Analysis: Core Inflation and Implications for CRE

The Federal Reserve’s Sept. 20, 2023, press release justified its actions in holding the Effective Federal Funds Rate (EFFR) at its current range of 5.25% to 5.5%. Briefly:

Economic activity “expanding at a solid pace”

Continued substantial job gains and low unemployment

A “sound and resilient” U.S. banking system

Interestingly, the Federal Reserve Open Market Committee (FOMC) kept the rate steady, even as the Consumer Price Index increased 3.7% through August 2023. This was higher than the 3.2% reported in July and a tad higher than the predicted 3.6%. The reasons for the increase included higher gas prices and an increase in airline fares, vehicle insurance and car repairs.

A recent Marcus & Millichap report, “Core Inflation Continues to Cool: Implications for Housing, Industrial and Retail Space,” said that yes, the metrics “could suggest a re-acceleration of price hikes.” But in reality, that isn’t likely. “The cyclical nature of the increase suggests that inflation is still broadly slowing,” the Marcus & Millichap analysts said.

The report also outlined inflation’s impact on the following:

Multifamily – Rents Continue to Cool

Yes, the shelter index increased by 7.2% year-over-year in August. But the figure continues decelerating “as both rent and owner’s equivalent rent tapered to their lowest metrics since November 2022,” the report explained.

Additionally, the housing/shelter indices lag market conditions due to the annual nature of leases and “are likely only reflecting market conditions from earlier this year,” the report said. Depending on whether the source is RealPage or Yardi Matrix, multifamily year-over-year rent growth increased by a meager 0.3% to 1.5% in August, respectively.

With more than 200,000 units anticipated to be delivered during the rest of the year, rent growth will likely continue to creep along.

Industrial – Increased Manufacturing Demand Could Help

Certainly, diesel fuel costs are providing a challenge to logistics and warehousing companies. Yet energy use prices for manufacturers are easing due to the reduced price of natural gas. The Marcus & Millichap analysts indicate that manufacturing created 12,000 new jobs, with “recent sizeable move-ins” from tenants including GlobiTech, Tesla and LKQ. Ongoing demand should mean vacancies remain below the long-term mean of 7.1%.

Retail – Concern Over Consumer Spending

Perhaps surprisingly, retail properties did quite well in early 2023. But, the report explained that higher gas prices could impact retailer performances. Households spending more on transportation costs could spend less on goods and services. This, in turn, could “potentially reduce near-term motivation for retailers to grow footprints,” the report said. While net absorption is projected to stay below the long-term average of 87 million square feet, “a mild late of deliveries” could pressure the national vacancy rate while keeping asking rent growth historically elevated.

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