ONTARIO, CA—With competition among lenders in full swing in L.A. and Orange County, many are eyeing this submarket as an area of growth and opportunity for deals, said speakers at RealShare Inland Empire's “Inland Empire Deals & Opportunities” panel here last week. The spillover has already hit Inland Empire West, leaving little room for development in that submarket, and lenders are looking at Inland Empire East as the next canvas for deal making.

Moderator Darla Longo, vice chairman of CBRE, said it doesn't make sense to go with the 36-ft. clear-height industrial buildings that have become popular in the Inland Empire because they're costly to build and tenants often shy away from the higher rents they necessitate. She asked the panelists how they value these properties.

John Magness, SVP of Hillwood Investment Properties, said the Inland Empire has good soil structure, which is often imported to other markets. “If you go to 36-ft. clear, you need to thicken the slab, although going to an 8-inch slab is over-engineering and you can use those costs elsewhere.” He also cited steel costs for beams running $1 per square foot to $1.25 per square foot higher in 36-ft. clear properties. “Tenants won't pay extra for these, but it may be worth the cost for preventing vacancy. You may take yourself out of the running for some people, and in the end you may put yourself at a disadvantage, but we're doing it because we don't want to miss any deal. In the long term, it may be where you need to go, be we feel users won't pay for it, even though they say they would like 36 ft. to 40-ft. clear.”

Michael Boss, director of global real estate for TIAA-CREF, said the long-term view of dollar-cost averaging will make it worth his firm's investment for the long run. “We would pay a lower cap rate just to have that income. It's a way to differentiate yourself and set yourself apart from others with users. We would rather have a Cadillac for the long term.”

Lynn King-Tolliver, SVP of Heitman Capital Management LLC, said her firm considers anything less than 30-ft. clear to be less than class-A space, but that's not the only criteria the firm considers. If the clear height reduces leasing time off the market, it may be worth the cost to build it. “The more you stand out, the bigger the difference. We're always trying to quantify risks with those yields.”

Howard Schwimmer, co-CEO and director of Rexford Industrial, said his firm needs to be able to reposition older buildings. “We buy a 22-ft. clear building and demise it down. We're looking for opportunities to buy those older buildings and to reposition class-B buildings. That class hasn't fully recovered, but there's rent-growth potential, so we are looking to buy them.”

Longo asked the panelists what industries and companies they are seeing in terms of tenants. Gianni Novo, senior director, capital markets, for Coldwell Banker Commercial Alliance, said, “We are seeing a lot of manufacturing and warehousing users—cosmetics companies, garment companies and Asian manufacturers—particularly in Downtown L.A.” Schwimmer says he's seeing more solar companies.

For rent growth, Inland Empire West is a strong market, but land prices are continuing to rise, and with the shrinking supply in that submarket many developers and lenders are moving East to where there is less competition, the panelists said. As foreign capital from South America, Europe, Asia and Canada continues to eye US real estate investments, the competition landscape becomes even fiercer.

Novo said competition among lenders in Orange County and L.A. has caused many lenders to head east, and “it's better for the owners.” King-Tolliver added that low interest rates are attractive, “but they don't really drive decisions in the core. “Foreign investors are more interested in placing capital here than they are in yield.”

When asked to give future predictions, Magness said he sees this market thriving in a low-interest-rate environment until at least 2019. “The decrease in oil pricing will have a greater impact on our economy than oil production or oil alternatives here, especially with truck drivers' salaries being a large part of that equation. “But housing is still not back here. If we can get that part of the economy back, we will be good for smaller developers, users and investors.”

Boss said he is a little less optimistic farther out than Magness, but agrees that smaller users will start to fill the gaps. “It's a place to go to chase yield.” He added that his firm won't deviate just for a three-year cycle, and the impact of global issues is hard to predict.”

King-Tolliver said she feels a correction is due out there. “We might not make it to 2019 or 2020 with that. “We're paying more attention to where we will be in exposure with some of those assets.”

Schwimmer was also not as optimistic, predicting a slowdown in 2017 or 2018. “The world is still a fragile place. We intend to operate conservatively, with mid-30s leverage.” Several panelists said the Rialto corridor is undergoing a renaissance.