There’s No Place Like The Inland Empire, Say SoCal BTR Builders

As investors flock to single-family rental development in the wake of the pandemic, the trend has yet to fully take off in Southern California, where market dynamics serve as barriers to entry. But the Inland Empire is proving to be a sweet spot for developers where the conditions for the housing type tend to align.

Two Orange County-based housing developers are heading up separate build-to-rent projects in the Inland Empire, which has experienced a surge in investor interest since the onset of the pandemic, according to Justin Woodworth, managing director of multifamily markets at The Hoffman Co., a land brokerage firm active in the region. 

“Inland Empire used to be an area of interest only to a limited number of developers, and very few of the most blue-chip developers were developing there,” Woodworth told Bisnow. “Everybody is interested in the Inland Empire now."

Over the past two years, housing developers and investors that previously worked in coastal and urban areas were drawn to the Inland Empire, seeking to meet renter demand for more affordable housing options, Woodworth said. He specifically noticed increasing demand from single-family homebuilders. 

During the pandemic, the Inland Empire saw a huge boost in renters and, as a result, rents as remote workers sought more affordable apartments than the ones they’d been renting in more urban areas, the Los Angeles Times reported in late 2020. 

Meanwhile, the build-to-rent sector was seeing newfound interest of its own.

Confident that Generation Z renters will pony up for the perks and space of a rental home, investors clamored to enter the space, which is expected to give investors a return of about 8% on average, according to The Wall Street Journal, citing data from Green Street. Those returns are the highest of the 18 property sectors Greet Street monitors, the WSJ said. 

“We start to look for opportunities where rents can support new construction, but it’s not just that the highest rent wins,” said Marcus Cook, the managing partner of Sancerra Communities, a Newport Beach-based developer that has started work on a build-to-rent project in the Inland Empire.

Sancerra’s first BTR project will be 163 townhomes in the city of Wildomar, about an hour southeast of Mission Viejo and 40 minutes south of Riverside. It has partnered with STG Capital Partners for the project. 

The development will offer townhomes ranging from 1,400 SF to 1,700 SF. Floor plans will feature two or three bedrooms and 2.5 bathrooms, with attached two-car garages and access to shared amenities aimed at attracting young families to the property, including a pool, sports courts and a dog park. 

Irvine-based Shopoff Realty Investments’ first build-to-rent project is 131 houses in the desert resort town of La Quinta. The Riverside County city is about a half-hour east of Palm Springs. 

Shopoff acquired the site in 2016 and has explored several options for the land since, including selling it, but ultimately decided to pursue build-to-rent, Shopoff Executive Vice President of Real Estate Brian Rupp said. Shopoff has partnered with Argosy Real Estate Partners on the project.  

One- and two-story homes will be available, with the single-family houses ranging from about 1,800 SF to 2,100 SF. Here, too, the houses come with access to shared amenities, including a pool and clubhouse.

“We felt that, given the location, the desert community, and the seasonal demand for housing and rental housing in particular, this would be an excellent location for a build-for-rent project,” Rupp said. 

A number of factors make the Inland Empire attractive to build-to-rent developers, experts note, especially compared to areas like LA and Orange County: land is more available and relatively less expensive; approvals are less cumbersome; communities are less resistant to new building; and there is less competition from big homebuilders, which are looking at the same properties and can afford to pay premiums for land. 

“I would love to be building build-to-rent projects in Orange County or Los Angeles,” Cook said. “But from a competitive perspective, it would be very difficult for me to compete with the likes of Lennar, KB Home or D.R. Horton.” 

In land-strapped Orange County, undeveloped parcels are often family-owned and not publicly on the market. The ones that come online trade in top-dollar deals.

In early January, Shopoff closed on a former agricultural property in Fountain Valley, CoStar reported. The company shelled out $65M for the 18.6-acre parcel that’s slated to ultimately hold a mix of for-sale housing and multifamily rentals, although plans still await city approvals, Rupp said.

Rupp doesn’t see a lot of opportunities in Orange County for build-to-rent, in part because the demand for for-sale homes is so great. 

“For land that's available, that’s zoned for single-family residential, the highest and best use is still for-sale housing,” Rupp said.

There, competition is stiff from for-sale homebuyers, says Land Advisors Organization Vice President Allison Rawlins Tift. Rawlins Tift worked with Toll Brothers on the acquisition of the Nakase Nursery, a 125-acre land site in the Orange County city of Lake Forest. Toll spent three years securing entitlements, and it reportedly paid over $100M for the site where it plans to build 500 homes, the Orange County Business Journal reported.

“Quite simply, the traditional for-sale buyers, the public homebuilders, can just pay more for the land,” Tift said.

Demand for for-sale homes is still outpacing supply in Orange County, and that's expected to continue, Rupp said. Even though rising mortgage rates are expected to moderate that demand a bit, he said there is a question as to “whether that's enough to really create more demand for build-to-rent [in Orange County]. I don't think so in the near term.” 

Build-to-rent projects, now taking off in more affordable land markets like Phoenix, Texas and Florida, are still few and far between in Southern California, said RCLCO Real Estate Advisors Managing Director Derek Wyatt, who consults on build-to-rent projects across the country. 

“In a more established market — say, in Los Angeles, for example — it's hard to find sites that have enough land to support single-family rentals,” Wyatt said. When they can be found, “they're typically specifically zoned to provide opportunities for higher-density development," which is often the highest and best use. 

For now, the Inland Empire appears to be the place to be for developers looking to get into the build-to-rent game in Southern California. Shopoff and Sancerra are tracking for completion within three years. 

Rents are not yet available for Shopoff's project. Sancerra’s Cook said traditional, three-bedroom apartments in the area generally rent for between $3K and $3,300 a month. His company’s townhomes will offer features that are usually reserved for single-family for-sale homes — like private access to the garage and full-size laundry rooms — so he expects the properties to rent “for a small premium relative to a similarly sized apartment,” Cook said.

Even so, those premiums might not seem so high compared with the costs of owning a home, sources said. 

Housing prices have soared across the country as the pandemic pushed buyers to seek more space, bolstered by historically low interest rates. Those prices, however, have shut many people out of the market, keeping prospective buyers in rental communities. 

Uncertainty about the accessibility of homeownership in the coming years is also likely playing a role in the decision-making of BTR tenants. 

“Some people just look at the monthly payment and say, ‘Oh, look, these single-family rentals have about the same total payment that you would be paying if you were going to own a home,’” Wyatt said. “But, with where home prices have gone over the past few years and the need for a down payment — will they even make that transition into owning?” 

CORRECTION, JAN. 27, 6:30 P.M. PT: A previous version of this story incorrectly identified Sancerra's Marcus Cook and the number of townhomes in his project. Cook is the managing partner of Sancerra, and there are 163 townhomes in its Wildomar project. The story has been updated.