There is no official body or organization that formally declares when the US economy enters a period of stagflation – that is, an economy characterized by slow economic growth, high unemployment, and high inflation occurring simultaneously. And it is highly debatable whether the US economy is suffering from these conditions or may in the near future. However, a growing number of observers believe CRE specifically has a problem with it, including most recently CoStar Group.
It notes that the current rise in borrowing costs coincides with a significant slowdown in income growth across most property sectors, as property incomes peaked at 8.4% year-over-year in the first quarter of 2022, but have since tumbled to 3.6% in the first quarter of 2024. “The current stark reduction in property income signals stagnation inside commercial real estate, with sluggish income growth averaging 3.6% across all sectors, barely outpacing the headline inflation rate of 3.4% in April 2024,” it said.
So far the impact of stagflation is varying widely by sector, it continued, noting that REIT-owned manufactured homes, industrial properties and healthcare facilities reported hearty annual income growth averages of 8.4%, 7.8%, and 7.6%, respectively, while the apartment sector showed a meager 2.5% annual income growth average. And property income growth averages for the office and self-storage property sectors have turned negative, each experiencing around -0.3% average income growth year-over-year.
But while CRE may be struggling with stagflationary elements, the current US economy does not reflect at all the conditions seen in the 1970s when stagflation was widely seen as rampant. Then, inflation reached staggering levels, with the Consumer Price Index peaking at 14.8% in 1974 and remaining in double-digits until 1982. Also, real GDP declined in 1974 and 1975 and while current data suggests a slowdown in growth, an outright contraction is unlikely.
But with the economy as uncertain as it is, worries abound that it may enter a period of stagflation. In an interview in April with the Associated Press, JPMorgan Chase CEO Jamie Dimon said he was hopeful the Federal Reserve can bring down inflation without causing a recession but wouldn’t rule out stagflation.
“You should be worried about” the possibility of stagflation, Dimon said.
A month prior to that, strategists from the Bank of America wrote that the macroeconomic picture is “flipping from goldilocks to stagflation,” which they defined as growth below 2% and inflation of between 3% and 4%. Inflation is higher in developed and emerging markets, while the US labor market is “finally cracking,” wrote Michael Hartnett.