Competing forces have twisted the Inland Empire's rental market into an unprecedented position, challenging rental property owners to steady both vacancy rates and rental prices.

The factors driving the phenomenon are varied and often at odds, resulting in a market that isn't plunging along with real estate prices but is affected by the fallout, according to industry data and the sentiments of landlords and analysts. The construction industry for multifamily rental property has virtually ground to a halt, dropping by nearly 90 percent last year, as financing has dried up and the market waits for existing inventory to be absorbed.

Contributing to the excess inventory is the surplus of homes on the market, which are often turned into rentals. Amid depressed housing prices, potential homebuyers are beset by tougher lending requirements and increasing regional job insecurity, which may indirectly play into rental demand.

About 42,000 jobs are expected to be cut in 2009, or 3.5 percent of the Inland Empire's work force, on the heels of 77,500 job losses in 2008, according to a report by real estate brokerage firm Marcus & Millichap.

Still, the upward demand forces can't cancel out the recent job losses and excess inventory built up in previous years. The result is rental vacancy rates that should top 8 percent regionwide by year's end, according to Marcus & Millichap. There could also be lower vacancy rates in more densely populated west-end cities whose decade of job growth hasn't been completely wiped away by the recent downturn -- like Ontario and Rancho Cucamonga -- but also rates approaching 20 percent in eastern desert communities.

The end result of the turmoil is rental rates forecast to slump an average of 3.2 percent, to $985 per month, this year, according to the report. Still, despite the general economic downturn and white-knuckle plunges in real estate values, relatively few major complexes have fallen victim to foreclosure, usually caused by falling rental revenues losing pace with debt payments. Alex Garcia, senior vice president of investments at Marcus & Millichap, said a 215-unit apartment building in San Bernardino that was foreclosed on in 2008 was the only 100-plus unit foreclosure he knew of in the area.

"I do anticipate some more major foreclosures happening before we're through, but I am amazed at the resiliency of the rental market," Garcia said. "I thought there would be more than this. Frankly, it's impressive."

A variegated marketplace

While Ontario, Riverside, Montclair and other west-end hubs can expect a continuing supply of renters looking to live close to work and either unable or unwilling to try the housing market, poorer communities and far-flung desert locales are getting hit hard.

Not only are they hit by a weakened job base, and a newfound emphasis on shorter commutes, but the glut of foreclosed and recently sold homes has also added to the oversupply of rental units.

"Over the next 12 months, we expect to see a mushrooming oversupply of rental houses in lower-income areas," said Nick Manfredi, president of Corona-based Forum Real Estate Investments Inc. "For these areas, oversupply will push rents for single-family residences further down for the next 24 months ... we expect those areas will see as much as a 20 percent drop-off," along with an outlook at least as grim for apartments, Manfredi said.

Renting in a challenging market

Randall Lewis sees a challenging market but one in which well-positioned rental providers can succeed. The executive vice president of the Lewis Group of Companies, which manages more than 4,000 rental units in the Inland Empire, Lewis said a number of factors augur well for his company in this market.

Lewis conceded that rental rates at his properties are down "a couple percent" off their highs, but he said occupancy rates have moved negligibly.

"I think that our numbers, which may be a bit of anomaly, are explained by two basic reasons," Lewis said. "We're in strong locations, and I think we do a really strong job on customer service. We do a really rich amount of programming and services, like dry cleaning, valet trash, fixing maintenance issues promptly, niche marketing, garages, etc."

He said his company is about to break ground on 250 additional apartment units in Rancho Cucamonga, an expansion of its Homecoming Community complex.

"Construction costs are low and interest rates are lower," he said.

Garcia, the vice president of investments at Marcus & Millichap, said he's seeing rental companies combining demand-inducing tactics -- such as move-in specials with discounted or even free month's rents -- with cost reductions including energy-efficiency investments.

"The ability to reduce costs are limited, but they are being taken advantage of because every little bit helps," Garcia said.

Investment opportunities abound

While prices of rental properties have dropped, fear remains high and financing is tight.

"Despite a short-term downturn in fundamentals, attractive opportunities exist for well-capitalized investors," reads Marcus & Millichap's second-quarter 2009 report. "Particularly in the low desert, I-215 corridor and west San Bernardino areas."

Garcia said the biggest sale his firm has had a hand in this year is a helpful guide to understanding who is seizing opportunities.

The Sunset Ridge Apartments, a 215-unit complex in north San Bernardino, were foreclosed on in November 2008, brought under by revenues declining against fixed costs. Its listed sale price was $12.95 million, Garcia said, a far cry from the $22 million it was valued at in 2006.

"We had 17 offers on the property," Garcia said. "And it ranged from wealthy individuals to opportunity funds and conglomerates."

The property was ultimately sold to a wealthy individual investor. But while it may take a multimillionaire to spring for a megacomplex, smaller individual investors are scooping up deals on smaller rental properties. That activity is also helping slow the real estate market's descent while keeping supply ahead of demand in rentals.

"We're seeing local entrepreneurial spirit in the house-buying business," Manfredi said. "Investor entrepreneurs are purchasing homes with the intention to fix up and re-sell on the retail market. No doubt some of those investors will be unable to sell the properties and still make a profit, so instead opt to become landlords."

Manfredi said that kind of adjustment can be an economic positive.

"The majority of local investors that have invested in Southern California housing during the past 12 months have great loans that are low enough to ensure positive cash flow ... and if inflation kicks in, real estate is a superior position to be in than cash."

According to the Marcus & Millichap report, transactions of rental units were down 50 percent over the 12-month period ending in March. Properties as of March were selling at a median price of $63,600 per unit, down 35 percent from the year before.

"The next 12 months will continue to be a good time to be a renter," Lewis said. "I don't see a lot of rental (rate) growth in the next year, and continued pressure downward on rent. Good for renters, tough for landlords."