LOS ANGELES—Where are we in this cycle? About the 7^th inning, according to Paul Rutter, a partner at Gilchrist & Rutter PC. As we head into another year, we sat down with Rutter for an exclusive interview to discuss the economy and capital markets, as well as to hear his predictions for the upcoming year. Here is what he told us.

GlobeSt.com: Where are we in this cycle, and how does the current economy compare to the years just before the last downturn?

Paul Rutter: We are in the 6th or 7th inning of this 9-inning game, in my opinion. The real estate cycle is usually around 10 years long and this cycle started around 2009. The current economy has a slower growth rate and certainly lower interest rates than we saw in 2005-2007. I think that investors and professionals in the real estate sector were burned sufficiently by the great recession that those lessons are still in the backs of many of their minds. We all know that there are “Black Swan” events that can spring up and seriously disrupt the economy and negate any project proforma. In the years leading up to the great recession, many folks seemed to have forgotten this fact and believed in a “new normal” that somehow minimized risk. Today, investors know that there is real risk in all aspects of the economy, both in the U.S. and abroad. I would hope this knowledge will restrain investors from some of the riskier deals.

GlobeSt.com: With interest rates remaining low and the competitive capital chasing deals, are there lenders and investors making similar mistakes?

Rutter: Despite my hope that investors will remember the recent great recession in underwriting deals, there does seem to be an increasing tendency by some private and institutional investors to push the underwriting of deals, through more aggressive initial rent and rent-growth assumptions, through faster absorption projections and other techniques, in an effort to justify the higher prices being paid for assets, especially in the U.S. gateway cities. This pressure on underwriting results from the competition for assets from abroad, including countries where the returns on investment may not be the most important reason for the investment, and from many capital sources chasing fewer assets that generate real current cash flows. In addition, lenders seem to be making changes in their underwriting and are loosening their standards on deals in order to get their loans made, although we are not seeing the excesses that were present in the peak of 2007. Even in some secondary markets, real estate acquisitions are harder to underwrite and more competition from capital sources is pushing up values, making the actual returns on investment more questionable.

GlobeSt.com: How should investors be protecting against the downside while still finding successes?

Rutter: This is the critical question for investors over the next few years. Investors should plan on making sure they can hold the assets through the next cycle and need to have a capital structure in place that gives them a high degree of comfort they can service the debt on a project in an environment of lower occupancies and lower rents. Investors need to stress test their proformas using assumptions that reflect the last downturn. Importantly, capital investors should align and partner with sponsors and co-investors who have the experience of dealing with prior downturns, who have the financial ability to fund their shares of capital calls that may be required to deal with shortfalls in operating revenues or unexpected capital expenditures, and who have the reputation of honoring their commitments in difficult situations.

GlobeSt.com: Multifamily development continues to outperform single-family residential. What does this say about the economy, and do you see this dynamic changing in 2015?

Rutter: The outperformance of multifamily developments reflects the change in home ownership by millennials, the fallout of the great recession, as well as the increasing urban density of many of our cities. The recession forced many folks to abandon their dreams of home ownership and return to renting. Millennials appear willing to live in higher density areas, taking advantage of shorter commutes, using amenities within walking distance, and enjoying the benefits of a true urban experience. These factors have spurred continued apartment and condominium development; however, I personally believe that the lure of single-family home ownership will attract many current renters into ownership if and when real wages show some growth and as the millennials start their families. If a young family has the down payment and steady jobs to handle a mortgage, many of them will want to own a single-family home if that is financially feasible. Home ownership has been a source of wealth growth in the U.S. for several generations and I do not see that changing. High-density living is great for couples and singles, but families with children will generally prefer to have the space and privacy that home ownership provides, so I see single-family home development increasing in future years; however, I believe the size of single family homes may change over the next several years to be more affordable and that new types of housing may develop to reflect changing demographics.

GlobeSt.com: What are your economic and capital markets predications for the coming year?

Rutter: I predict that the US economy will continue to heal and grow over the next year, at a slightly better pace than last year. I see interest rates increasing toward the end of 2015, but at a very slow rate. I think that real estate prices, especially in the gateway U.S. cities, will continue to be pressured on the upside by demand for yield and capital flows out of countries with high political, economic or social risk. However, I do not believe that real estate prices will grow at the rates we have seen over the past couple of years and that prices will grow at a more moderate rate, especially as inflation remains very low.