The Federal Reserve is expected to raise its benchmark interest rates this week for the first time in a year and just the second time since rates plunged to nearly 0 percent at the outset of the 2008 financial crisis.

This action will likely kick off a steady stream of rate increases starting next year as part of Federal Reserve Board Chair Janet Yellen’s plan to bring inflation levels back to 2 percent from the current 1.6 percent.

The impact locally might be felt most immediately in L.A.’s booming commercial construction market, where debt financing will become more expensive. The same lending principle applies to the region’s frothy residential market, which could eventually cool if buyers become turned off by the prospect of higher mortgage payments.

While Yellen’s plan could run into hurdles if she and President-elect Donald Trump clash on economic policy or if the economy destabilizes, the chair and the Federal Advisory Council have signaled that rates must begin to rise in order to ensure long-term fiscal growth.

“It seems abundantly clear that the Fed will raise rates in December,” Russell Goldsmith, chairman and chief executive of Beverly Hills’ City National Bank, which is owned by the Royal Bank of Canada, said last week. “And if the economy continues to do well, we’ll see two to three rate hikes in 2017.”

If the prevailing wisdom holds, the practical effect of the looming rate hike is that capital will cost more for businesses and consumers to access, though that should happen incrementally as rates are expected to tick up by only 0.25 percent at first. Goldsmith said that in many ways the increase is a sign that the U.S. economy is in good shape – a position supported by the latest unemployment numbers (down) and gross domestic product figures (up).

“People should realize that when the Fed is raising rates after a lengthy period of time where they remained flat, it’s a positive indicator that the economy is doing well,” Goldsmith said.

The anticipation of the rate increase has already begun to impact the financial markets and lending. Benchmark 10-year U.S. Treasury note yields are at 17-month highs and Libor rates have inched up in the past month as well. Banks, too, are building the increases into their floating loan rates, a practice CTBC Bank Chief Executive Noor Menai said gives lenders a good cushion for their margins.

Rates on mortgages, for instance, have already begun to creep up, affording lenders an opportunity to borrow at current low rates and lend at higher numbers than in recent years.

“When rates rise, banks tend to do very well in the short and medium term because they have anticipated the rate rise,” Menai said. “Rates on deposits are relatively sticky while rates on loans go up more quickly.”

The banking industry, while at the center of the interest-rate impact zone, would be far from the only economic center to be affected by the Fed’s expected decision. U.S. stock markets, already at record highs this month, are expected to jump, while bonds are generally viewed as having a downward trajectory in the short term. On the practical lending side of the market, experts said both commercial and consumer borrowers as well as the M&A industry will have to make minor adjustments to compensate for rate increases.

Commercial appeal

There is general agreement that most healthy companies will have little trouble accessing the debt market as interest rates rise. But, like banks, smart corporate actors have already taken proactive steps to shore up their financial position in advance of the Fed’s December meeting, according to Patrick Schaffer, a global investment specialist with J.P. Morgan Private Bank in Century City.

“Every single, solitary firm or company that’s been paying attention has extended their fixed-rate terms,” he said.

Commercial loans without fixed-rate terms are, by definition, more volatile, and businesses saddled with this type of debt are in some cases hedging their loans with derivative lending structures to spread out risk and reduce the possibility of default, according to Schaffer.

This floating rate volatility could make an acute impact on project finance and construction loans, where there’s an almost direct correlation between rates and development costs.

John Livingston, chief executive of Aecom Capital, the real estate investment arm of downtown’s Aecom, said that even the smallest amount of market uncertainty caused by rate increases could spook lenders and make it more difficult for developers to access affordable capital.

“Rate increases create uncertainty and generally in times of uncertainty there’s a herd mentality among lenders,” he said. “If someone already has a project underway, they’re letting out a great sigh of relief, but for those going out trying to get debt equity there’s what I call a hole in the stack.”

This “hole” is the space left unfilled as different lenders become more conservative and reduce the size of loans they’re willing to extend developers. That would make things particularly problematic for smaller and midsize outfits, which might have to turn to hybrid loans featuring a mix of senior and mezzanine debt, and debt from other sources that carries higher rates.

In Los Angeles, the access to cheap capital created by historically low rates has helped fuel a construction boom with projects popping up from Boyle Heights to Playa Vista. With low rates lowering default rates, areas such as downtown – once a dead zone for development – have become suddenly resurgent.

“There’s been a tremendous amount of development because of low rates,” Livingston said.

While the era of historically low rates could be nearing an end, the coming incremental increases do create opportunities for some players in the space. Livingston said as developers push lending boundaries, opportunities will emerge for larger outfits to step in and rescue projects if they run into trouble.

“There will be some distressed real estate projects that can’t quite put it together,” he said. “That creates opportunities for larger guys to take advantage of the smaller ones.”

Confident consumers?

A rate hike could have a more material impact on consumer debt where, as the cost of debt will go up, consumers will see the prices of monthly mortgage payments increase apace. While this could mean a softening of the housing market, many observers said that might not be a terrible thing, especially in Los Angeles, where prices have skyrocketed in recent years.

“On the consumer side, rate increases will cause monthly payments to tick up,” said Goldsmith, who also acts as chairman of Royal Bank of Canada’s U.S. wealth management arm. “On the plus side, that could lower the demand for homes and decrease prices a bit.”

While the direct impact on the consumer debt market is initially felt by the borrower, if the market softens too much and consumer confidence edges downward, banks can be the ones ultimately left hurting.

“From a banking perspective, lending is not just about the access to capital but the demand for it,” CTBC’s Menai said. “Customers have to feel upbeat and that’s why consumer confidence is such an important benchmark.”

No deal downturn

One area where experts expect little change is in the deal market. Most players in the space are well-capitalized, and with debt still at near-historic lows, both private equity firms and companies looking for strategic purchases will be on the hunt for buy-low opportunities.

That could change, but it would take an unexpected spike in rates, according to Lloyd Greif, chief executive of downtown investment bank Greif & Co.

“(The) only thing that could chill M&A is a huge spike in interest rates,” Greif said. “Maybe a (smaller) rise in interest rates impacts financial buyers but not strategic deals.”

This, however, is almost a worst-case scenario. Barring a full-fledged recession or global disaster event, players in the deal space said they remain very optimistic about the market heading into next year.

“The market continues to be robust,” said Jim Freedman, chairman of Brentwood’s Intrepid Investment Bankers. “I don’t think capital is going away (as) interest rates rise a little bit, so overall I’m pretty bullish.”