First Quarter 2025
Rents Rise, Vacancy Falls, and Investment Recalibrates in the Inland Empire Multifamily Market
Average deal sizes surged despite muted transaction volume, as slower construction points to future supply constraints.
As investors reposition their strategies to address higher borrowing costs and ongoing rental demand, the market stays competitive.
MARKET OVERVIEW
In Q1 2025, the Inland Empire’s multifamily housing market reflected shifting dynamics. Vacant units declined 7.5% quarter-over-quarter and 6.7% year-over-year, totaling 12,767 units. Developers delivered 1,207 new units—down from 1,532 in Q4 2024 but up from 797 in Q1 2024. For the full year 2024, 4,878 units were delivered—a 39.5% increase over the prior year—underscoring the accelerated pace of inventory growth. This expansion was met with strong demand, pushing the vacancy rate down to 5.3%—a 50-basis-point decline from Q4 2024 and 60 basis points lower than a year ago.
Average asking rents rose 1.6% quarter-over-quarter to $2,116 per unit and were 1.4% higher than a year ago—setting a new all-time high and surpassing the previous record from mid-2024. Renewed rent growth reflects heightened tenant demand and premium pricing for newly completed units, while high interest rates and elevated construction costs have begun to curb future development. As of Q1, 5,247 units were under construction—down 8.3% from the previous quarter and 42.8% year-over-year.
Sales activity painted a more uneven picture of the multifamily investment landscape. Transaction volume fell 23.9% quarter-over-quarter to $962.2 million, but year-to-date sales were up 146.7% compared to early 2024—when investor sentiment was weighed down by expectations for rate cuts that never materialized. The average sale price per unit rose 2.6% from Q4 2024 to $238,501, while year-over-year gains matched the 146.7% increase in volume. Meanwhile, the average capitalization rate climbed 30 basis points from Q4 but declined 50 basis points year-over-year to 5.8%.
These trends point to a market in transition—strong tenant demand and higher rents are counterbalanced by slowing construction, selective investor activity, and fluctuating cap rates.
TRENDS TO WATCH
Market fundamentals are expected to remain strong, adapting to economic shifts, employment trends, and the persistent challenge of homeownership affordability. These forces continue to fuel rental demand, even as investment sales gain traction. While higher borrowing costs have elevated financial risk, demand persists across select asset classes—particularly in the Inland Empire, where growth prospects remain robust.
In Q1 2025, the market recorded only two sales of properties with over 100 units, down from three in Q1 2023 and up just one from Q4 2024. Despite the decline in volume, the average deal size rose to $4,944,054, up 19.4% from the previous quarter and more than double year-over-year. This growth reflects a smaller pool of higher-value transactions, as elevated borrowing costs and more discerning investors limit deal flow. With the Fed holding interest rates steady, transaction volume is expected to remain restrained in the near term.
Still, Q1 2025 featured notable deals, including the two largest transactions by unit count:
- Brixton Capital sold Elevate at Towngate, a 227-unit, seven-building apartment community in Moreno Valley, to FPA Multifamily. Originally acquired in December 2017 for $28 million, the property was renovated and rebranded before its $41 million sale this quarter—highlighting continued appetite for stabilized, value-add opportunities.
- Clear Capital sold the ground lease (leasehold) interest in a 125-unit Ontario, CA multifamily property to Convenient Holdings, an institutional investment firm, for $46.275 million—roughly $370,000 per unit. The leased fee (ownership of the land) was sold simultaneously. The asset had undergone significant upgrades, with new ownership expected to unlock further upside through unit renovations and community enhancements.
As investors recalibrate their strategies to manage rising borrowing costs and capitalize on rental demand, the market remains dynamic. Looking ahead, multifamily performance in the Inland Empire will be shaped by broader economic shifts and capital markets. With mortgage rates nearing their highest levels since 2002 and home prices continuing to rise, homeownership remains out of reach for many—sustaining demand for rental housing. However, slower rent growth may temper pricing as investors adapt to these evolving conditions.
