have been put on hold because of the economy,” said Alex Garcia, senior vice president with Marcus & Millichap in Ontario. “Investors have been buying foreclosed single-family homes and turning them into rentals. In some cases, they were bought cheap enough to be more affordable and compete with apartments.”

Overall, San Bernardino and Riverside counties moved up five places from last year to 37 in the 2010 National Apartment Report by Marcus & Millichap. Analysts attributed the rise to forecasts for modest payroll additions and minimal construction.

The annual report ranks the nation’s 44 major metro markets on an investor index based on 12-month indicators of supply and demand. Markets are ranked by average scores for factors including forecast employment change, vacancy, construction, affordability and rental rates.

“The local housing industry downturn will continue to adversely impact the apartment supply/demand balance in the Inland Empire this year, though operational performance will depend largely on location,” analysts said in their latest report.

This heightened competition will cause incentives to increase as landlords look to fill vacancies. Conversely, operations are expected to be steadier this year in submarkets closer to Los Angeles County.

Vacancy in Ontario, Chino and Rancho Cucamonga, for instance, began to stabilize late in 2009 and will lead the region once a recovery starts, the report said. But while apartment conditions continue to soften this year, analysts expect the market to be near the bottom of its decline, which was expected to show recovery next year and in 2012.

“It’s tough to time the bottom of the market,” Garcia said. “But the trends point to a recovery. The west is a stronger market with less vacancies and higher rents, but the further east you go the longer it will take to recover. In the submarkets in Coachella Valley and High Desert you have an overall vacancy closer to 20 percent.”

Cray Carlson, senior vice president with CB Richard Ellis in Ontario, agreed saying the High Desert and Coachella Valley suffered from overbuilding and were devastated by job losses.

Carlson said he assumes a turnaround will begin at the end of the year, “but the realistic answer is, ‘I don’t know.'”

Inland sales activity was expected to increase as distressed and Real Estate Owned (REO), or banked-owned, listings become more prevalent. A number of smaller bank-owned properties came to market late last year, attracting bargain-seeking buyers.

Legend Apex Investments LLC of Los Angeles recently acquired 36 units of the 40-unit Rialto Arrow Terrace condominium project from a partnership of two lenders for $3.8 million in a foreclosure sale, according to Paul Runkle, associate partner with the Inland Empire office of Hendrick & Partners in Temecula. Runkle said at the time of foreclosure in October, the outstanding loan balance on the project was $9 million, or more than $250,000 per unit.

He said Legend Apex plans to operate the complex, which was completed in April 2006, at 1655 W. Rialto Ave., as rentals until the condo market recovers.

From January to May 2008, four of the condominiums were sold to individual buyers at prices ranging from $305,000 to $309,000 per unit; the remaining 36 units were never sold. The units are 1,332 square feet each, with three bedrooms, two and a half bathrooms and a direct-access, two-car garage.

“This was a 40-unit condominium project,” Runkle said. “They sold four units before realizing it wasn’t going to work. The buyer realized it was worth more as a rental than for sale. Already half of the units have been rented.”

The region’s eastern and southern areas should offer the most distressed-asset opportunities; however, properties in these areas will likely recover more slowly than the market as a whole.

Garcia, of Marcus & Millichap, said he was working on a couple of short sales, including a “pretty high quality” property that is 35 percent vacant in the Coachella Valley. He said the multifamily property was the first short sale “ever” involving Fannie Mae.

With the sale expected to close within two weeks, Garcia declined to provide additional details. Messages left with Fannie Mae in Washington, D.C. were not returned.

As 2010 progresses, larger, newly built Class A complexes also will work through the foreclosure pipeline, drawing investors with considerable capital reserves, the report said.

Sales of traditional apartment assets are expected to be limited as owners who are not in immediate distress elect to hold at a time when buyers are demanding significant price reductions.

Carlson attributed the lack of apartment sales to “not a lot of inventory on the market” and to banks taking longer to approve loans on existing listings.

“It’s taking between 30 and 90 days to get a listing to where the banks will loan to finance the sale,” said Carlson, who added that the average listing is on the books today for between 60 and 120 days, compared to 30 to 45 days in 2008.

He said his office had three multifamily listings including two in Barstow and one in Riverside. The listing, whose price was not disclosed, was located at 3257 Market St. in Riverside. The property, which was built in 2008, was situated on 0.39 acres and consists of one three-story mixed-use building that includes two levels of 2 bedroom/2.5 bath townhomes.

Carlson said the region’s apartment market was near the bottom of the current down cycle and he expected investors to “start jumping back into the market.”

“It’s time,” he said. “Investors are looking for anything that makes sense.”

Garcia said his biggest concern was a turnaround in the region’s job market, because if expectations weren’t met additional foreclosures could come to market.

Despite the expected uptick in employment figures, waning demand and ongoing competition from foreclosed homes are expected to drive up vacancy 40 basis points this year to 9.8 percent in the two-county region. In 2009, Inland vacancy increased 240 basis points.

In a first-quarter report compiled by Marcus & Millichap, Rancho Cucamonga was the best performing sub-market in the two-county region with a vacancy rate of 5.4 percent, up 70 basis points from the same period a year ago. Rents in Rancho Cucamonga averaged $1,198, down 3.2 percent from the first quarter of 2009.

On the opposite side of the ledger, Upland and Southwest Riverside County were the worst performing sub-markets. In Upland, the vacancy rate jumped 240 basis points to 8.8 percent, while rents were down 7.2 percent to $985 at the end of the first quarter. In Southwest Riverside County, the report found vacancies increased 10 basis points to 9 percent, and rents were off 4 percent to $1,007 compared to the end of the first-quarter of 2009.


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