The Azucena Take: Inflation and the CRE Market of 2022
It was reported in early January that core inflation has risen to 7.1% as of December 2021, making it the greatest increase since 1982. This has resulted in the Federal Reserve having to take action to bring inflation under control. These actions are going to have a major impact on the commercial and investment real estate market of 2022.
It first helps to understand what is causing the inflation followed by what the Federal Reserve is going to do and how it will impact the market. The three major factors contributing to the rising inflation are the disruption to the supply chains, the labor shortage, and the lack of housing.
Supply Chain Disruption: When the pandemic hit in 2020, everything came to a halt. By 2021; the economic restrictions were lifted and life was returning to normal, but the supply chains had failed to prepare for the economic boom. Manufacturers are having trouble acquiring raw materials to make goods, stores are having trouble acquiring goods, major ports are backed up due to a lack of truckers and containers.
Not helping is the fact that consumer demand is at an all-time high (up by +16% compared to 2019). By comparison, the number of goods being moved is down by -5% compared to 2019.
Labor Shortage: The number of jobs on the market is over 8 million but there are about 4 million who are unemployed. Despite rising wages and better benefits, several industries are having trouble finding staff. From trucking to the service industry are among the hardest hit by the labor shortage.
Lack of Housing: The labor shortage and the hit to supply chains have also resulted in a lack of affordable housing. Contractors are having trouble hiring workers and acquiring the needed material. Add in the demand for new homes and the result is a lack of housing on the market.
In response to the inflation; the Federal Reserve has announced they plan to accelerate the tapper of quantitative easing that has been in place since early 2021. This means that they will cut back on how much bounds they will buy back, putting upward pressure on long-term interest rates. Feds have also announced plans to raise interest rates by up to 3%, which will affect short-term interest rates.
What does this mean for the commercial and investment real estate market? Commercial real estate has been one of the safest investments during times of high inflation and thus there is going to be a lot more competition going into 2022. Apartments and storage will be the most sought after followed by industrial and retail spaces.
Those who already own several investment properties are going to be in a lucrative position. Even if the property is underperforming, 2022 is going to be one of the best years to sell or exchange it (via a 1031 exchange).
The Azucena Take provides an inside look into the investment real estate market using the research done and data collected by Marcus & Millichap.