Fed's Rate Hike Won't Derail 2016

LOS ANGELES—The Fed's nominal interest rate increase last week turned out to be a nonevent, according to Shlomi Ronen, founder and managing principal of Dekel Capital. Ronen says that the increase won't be significant enough to affect the volume of transactions in the market and that, as a result, we should expect another healthy year ahead in the capital markets. To find out the capital markets perspective on the rate increase and how it will affect the market next year, we sat down with Ronen for an exclusive interview. Here, he talks about the big picture, what will continue to drive the capital markets and if the increase in short term rates will affect long term rates next year.

GlobeSt.com: Do you think that this was the right time for a rate hike?

Shlomi Ronen: That is a big question. While the move is groundbreaking, meaning that we haven't seen interest rates move for quite sometime, it is less important than the overall path that they are going to take. They ended up signaling that we are going to see more gradual increases next year. Essentially, the Fed is giving a vote of confidence in the economy and its continued expansion that they expect to see over the coming year. Could they have done this in September? Probably. I don't think that we are in a different economic state than we were in September. I think there were some different headwinds and some things happening globally that they didn't want to pile on at that point because the markets were a little jittery. By doing it in December, they really prepared the market for the raise, and the raise itself became a nonevent.

GlobeSt.com: You are talking about whether or not it should have happened in September versus December, but there are some people that still believe the move is too soon and that this might hinder job and wage growth. Do you agree that this was a good move, and that they shouldn't have held off longer?

Ronen: The US economy is a slow moving object. If you start moving policy when the data has already affirmed it, you are probably too late at that point because it has too much momentum. They are seeing enough strength in different sectors, but not everywhere. The challenge for them has really been inflation growth, but the inflation growth has really been offset by energy prices and raw materials prices. Raw materials and energy have really helped keep inflation in check this year. They don't think it is going to be sustainable going forward. I am not smart enough to tell you if it is going to be sustainable or not, but I tend to believe in their argument that it isn't sustainable.

GlobeSt.com: Obviously this is a decision that affects the broader economy, but how do you think this will affect the commercial real estate market specifically?

Ronen: When you put together a cash flow model to look ahead three years from now, you can no longer make the assumption that interest rates are going to be the same, at least in the short term rates. When we are looking at a development deal, we have to factor in rising rates and include that additional cost into the model. It does have a bearing on the overall cost of the project, but is it going to stop or slow anything? I don't think it will stop or slow anything significantly. It is just an adjustment, and at this point, it is one that is minor to the overall cost. It isn't going to be significant enough to affect the volume of transactions in the market.

GlobeSt.com: The Fed was really transparent in their plans for next year and the benchmark that they are looking to hit over the next three years. Do you think that transparency is helpful in maintaining a calm in the market?

Ronen: Absolutely. Now, they can state their plans, but the economy and the world economy has to cooperate. So, while it is helpful and may be reassuring to some people, I think that their guess is as good as ours as far as where we'll be in 2019 in terms of rates. They will do everything in their power to get us there, but their power is limited to the US and we live in a world economy.

GlobeSt.com: Do you think that we'll also see a rise in long-term interest rates?

Ronen: All of the economists that I follow believe that rates will be in the 2% to 3% range next year. I think that if we stay in that band, we'll be okay. I don't think that it is going to create any slowness in the real estate world. That is a fairly healthy band for us to be in, given the cap rates and the yields that people are building to today.

GlobeSt.com: The low interest rate environment has been responsible for a lot of the activity in the capital markets. Do you expect that to change in the coming year?

Ronen: It isn't going to change. We are still seeing our clients very actively perusing real estate opportunities, and I think there is a lot of optimism with respect to the economy and fundamental rent growth. We still have certain sectors that have yet to see any substantial development, such as the office sector, and we are just now seeing the labor markets come back, which is going to have a direct impact on office demand and lease rates. I think the fundamentals are still there, not to mention the backlog of 2005 and 2006 vintage CMBS debt that is going to mature over the next year. We will definitely see a good amount of transaction volume from that as well.