As rent growth has exploded in neighboring Los Angeles in recent years, many renters have eyed the much more economical housing within the Inland Empire, a stone's throw to the east. However, shifting populations have created a spillover effect in the market, leading rents to expand at an accelerated pace there, as well.

The Inland Empire's asking rents have increased by 11.5% annually, a first-quarter Kidder Mathews report concludes, compared to an uptick of 7.2% in Los Angeles. While L.A. remains much more expensive — with an average asking rent of $2,079 compared to the Inland Empire's more modest $1,726 — the gap is closing.

And it's likely to begin closing even faster. Only 244 units delivered in the first quarter, as the market's vacancy sat at 2.6% — notably tighter than the 3.3% in Los Angeles.

In a nutshell, the Inland Empire appears well positioned both for investment and development activity.

So, What Does This Mean for Investors?

In terms of investment, cap rates in the first quarter were at 4.7%, a full 70 basis points higher than in neighboring L.A. or Orange County. And price points are much more accessible in San Bernardino and Riverside counties, averaging just under $206,500 per unit, a far cry from Los Angeles's $370,815.

Even so, investment volume has yet to see the major uptick one might expect. The largest multifamily deal closed in the first quarter was FPA Multifamily's $35.4 million sale of the 128-unit Veranda Riverside in the Ramona neighborhood of Riverside, Calif.

Developers Are Taking Note

On the development side, activity has begun to pick up. Nearly 5,300 units were under construction at the end of the first quarter, an increase of 39.5% compared to the same time in 2021. However, land availability could impact future activity: Much of the area's developable land has been rapidly snapped up by developers looking to embrace the gargantuan Inland Empire industrial market.

The two largest projects underway in the market were the 1,000-unit multifamily component of Lewis Management Corp.'s The Resort @ Empire Lakes in Rancho Cucamonga and G.H. Palmer Associates' 925-unit Vineyards in Ontario. Both developments are expected to wrap up by the end of summer this year, easing occupancy pressures at least a bit.