December 3, 2015
On December 2 at the Beverly Hilton, Connect Westside Los Angeles featured a robust panel, moderated by Gary Tenzer, principal and managing director of George Smith Partners, that discussed the state of commercial real estate’s capital stack throughout this momentous year and also took a look ahead into what is expected in 2016.
According to Brad Wilmot, regional director of Goldman Sachs’ Real Estate Finance Group, it looks like CMBS ordinations will hit just over $100 billion this year, up from $94 billion in 2014.
That said, even though industry fundamentals and demand are strong, lenders are going into 2016 with a little pause. “In 2016, we should be a little more cautious going into it,” pointed out Thomas Whitesell, managing director of construction real estate at CapitalSource. “You have to put the money out, but you have to be very conservative about what you’re doing.”
Two questions that panelists tackled were: How will a potential Fed-rate increase impact the commercial real estate industry, as well as whether or not a correction will take place in the market.
As far as the interest-rate increase is concerned, panelists agreed that it will not be a problem as long as it is bumped up gradually, but if we start to see quarterly jumps and hit five percent, it would “crash the economy,” Tenzer warned.
As far as a commercial real estate correction goes, it’s bound to happen at some point and in some locales, but it remains to be seen to what extent that will take place.
“Everything is cyclical, so a correction at some point is imminent,” said Wilmot. “The question is: ‘How deep is that correction?'” Senior Managing Director of NGKF Capital Markets, Scott Selke, followed by touching on the requirement of true inflation and wage growth for a correction to take place. Despite the lowered unemployment rate, inflation is currently far from its two percent goal.
One upside is that there isn’t a lot of overbuilding nationally, Wilmot continued. But markets such as San Francisco and Dallas, which have seen tremendous growth, could experience an impact. When speaking of San Francisco, Tenzer questioned: “How much more can rents go up?”
With all the predictions, it remains clear that during this round of the economy, lenders have been much more careful as wounds from ’08 continue to heal.