To state it simply, one way or another Inflation is impacting us all.
Either consciously or subconsciously, these changes in prices impact our behaviors and decisions. Here’s a run down of inflation’s impact on commercial real estate thus far.
Inflation is Impacting Consumer Behavior
According to a recent article, “Where Americans Are Cutting Back As Inflation Closes In” By TheStreet, these are some of the ways Americans have decreased their spending due to inflation:
73% on eating out
63% on consumer spending
57% on groceries
54% on vacation
44% on gas
35% on debt payments
These Changes are Well Justified
According to the Consumer Price Index (CPI), the inflation rate in March 2022 accelerated to 8.5%.
The sectors that have seen the strongest increases include used vehicles, services and commodities, and airline travels.
As Costs Increase, American’s Incomes Will Increase, Right?
Not necessarily, especially in the short term.
Although wages will adjust over time, this doesn’t always happen at the same rate as inflation. This is what we are experiencing right now: The Wage Growth is lagging behind inflation
While inflation accelerates to 8.5%, wage growth has been at 4.7%.
Because of this difference, it shouldn’t be surprising that consumers are left with no choice but to change their spending habits to adjust.
How Does This Impact Real Estate?
Every change in consumers’ behavior pulls on a thread in the tapestry of our economy.
With several threads being pulled at once, the real estate picture may look at little different.
In the first quarter of 2022, all commercial real estate sectors have experienced a positive net absorption, but each sector is faring quite differently.
In this blog, I will focus mostly on the industrial and multifamily sectors since they are the asset classes that are providing a stable hedge against inflation.
Industrial Rents are rising. In April 2022, industrial rents had increased 11% in the past 12 months. The south is the region with the fastest growing rents.
I’m pleased to report that McDaniel and Co’s hometown, Spartanburg, South Carolina, made the list for Top 10 Industrial Rent Growth as of April 2022 at 13.8%
What Factors Are Impacting The Industrial Sector?
Because wage growth rates are lagging behind inflation, consumers are spending less.
As the demand declines for goods, there is less demand for industrial facilities such as warehouses and distribution centers.
Gas prices may have a positive impact on industrial demand.
As transportation costs become more costly, it will become increasingly advantageous for companies to have distribution centers in strategic locations.
During the pandemic, the rise in online sales increased the demand for industrial real estate.
Due to the current supply chain disruptions, there has been a major shift from a “just in time” inventory method to a “just in case” inventory method. In other words, companies had cost effective systems where suppliers would deliver goods exactly when they were needed. This significantly reduced the need for warehouse space.
Just in time inventory is much less feasible now; companies are more inclined to order more goods than they would normally due to the supply chain issues.
As of April 2022, multifamily rents increased 9.4% in a twelve month period, which outpaced the 8.5% inflation rate. Therefore, multifamily rents have provided a solid hedge against inflation rate.
As the interest rate rises, more Americans may decide to rent instead of buy. This may explain why multifamily has the lowest vacancy rate among the main commercial asset categories despite it having the strongest rent growth in the past year (11.2% from April 2021-2022).
Have all multifamily asset classes seen this trend? The short answer is no.
While Class A and B multifamily has experienced an impressive rent growth trend, class C multifamily is rising at a rate behind the rate of inflation.
Like the industrial sector, the south has seen the fastest growing rents in the multifamily category.
Retail and Office
These Sectors Are Not Keeping Up With Inflation
Both the retail and office sectors are rising at a rate below the rate of inflation, so these asset classes are currently not strong hedges against inflation.
But There Is Some Good News
There are some sectors of retail such as strip centers that are doing well. One factor that is favorable for retail is that construction is not heavy in that sector; therefore, there is no large influx of new properties to push down current rents.
The good news for office space is that workers are going back into the office. At its peak, 35% of employees were working from home. As of April 2022, the percentage of employees working from home was at 8%.
While office and retail space rents are not keeping up with inflation, multifamily and industrial rents are rising faster than the rate of inflation.
Milton Friedman once said “Inflation is always and everywhere a monetary phenomenon.”
It’s interesting to step back and observe how this phenomenon is impacting the different sectors of our economy.
Please see the full article below that I used as a refence to write this blog!