Contracting isn’t the most metaphorically-rich industry. After all, building something as tangible as a piece of real estate doesn’t lend itself much to poetry. But when thinking of westward expansion in America, it is helpful to picture a slow-moving wave, whelming up from vast reservoirs and rolling inexorably westward. When it hits the furthest point of expansion – the California coast – it breaks apart and starts a slow and uneven roll backward, leaving most of its energy at the shoreline. We see that energy in the great coastal cities, such as San Francisco, San Diego, and, perhaps most of all, Los Angeles. We also see the wave’s recession as you move east. Understanding where the energy from this wave will be going next is key to a successful ground-up construction business.
A lot of that dispersed energy from Los Angeles went toward the Inland Empire, a vast area that was once known primarily for farming but has since become a hub of international shipping and distribution. Inland Empire real estate has benefitted greatly from this business and the area has become incredibly densely-packed. This is altering the area’s real estate market, leaving builders looking for new opportunities. For an experienced builder, this is a great time to get a ground-up construction loan and be part of the next phase in the Empire’s development.
Inland Empire Real Estate and the Role of Geography
There are two ways to look at the Inland Empire and its boundaries. There is the strictly geographical view, which places it in the area roughly comprising Riverside and San Bernardino counties. That’s what you’ll find if you do a search on Google Maps. But the Inland Empire hasn’t always been defined by limited geography. Historically it was delineated by its relationship to Los Angeles and Orange counties, and the ease of transportation between them. That’s why the western and northern areas built up much more quickly. If it wasn’t convenient to move goods or people in a particular spot, it was deemed acceptable for that area to remain farmland.
That rule is changing. As real estate markets in Los Angeles and Orange County continue to tighten, we see the same wave moving east again. Maybe “tighten” is too easy a word – they are actually being constricted, as if wrapped by a huge snake. Los Angeles has a residential vacancy rate of 3.2-3.3%, depending on who is doing the counting. Orange County is even tighter at 2.3%. Needless to say, this is driving real estate rates to an extraordinary level and forcing many people to look elsewhere for housing.
This trend doesn’t stop with residential real estate. Orange County is also experiencing a huge spike in office rental space, with prices jumping to $183 per square foot in the second quarter. This is a year-over-year increase of 17% and, maybe more significantly, it beats the previous high set in 2007, which was the peak before the crash. This time, though, the economy has a solid foundation, so no one expects rents to plummet anytime soon.
Los Angeles industrial and commercial real estate isn’t quite as tight, but as Collier’s reports, the third quarter of 2015 was the sixth consecutive quarter for positive absorption, with rents continuing to increase.
Construction Moves East
So where do businesses go when they can no longer afford to do business in LA or the OC? What about residents? Naturally, they look toward the Inland Empire. That has meant huge absorption rates for businesses, in addition to rapidly declining vacancy rates. From Q1 2014 to Q3 2015, vacancy rates in the Inland Empire fell from 4.9% to 3.4%.[4. Salustri, John, “Looking for Growth? Go East, Young Developer.” Last updated November 23, 2015. http://www.globest.com/news/12_1245/inlandempire/xceligent/Looking-for-Growth-Go-East-Young-Developer-363760-1.html] Much of this is concentrated in the west, near LA, with Ontario being one of the furthest points.
At this point, we run into simple geographic arithmetic. People want to be near the great urban areas, but they have run out of room and are running out of buildings. This means two things: moving east and building more. What once seemed far-flung and rural is now going to be considered exurban, and soon maybe even suburban.
What we’re talking about here are towns near the 215, and even west of that, like San Bernardino. This region used to be its own center of gravity, but with eastward expansion from Los Angeles, it is becoming a vital part of the greater LA economy. There is also a lot of ground to be built here.
This is great news for an experienced contractor who specializes in ground-up construction. Space is tight and it is only going to get tighter. There is a lot of land in the underdeveloped areas of the Inland Empire, ready for a skilled and proven builder. Commercial, office, industrial, residential, and (especially) mixed-use properties are going to be needed as the wave continues to roll backward. A hard-money loan from Socotra Capital, which helps experienced contractors get the support they need for ground-up construction, can be your key to participating in the next stage of California’s development.