National Inflation Averages Hide Local CRE Opportunities, Marcus & Millichap Says

Higher-than-expected September inflation has been driving the CRE narrative of increased cost of capital, along with rising operating and construction expenses.

The consumer price index rose 3.7% year-over-year in September, according to the U.S. Bureau of Labor Statistics, while the producer price index for final demand climbed 6.3%

A recent Marcus & Millichap video said that the main inflation drivers have been energy prices, up 20.4% year-over-year, and transportation costs, up 7.8%.

“But we have to remember that, while we have a national inflation rate, not all states or metros are facing the exact same cost increases,” Marcus & Millichap Senior Vice President John Chang said in the video.

Metro-Level Differences

Chang pointed out that, on a year-over-year basis, inflation was:

• 1.3% in Houston, TX
• 1.9% in Tampa, FL
• 2.5% in Phoenix, AZ

On the other side of the spectrum, inflation stood at:

• 4.5% in New York, NY
• 4.7% in San Diego, CA
• 5.2% in Hawaii

Diesel, a primary driver of inflation, shows the same pattern. Nationally, diesel averages about $6.30 per gallon. But the Chang said that diesel ran about $5.60 to $5.80 in North Carolina, South Carolina, Georgia, Texas and Louisiana. Meanwhile, California reached about $8.50 per gallon, with prices in Washington, Oregon, Nevada and Hawaii ranging from about $6.75 to $7.30.

“My point here is that national averages don’t tell the whole story, and that carries over to commercial real estate,” Chang said.

Wide Ranges Within Property Types

Chang acknowledged that broad trends, including elevated inflation, slowing job creation and rising interest rates, generate CRE headwinds that can impact cap rates.

But the opposite is true when digging down to the metro, submarket and asset levels.

For example, office cap rates differed, depending on the property:

Apartment cap rates also showed a wide range:

Chang said that many investors will push higher in the coming months, providing opportunities for investors. In addition, “motivated sellers are already reevaluating their pricing, creating unique investment opportunities,” he added.

Overall, the national economic and investment headwinds are real. But they can vary when you get down to the market and property level.

“At some point, the headwinds will abate,” Chang commented. “As that happens, core commercial real estate drivers like demographics, slowing construction, and pent-up demand will reassert.”

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