Research Brief: Inflation
August 15, 2022 | Marcus & Millichap
Multiple Real Estate Sectors Poised to Benefit from July Inflation Slowdown
Inflation trend may be turning corner. The headline Consumer Price Index in July was up 8.5 percent compared to a year prior, a deceleration from the 9.1 percent year-over-year jump recorded in June. This slowdown was driven predominantly by a month-over-month decline in energy prices, led by a 7.7 percent drop in the gas price component of the index. The costs of other items, most notably food, continued to rise however. Setting aside energy and food, core CPI advanced 5.9 percent year-over-year in July, matching the pace set in June but below the 6.4 percent year-over-year increase reported in March. Stability in the core index paired with a smaller rise in the headline rate suggest that inflation may have peaked, likely a reflection of less impeded supply chains and tightening monetary policy.
Supply chains factor into inflation, industrial space demand. While the collective 225-basis-point increase in the federal funds rate so far this year is weighing on borrowing activity, it is not the only factor contributing to decelerating inflation. Supply chains are also showing improvement. The transit time between shipping goods from China to the U.S. has declined from a pandemic peak of 83 days to 63. While still above the pre-2020 norm of 48 days, this shift is nevertheless helping supply better meet demand, softening upward pricing pressure. Adapting to these challenges has translated into a robust uptake in industrial space. Absorption has been elevated since mid-2021, driving the national vacancy rate down 120 basis points year-over-year in June to 3.7 percent, its lowest level since at least 2000. Record construction should help stabilize availability this year, with competition by tenants propelling asking rents up by double-digit percentages.
Additional quantitative tightening still on the docket. While slowing, inflation is still high, which will likely prompt the Federal Reserve to raise the overnight lending rate again in September. Next month the Fed will also double its level of balance sheet reductions to $95 billion in monthly volume. Long-term interest rates, such as the 10-year Treasury, will likely feel upward pressure as a result. The combination of elevated inflation and climbing interest rates will be a challenge for investors, however, the market has already begun to recalibrate. In some cases, prices are being adjusted or buyers are reducing leverage. Investors may also be considering new locations or asset types. Overall, the market is liquid, with investors holding favorable long-term outlooks.
