Inflation is the current controversy of the moment among economists and, consequently, American business. The concern: billions of government fiscal stimulus and a Fed monetary policy in place since the Great Recession could fuel a wave of cumulative demand from millions arising from the isolation of the pandemic, causing a wave of inflation it was not seen in decades.
Could this happen? Possibly. Economists are strongly divided on the issue, but it helps to remember that the Tax Cuts and Employment Act of 2017, which also bombed billions in the economy, saw no inflation problem.
The important thing to be aware of commercial real estate is that inflation is not monolithic. Rather, different aspects of trade can have very different effects. Some of the concerns are the opposite of what many of the properties thought a year ago.
“If we went back 12 months ago, the big concern I had from customers was that we would become Japan,” JLL chief economist Ryan Severino tells GlobeSt.com. “We have now gone from not being able to generate inflation and raising interest rates until the 1970s. That’s how I know none of this was likely to be true.”
This is not to say that inflation does not exist.
“It is clear that there is an imbalance between the supply and demand of many goods and services in the economy right now because the supply chains disrupted by the pandemic are not prepared for the increase in fiscal stimulus and the economic reopening of demand, “said Mark Fleming, chief economist at First American Title Insurance Co., explains GlobeSt.com. “There are good arguments for this inflationary pressure to be temporary as supply chains will recover, but there are also broader concerns about the amount of fiscal stimulus and weak monetary policy that causes a long-term overheating of an economy which is already growing well above the trend. “
There is also the question of where inflation is occurring because price increases did not show solidarity. “While the 4.2% price increase over the last year was a remarkable impression, the figures suggest that it was not a base increase in all goods and services,” said Peter Essele, head of Commonwealth Financial Network Investment Management, in a May 21 statement. “In fact, of the main categories of expenses used to calculate the number of headlines, only a few exceeded 4.2%. They highlighted energy commodities, used cars and trucks and transport services — specifically, air fares and vehicle insurance — which recorded annual price increases of 47.9%, 21% and 5, respectively. 6%, respectively. The other major expenditures matched the long-term averages. “
There are aspects of inflation, such as inflation rising wood prices, this may reach the industry, but again, not equitably. “In the real estate industry, there are discussions about the price of wood,” Severino says. “Now the land is very expensive. Anyone who wants to build, especially in terms of housing, where there is evidence that there is little supply of supply for demand, and that is a problem. But that’s not all CRE.
In addition, inflation is relative. “People don’t understand that we’re growing prices that fell last year,” Severino adds. The jump in inflation partially restores previously falling prices.
That said, depending on where someone plays in the industry, real inflation may not matter. Short-term leases allow you to market faster. Long-term leases give less flexibility to respond. But, as Severino says, “if it’s longer, there’s usually a clause in the CPI leases.”