Inflation might wreck this asset class

Written by Tyler Kastelberg

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Happy Sunday!

The data is in – the consumer price index surged 6.2% from a year ago, the most since October 1990.

In light of the big economic report, I’m going to use this letter to share my predictions about the impact of inflation on the current commercial real estate market.

Grab a drink, put your feet up, and let’s get to it. If you’re new here, subscribe to my weekly letters here.

1. The market will weaken

Inflation is one of the biggest enemies of a strong economy. The Fed will likely accelerate its plan to end bond buying and increase the overnight borrowing rate, which should increase borrowing costs for commercial real estate.

Increased borrowing costs will put pressure on valuations, and my bet is that we’ll start to see fewer broker-blasts about new all-time high sales.

2. Asset prices won’t fall very much, if at all

Real estate operators probably won’t be impacted by short-term changes in borrowing costs as most have locked in low rates from the past 3 years. The only way we’d experience a dramatic drop in real estate prices is if operators are forced to sell their assets into a weak market. I don’t think this will happen, especially not at scale. 

3. Inventory will fall, but competition for assets will remain high

With weaker market conditions, I believe the number of on-market listings will fall (yes, even lower than it already is). However, there is a ton of money in circulation, and sponsors will still be looking for deals. 

While the market won’t be great for sellers, it won’t be that great for buyers either. I’d expect a period of stagnation where there isn’t as much deal volume.

4. Most asset classes will be fine, but I worry about office assets …

Most asset classes should be able to ride out this “inflation” storm. Rents and operating costs will likely rise at commensurate rates, and I doubt we’ll see too much pressure on multifamily, industrial, and retail operators.

However, office assets may get squeezed. Demand for office spaces continues to be lower than pre-pandemic, and I don’t believe it will come back anytime soon.

Most office owners won’t be able to lift rents with inflation. At the same time, their operating costs and capital expenditures will likely increase.

Owners with debt-laden properties might find themselves in forced-sale situations.

That’s all for this week. Send me a reply with your thoughts about what inflation means for the real estate market.

Catch you next week!

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