Inflation trend may be turning the 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 suggests that inflation may have peaked, likely a reflection of less impeded supply chains and tightening monetary policy.
Additional quantitative tightening is 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.
Additional CRE Trends:
Multifamily outlook is largely unfazed. The impact of high inflation and rising interest rates is so far not having a substantial impact on the underlying need for housing. Demand for apartments surged in 2021, with net absorption eclipsing 650,000 units, nearly double the previous peak. That metric has been more tempered in the first half of 2022, due in part to delayed eviction proceedings, as well as limited options for prospective tenants. June’s 3.2 percent national vacancy rate was a three-decade-plus low for that time of year. Tight availability aids rent growth in the near term, while a structural housing shortage also lends strength to the outlook for the next three to seven years.Lower fuel costs boost hospitality outlook for rest of year. The energy component of CPI, which was up 43.5 percent year-over-year in June, took a notable step down last month, with prices falling across oil, gasoline, and natural gas. This shift bodes especially well for travel. Hotels have already seen increased bookings throughout the year, despite higher fuel costs. June occupancy was just above 70 percent, a pandemic-era first, even with an average daily room rate more than 15 percent above the same point in 2019, which helped compensate for higher costs. The ability to reprice rooms on a daily basis can also appeal to investors concerned about short-term cash flow during elevated inflation.
0.0% |
8.5% |
| Change in CPI from June 2022 to July 2022 | Year-over-Year change in CPI as of July 2022 |
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