What Last Week’s Inflation Report Reveals About the State of CRE

Last week the government reported an increase in headline inflation to 3.4% over the year ended 2023. Both energy and shelter costs saw an increase during the month of December. At the same time, core inflation continued to cool, down to 3.9% in the 12 months ended December. This suggests most consumer prices, excluding food and energy, remain on a steady downward path since reaching highs in June of 2022.

There was a lot to parse from the report, including the question of how it might affect the Fed’s plan to cut interest rates this year. Digging a little deeper, Marcus & Millichap also identified some CRE-specific trends of note.

For instance, shelter costs are still elevated, as the demand for housing remains strong and the affordability gap for homes increasing. Due to a supply increase, the rental market will start cooling to a below average 1.5% throughout the year. More stable rents should help level the core inflation metric.

In addition to shelter, gasoline prices and industrial space are considerations, as well. The cost of gasoline rose in December, but prices were at a near-annual low of $3.24 per gallon in November when U.S. inventories marked a 2023 high. Slower operations within the logistics and warehousing sectors are partially responsible for less demand for gasoline. While readjusting of industrial properties is occurring, the average asking rent for industrial properties will grow by 3.7% this year, Marcus & Millichap said. This is the fastest gain in any major property type for 2024.

The firm also noted that the retail sector maintained its strength last year despite higher costs for food and energy. This increase in food and energy could have impeded discretionary spending during the holiday season but showed no negative impact. Inflationary-adjusted core retail sales, which excludes restaurants, automobiles, and gasoline, rose 2.0% in 2023. While the cost of goods increased, personal credit reached a record at the end of 2023. This consumer resilience suggests positive retailer performance in the upcoming months.