GSP: "Cycles Don't Die From Old Age"

LOS ANGELES—It has been an interesting year for the capital markets. We've seen interest rates continue to rest at all-time lows and volatility, for several reasons, shake the global and domestic markets, while seeing the commercial real estate market continue exponential growth with compressing cap rates and soaring prices. With 2016 just around the corner, we are surely in for some additional changes. To find out what is on the capital markets horizon, we asked David Rifkind, a principal and managing director at George Smith Partners for his view from the balcony. Here, he talks impending regulatory changes, global and domestic volatility and the middle markets, and what it all means for 2016.

GlobeSt.com: What regulatory changes are going to be implemented in 2016, and how will they affect or "re-stack" the capital stack?

David Rifkind: The long anticipated regulations that come primarily from Frank-Dodd and Basel III are taking shape. Specific regulations that effect commercial real estate finance include higher equity requirements for construction loans, greater retention from issuers of mortgage backed securities and higher underwriting stress constants. These regulatory changes are currently reducing the loan-to-cost construction lenders will allow.  Many debt funds are stepping in to fill this equity gap by providing preferred equity. We will continue to see more structured finance in 2016 driven by the unfolding regulatory environment and corresponding lender underwriting changes.

GlobeSt.com: Where are interest rates headed, and how will a potential fluctuation in interest rates really affect the market? Is there an upward bias?

Rifkind: The market is telling us that it expects the Fed to act soon. CMBS spreads have widened dramatically in the 2nd half of 2015, this is partially a response to expected Federal Reserve actions. Worries about credit quality and international economic concerns have also influenced the widening of spreads. It is likely that the anticipated increase in the Fed Funds Rate is already factored into the present market. The first move will be a relative non-event. Watch for the pace of future moves.

GlobeSt.com: What is behind the volatility that we are seeing in the market, both globally and domestically? Can we expect this to be a theme in 2016?

Rifkind: Volatility is currently driven partially by rate anxiety. Greater factors driving volatility include macro economic uncertainty and credit concerns. China and a slow Eurozone plus growing geo political concerns, add to volatility. The collapse of pricing in the energy and commodity sectors have also become major concerns in the 2nd half of 2015. Nearly 1/3 of high yield bonds are tied to energy and commodity based companies. These factors remain firmly in place going into 2016 and volatility will continue to be moderate to high in the coming year.

GlobeSt.com: Tell me about the rise of the middle market and how this will play out in 2016.

Rifkind: Institutional buyers and investors were the market movers in the early part of the recovery. As the cycle matures, institutional investors are relying on larger transactions (typically +$100M) and beginning to trade amongst themselves. We are seeing an increase in activity from high net worth and small investment platform investors. This category of investor tends to transact locally and is either engaged in syndication or is searching for a 1031 replacement. They invest in a variety of property types and often search outside of the core CBD to find opportunities. 

Lenders are responding to this unfolding theme by establishing small balance lending platforms. These programs are designed to streamline the process and reduce transaction costs. Nonbank lenders such as debt funds are particularly effective in this space. Crowdfunding is finding a foothold here as well. Crowdfunding is emerging as an effective debt and equity provider for smaller, middle market transactions.   I expect to see a continued up trend in middle market activity in 2016.

GlobeSt.com: Taking all of this into account, what is your 2016 view from the balcony?

Rifkind: My outlook for 2016 is favorable. There is no doubt that the cycle is maturing but cycles don't die from old age, they end with a confluence of factors that are largely predictable. 2016 will see an increase in middle market activity with ample, efficient capital available to fund these activities. The differentiation between the investor market and the institutional market will continue to widen. We will see more trades between institutions and increased M&A activity in the institutional space. Interest rate volatility will continue but borrowing rates should remain within a reasonable range. Debt and equity capital will remain plentiful and there will be strong competition between capital providers to fund well-sponsored transactions. Barring a collision with any Black Swans, 2016 will be an active, solid year for U.S. commercial real estate.