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  • Writer's pictureJason Tuvia

Core Inflation Continues to Cool: Implications for Housing, Industrial and Retail Space

Keeping a close eye on economic indicators and trends is essential in today's rapidly changing financial landscape. In this blog post, we'll explore recent developments in inflation, their impact on various real estate sectors, and what experts are saying about the Federal Reserve's potential actions in the coming months.

Understanding Inflation Trends: Inflation has been a topic of concern for many, with the headline consumer price index (CPI) rising by 3.7 percent year-over-year in August. However, a closer look reveals that the increase is driven primarily by external factors, such as a 10.6 percent annual jump in gasoline costs. Core CPI, which excludes volatile energy and food costs, decelerated to a two-year low of 4.3 percent in August. This suggests that inflation may be broadly slowing, especially when energy prices stabilize.

Impact on Apartment Rents: For those in the real estate market, particularly renters and landlords, understanding the trends in apartment rents is crucial. The shelter index, which tracks various housing-related costs, rose by 7.2 percent year-over-year in August. While this may seem high, it's important to note that this figure has been gradually decelerating for five consecutive months. Recent data shows that the mean effective multifamily rent increased by just 0.3 percent year-over-year in August, almost a two-year low. This easing of pricing pressures may take time to reflect in core CPI calculations but could eventually assist the Federal Reserve in controlling overall inflation.

Industrial Properties: Industrial properties have been affected differently by recent economic shifts. Rising diesel fuel costs have presented challenges for transportation and warehousing firms, resulting in job losses in these sectors. However, energy prices used by manufacturers have eased, leading to the creation of manufacturing jobs. Recent large move-ins from companies like GlobiTech, Tesla, and LKQ indicate a growing demand for manufacturing space. This trend is expected to keep industrial vacancy rates well below the long-term mean of 7.1 percent in 2023.

Retail Properties and Gas Prices: Retail properties have remained stable in the first half of 2023, with a U.S. vacancy rate of 4.7 percent. However, the recent increase in gas prices could impact retailer performance. Higher transportation costs may lead households to allocate more of their incomes to commuting, potentially reducing discretionary spending on other goods and services. This could, in turn, affect retailers' motivation to expand their footprints. While net absorption in 2023 is projected to remain below the long-term average, limited new deliveries will help maintain historically elevated asking rent growth.

Federal Reserve's Stance: Despite the recent rise in CPI, the market is pricing in a 97 percent probability that the Federal Reserve will keep interest rates flat in September. High gasoline costs may have disinflationary effects, and the Fed is likely to focus on the sustained cooling of core CPI. However, the possibility of one more rate hike in 2023 remains relevant. The Fed's decisions will depend on factors like shelter costs and hiring trends in the coming months.

Keeping abreast of economic trends and their impact on various real estate sectors is crucial for making informed decisions. While inflation remains a concern, understanding its nuances and how it affects different industries is key. Additionally, monitoring the Federal Reserve's actions and expert opinions can provide valuable insights into the evolving economic landscape. Stay informed to navigate these dynamic financial times effectively.

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