Inflation Hits 30-Year High, May Drive Investors to CRE

Inflation hasn’t been this high in 30 years, and it might drive investors further into commercial real estate, which has had a long history as an inflation hedge due to its propensity to generate cash flow.

The Consumer Price Index for All Urban Consumers increased 0.9% in October after rising 0.4% in September, according to the Bureau of Labor Statistics. Over the past 12 months, the all-items index increased 6.2%, the highest rate since the early 1990s.

Take away the volatile food and energy sectors — the so-called core rate of inflation — and price increases are still fairly high year-over-year, with the index for all items less food and energy up 4.6% over the past 12 months, the BLS reports.

Some goods and services have spiked dramatically over the past year, including used cars and trucks (up 26.4%) and new vehicles (up 9.8%, which is the largest 12-month increase since May 1975). However, some sectors saw price increases of less than 4.6% year-over-year, such as shelter (up 3.5%) and medical care (up 1.3%). A few even experienced decreases, such as airline fares (down 4.6%).  

The prospect of more inflation in the coming months has investors looking to real estate. 

“During an inflationary time, like we’re seeing now, costs will go up,” Cadre Managing Director Dan Rosenbloom told Wealth Management

“So, your basis looks more compelling related to what replacement cost would be,” Rosenbloom said, adding that Cadre, a real estate investment management company, is looking more closely at multifamily as an inflation-resistant asset class. 

Not everyone is persuaded that this run of inflation will last or will be anything like the worst of late 1970s and early ’80s inflation, which peaked around 13% in the early Reagan administration but was eventually quelled by high interest rates (the prime rate peaked at 21.5% in late 1980).

At its Nov. 3 meeting, ahead of the latest inflation numbers, the Federal Reserve’s Federal Open Market Committee downplayed the risk of inflation, asserting that its longer‑term inflation expectations are still 2%. The FOMC did, however, also say that the Fed is reducing the monthly pace of its net asset purchases by $10B for Treasury securities and $5B for agency mortgage-backed securities, which is considered a stimulus for the economy.

“The economy continues to expand, but because demand growth exceeds supply growth the price level in the economy is rising, producing inflation,” JLL Chief Economist Ryan Severino writes. “In that sense, inflation can be viewed as a by-product of a positive development — a strong snapback in demand that supply is struggling to keep pace with.”

Inflation will remain elevated compared to pre-pandemic levels for some time, according to Severino, but not devolve into the nightmare of the late ’70s and early ’80s. He predicts that demand for consumer goods will probably level off next year, and the kinks in the global supply chain will smooth out as well, removing some of the inflationary heat from the economy.

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