Waiting Out Inflation: What’s Next for Commercial Real Estate? – by Shelly Branscom
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Architecture in the U.S. is unique and timeless. Even our modern structures have a classic and familiar feel to them. From Fallingwater in Mill Run, PA, to 1111 Lincoln Road in Miami Beach, FL, the creativity is endless. If you are still planning your summer vacation, do not forget to include site-seeing some amazing architecture in your itinerary. What else do you plan to do this summer? My summer vacations include riding our motorcycle in the mountains as well as a long weekend get-a-way with our children and grandchildren where we will enjoy both swimming and age-appropriate museums.
A summer of interest rate hikes? Most likely. Minutes from The Federal Reserve’s June meeting made it clear officials are eager to move rates up to a point where they are weighing on growth as policymakers ramp up their battle against inflation. The ramp up seems to be working as inflation hit 9.1% this month. Federal Reserve chair, Jerome Powell, has said central bankers will debate a 0.5 or 0.75 percentage point increase at their July meeting. Billionaire Sam Zell does not believe the U.S. is currently in a recession, and insists that “interest rates could go up a couple hundred basis points” without necessarily inducing a recession. Watch for the Feds announcement on July 27, 2022 after June’s latest job numbers and updated Consumer Price Index (CPI) inflation figures are released.
Can the average consumer wait out inflation? Probably not. Even with all of the shutdowns, because of the federal fiscal aid, people survived, and many increased their savings. After all, where were they going to spend their money? Unfortunately, the inflation wave has kicked up costs for consumer at a year-over-year rate of 8.6%. Credit card use is rising while savings are dropping. The hope of economists that most consumers would be able to hold out until inflation cooled is now up in smoke signaling big trouble for the economy. As savings balances drop and credit limits are pushed, eventually a time will come when more and more consumers have to slow their spending. This is a disaster for the economy!
Despite mounting economic headwinds, commercial real estate deal volume is expected to remain high in the second half of 2022, according to PwC’s midyear outlook on CRE deals. Nontraded REITs with capital to deploy from their sizable war chests and investors recapitalizing existing property-oriented funds will continue to fund deals moving into the third quarter and beyond. Grocery anchored retail centers, industrial real estate and hospitality investment deals have been hot. PwC forecasts niche sectors will interest investors more in the days ahead, calling them “cornerstones” of real estate investment activity. Such niches include cold storage, data centers and life sciences.
According to a First American Financial Corporation analysis, capitalization (cap) rates will start to rise. This prediction is “based on the historical relationship between interest rates, rental income, prevailing occupancy rates, the amount of commercial mortgage debt in the economy, and recent property price trends.” Currently cap rates are still a near-record lows. Multifamily and industrial assets set first-quarter price growth records, increasing at a faster rate than any other overall CRE price growth. “However, a record amount of industrial square footage is currently under construction and expected to come to market later this year, which may slow price growth for industrial assets and put further upward pressure on the potential cap rate as the year progresses.”
Given when cap rates rise, values fall, we will likely see the peak in commercial real estate values very soon. The good news is as previously reported, Albuquerque’s tertiary market is cushioned causing our peaks and values to never be as high nor as low as the nation. We are always slower to experience what the global markets experience and our outcomes are typically less impactful.
Commercial real estate is still alive. How are you planning to position yourself to take advantage of our continued low interest rates? Yes, that’s correct, even with the Federal Reserve increasing interest rates, they are still low.