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Inflation Impacts on Occupiers

A great deal has been written about the impact of inflation (and the Fed’s continued interest rate hikes) on commercial real estate. The cost of capital is going up, meaning deals that made sense even six months ago don’t quite so much. Increasing land, labor and material costs, along with gas pump and energy sticker shock, are making it more difficult to construct and renovate.

What hasn’t been focused on quite so much is the impact of inflation on tenants occupying commercial space. Cushman & Wakefield’s Research Spotlight, “How Inflation is Impacting CRE Occupiers” noted that while tenants are “certainly not immune to inflation, the implications are not easy to generalize.”

One of the reasons is that tenants span a broad range of businesses and activities, reflected in how they use their real estate. For example, in examining inflation’s impact on industrial tenants, Cushman & Wakefield researchers said that these occupiers have higher rates of real estate ownership, meaning higher land and construction prices. Energy and transportation costs are also impacting these tenants. Meanwhile, retail tenants could see a decline in foot traffic (and lower profit margins), in addition to potentially carrying the brunt of transportation and energy costs. Tenants in office space are facing challenges of the trend toward work-from-anywhere (WFA), leading to a higher investment in information technology and consideration of different payment structures for remote employees. Additionally, Cushman & Wakefield point out that “many occupiers remain unsure about future office needs.”

Overall, the gap between labor supply and demand means labor shortages across sectors, with higher wage growth the result. Meanwhile, operational costs, such as materials, transportation, storage and supporting services are also increasing.

In the area of energy, Cushman & Wakefield analysts indicated that companies might put more effort into energy saving strategies, while occupiers that are energy-intensive could focus on hedging to help reduce financial risk associated with potential price fluctuations.

The report said that the services side (financial, legal, healthcare and wireless, for example) might not bear the brunt of inflation quite so much, except for labor costs. The shift in this case is in information processing equipment. Despite the semiconductor shortages, end users haven’t seen too much of a price impact.

What about real estate costs? Cushman & Wakefield analysts reminded readers that, with lease lengths ranging from five to seven years, occupiers typically are in a position to plan for rental cost increases. When it comes to base rent, “evidence suggests that market conditions more generally are driving rent patterns versus broader inflation, which should be good news for tenants.” But again, those tenants who want to build out might be more constrained, with the above-mentioned materials and labor costing more.

Because inflation isn’t going away anytime soon, Cushman & Wakefield’s advice to tenants is to focus “on broader market conditions when searching for space during period of high or low inflation.” As there are large variations by geographic region, market and property type, “occupiers should invest substantial effort in understanding these dynamics as they consider location and potential lease decisions,” the report said.


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Cushman & Wakefield

About Amy Wolff Sorter

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