The most recent inflation numbers, 9.1 percent, could potentially impact how much capital goes toward various property types throughout the U.S., Marcus & Millichap’s John Chang told GlobeSt.com. Chang noted that energy prices were a key contributor to high inflation numbers, however.
“But if you strip out the cost of energy and food, just looking at core inflation, the picture is a bit more promising,” Chang said. “Core inflation was only 5.9 percent, and that’s down 60-basis points from its peak in March, and that tells me a lot.”
So, while the energy sector has pushed up inflation numbers, other arenas have seen their prices fall — lumber is down 49 percent from January and steel prices dropped 41 percent since March. Meanwhile, it costs $7,000 to ship a container from China, vs. the $20,000 it cost in September, GlobeSt.com reports. Gas prices have also started to decline.
“It looks like the inflationary pressures may be leveling off, but we’re not in the clear yet,” Chang said.
He also noted that the war in Ukraine likely will continue to impact oil and food prices. Plus, even if inflation does level off, it will still be high, and the Federal Reserve will have to implement future rate increases.
Meanwhile, “blinking recession indicators are spooking Wall Street,” according to Chang. Wall Street’s concerns have led to a stock market downturn and long-term interest rates. Meanwhile, the yield in the two-year Treasury has surpassed the 10-year Treasury yield, which could indicate an upcoming recession. However, Chang said the three-month Treasury is a better indicator than the 10-year and the spread has not inverted yet, GlobeSt.com reports.
“Remember, a yield curve inversion is not a bulletproof indicator that a recession is coming,” Chang said.
Inflation’s impact on CRE
CRE investors can take several things away from the recent inflation numbers, according to Chang. CRE is deemed a less volatile asset, so it’s attracting more investment capital and balance sheet lenders may offer lower rates than credit market lenders. Additionally, a lot of inflation-resistant CRE properties such as hotels and self-storage units are still favorable. Meanwhile, suburban office space is attracting more capital due to its strong rental upside.
Chang also noted that investment capital is moving from last year’s more in-demand areas to higher yield secondary and tertiary markets.
“There’s a lot of capital out there looking for the durable inflation resistant returns offered by real estate,” he said.