Inflation, Potential for Rising Interest Rates
Drivers of Inflation
Naturally, analysts and investors are heavily fixated on the market to examine the change of rate of inflation especially in a post pandemic world. Historically, change of inflation has positively impacted single family homes and while the performance of commercial properties typically decreased in value. The outlook of commercial properties is different as there is a gradual increase in the inflation rate. The primary causes of inflation are Demand-pull and Cost-push. This inflation period is driven by the shift in demand of consumers.
Hybrid Work
Hybrid work is making consumers stay home more. There will be less of a demand for retail and hospitality companies directed at the working professional. Restaurants have proven to be less in demand during COVID-19 as various companies were using propaganda to promote uber eats and postmates to avoid the shut down of restaurants. Now since an abundance of the population is vaccinated and beginning their lives again, will the demand of companies targeted at the working professional and restaurants return back to normal? Marcus and Millichap CEO, Hessam Nadji, exclaims hybrid work is here to stay and we should expect new demand to make gradual increases short term (Pollack). So what does this mean? Low inflation rates signify the demand for goods and services is lower than it should be, so economic growth and wage growth is slow as well.
Low demand can lead to a recession and as a result, increases in unemployment similar to what we saw during the Great Recession. However, demand is still present and is changing as the technological era emerges. Clothing, accessories and footwear together captured 19% of all U.S. e-commerce sales growth even as overall apparel and footwear spending declined during 2020. Forrester projects that digital sales in the clothing category will reach 47.5% by 2024 (Dive). We have to closely examine the new demand to see what the real estate market calls for. Nadji agrees, “The economy is reshaping itself, and within the next 12 to 18 months all of that will create new demand, whether it’s for office space or industrial warehouses… even retail is resurging – I’m talking about brick and mortar retail, not just retail in general. And, of course, housing is very hot.” Fluidity of the workplace and post pandemic culture is driving Americans to return to their favorite pastimes. With more of the country vaccinated and not needing masks, people cannot wait to abandon online shopping to return to the in person retail experience. E-commerce in the U.S. grew 30% in 2020, its fastest growth rate since 2002, according to an emailed report from Forrester. Yet, the research firm projects that 72% of retail will still take place offline in 2024 (Dive). It is really important for investors to examine this trend since during the pandemic Americans were relying heavily on e-commerce resulting in industrial properties to thrive.
Companies that had a great online presence were successful and profiting during this period while in person retail was struggling. The demand for goods and services during the e-commerce era was high and companies were mass producing. Now since consumers are returning to old habits and shopping in person, it will slow the market and support the idea that inflation rate is at a low right now. On July 13th, we’ll see June’s inflation data at a 5% annual rate for June and those expecting inflation to be transitory will hope to see some moderation. July 30th showed the PCE price index, providing another data point on inflation. It rose at a 3.4% year-on-year rate for the May release. Despite hesitancy in 2021, both bond, stock market and real estate market don’t appear worried about inflation. If inflation were a major concern for investors, their portfolios would be positioned differently. However, July and August will truly test June’s inflation data to further project how the market might evolve. Investors and developers need to be proactive in creating innovative and creative solutions to accommodate the change of consumer needs.
Effects of Inflation and importance in RE investments
Over the last decade, inflation in the US was at an average of 1.8%. Now experts are claiming higher than normal inflation rates and future inflation as a result of COVID-19. Regardless of the current state of the economy, there are things real estate investors can do so their portfolio thrives under these conditions.
Positives during the height of inflation are rising rents. It can be difficult to obtain a mortgage during times of high inflation. High mortgage rates cause buyers to have less purchasing power. The higher the inflation rate, the more likely interest rates are to rise. This occurs because lenders will demand higher interest rates as compensation for the decrease in purchasing power of the money they are paid in the future. Currently, lending rates have been at an all time low. Right now is the perfect time to invest to take advantage of the low interest rates before they begin to climb.