National Apartment Association: Expect Economic Pressures to Continue

At 9.1%, the new inflation numbers shouldn’t be enough to get you to panic, but they are plenty to generate concern. 

That’s true in most of CRE, but there’s some particular worry on the multifamily front, according to the National Apartment Association. The rent portion of CPI, or the consumer price index, otherwise known as inflation, was up 5.8% year over year in June. As the NAA noted, that’s the highest level since 1986, back when inflation was coming down from actual double digits without a decimal place.

That’s less than the headline 9.1%, but it’s still a serious number. And unlike the overall shelter component of CPI—which includes a current rent equivalent of homeowners, even though most are locked into fixed rates that don’t change over time—this is real, not theoretical, change. Multifamily owners and operators are adjusting rents upwards because that’s how they manage inflation and their own spiraling costs.

Taking out energy and food price growth, which are the biggest drivers, the remaining, called core inflation, was still at 5.9%, with new and used vehicles and shelter being the largest movers.

Also, the NAA says to keep in mind that estimated housing costs, whether apartments or owner-owned homes, lag actual costs because they’re sampled less frequently. “Shelter costs are expected to accelerate further but may peak in the third quarter,” the group’s report says.

There are signs that inflation could be about to moderate. The Fed pays more attention to personal consumption expenditures, or PCE, when making its decisions, and that’s downshifted from 0.5% increase a month to 0.3%. Still, it leaves the year-over-year measure at 4.7%, far over the average 2% the Fed aims for.

Global supply chain problems seem to be easing, “but the index remained elevated [due to] delivery times in both China and the Euro zone, as Covid restrictions and the prolonged Russian war on Ukraine take their toll on the supply chain.”

Not reflected in the report is a new problem, as well. Many independent truck drivers in California learned that they lost their bid to get out from a state law that looks to force them into being employees, not business owners. “Freight operators say tougher restrictions over independent contractors will raise costs and may push some drivers off the roads,” says the Wall Street Journal. That would have a negative impact on supply chains, drive up transportation costs, and could reignite how infrastructure contributes to inflation.

JLL chief economist Ryan Severino writes that the second half of 2022 is likely to be similar to the first half, including a hot labor market. Between that and the potential for new supply chain issues, expect inflation to be “higher for longer” and the Fed to get more aggressive, even though many in markets think the organization will back off with continued slowing growth.

“Slowing economic growth should cause cyclical forces to start to weigh more heavily on sectors and markets,” Severino writes. “Though this will almost certainly not occur in a uniform fashion, virtually no corner of CRE will find itself immune. While not doom and gloom, expect cyclical forces to play a larger role over the next 12-18 months.”