Inflation and Its Effect on the Market

During the early stages of the Covid pandemic, supply chain disruptions due to plant shutdowns and widespread employee shortages resulted in price increases as demand rapidly outweighed supply.  Consumers have remained burdened with high prices on most goods, and prognosticators are predicting that costs will remain high or continue to increase moderately for the foreseeable future.

With this inflationary period no longer transitory, consumer concerns have shifted to thoughts of a potential recession. Gasoline and diesel prices, a significant influence on inflation, are up almost 74% nationally over the last 24 months. When fuel costs more, getting products to the shelves means consumer goods cost more.

How does a sustained inflationary environment affect the real estate market? Repeated Fed interest rate hikes this year have quickly tampered with residential borrowing.  In the commercial real estate market, higher interest rates on lending prevent investors from earning the same yields for the same investment as just a short time ago.

Negative cash flows can become more commonplace in the sensitivity analysis of acquisitions. When investors become apprehensive and apathetic about acquisitions, the market stalls.  Sellers that still want the higher priced, lower cap rate for their properties; investors become nervous due to the higher interest rates and inherently concerned whether rental rates will continue to rise to support the debt being placed on the asset.  When users of commercial real estate find that their acquisition matrix for acquiring properties no longer provides a cost benefit to ownership, the market will slow down even further. This can result in a significant reduction in the commercial real estate participation rate.

All this market is looking for is stabilization. The Federal Reserve Chairman, Jerome Powell, recently cautioned that monetary policy is likely to stay restrictive until real signs of progress emerge on inflation.  Let’s keep a watchful eye on the economy and hope for the best.