Inflation Could Stay Higher: What it Means for CRE

The June Consumer Price Index offered some good news: inflation dropped to 3.5%, driven by lower oil and gas prices.

However, that state of affairs is unlikely to last, especially as tensions in the Middle East are heating up again, suggesting the U.S. isn’t free from the elevated inflation cycle just yet.

In a recently released video, “Inflation Risk: Headwind or Opportunity for CRE?” Vice President John Chang discussed the realities of inflation and its potential impact on commercial real estate.

First, the ongoing Middle East conflict could lead to an “extended cycle of elevated prices, which, in turn, could sustain inflationary pressure,” he said. It could also signal a higher probability of a federal interest rate hike by the end of the year.

Second, other inflation metrics, like food, housing and medical care, have comparatively low inflation numbers in the 2 to mid-3% range. Energy prices, which affect transportation costs, could lead to ongoing higher headline inflation.

Third, this isn’t unexpected news for commercial real estate investors. “In large part, the risk of potential rate increases is already baked into Treasury and lending rates, and because they’re already baked in, the cost of debt capital should remain relatively stable,” Chang said.

Fourth, even in an extended inflation cycle, commercial real estate is one of the few investments that can offer some inflation resistance. “Despite elevated uncertainty, despite the Middle East conflict, and despite tariff-driven headwinds, all four of the major property types are generating positive space demand,” Chang said.

Based on preliminary reports from Q2, office properties reported a ninth consecutive quarter of positive net absorption, while apartment demand pushed vacancy rates lower. At the same time, retail and industrial space had relatively stable vacancy rates.

Finally, inflation could decline, and economic momentum could strengthen if a resolution to the Middle East conflict is reached. That could also improve real estate fundamentals.

As investors look forward, they have to consider the durability of commercial real estate and its inflation resistance,” Chang said. “Then, when the economy shifts gears, this sector could be invigorated.”