Executive Summary
• The Consumer Price Index (CPI) rose by 8.5% annually in July, down from 9.1% in June and better than consensus estimates of 8.7%. The 5.9% increase in core inflation, which excludes food and energy prices, was lower than estimates of 6.1%.
• Inflation was unchanged from June, thanks to a decrease in energy prices.
• Core inflation remained high enough for the Fed to raise the federal funds rate by another 50 or 75 bps in September.
• CBRE expects inflation will close the year at 7.4% and fall to 3.0% by year-end 2023, still above the Fed’s 2% target.
• Economic growth will slow further amid tighter financial conditions, which will weigh on commercial real estate fundamentals and investment volumes.
July CPI
Prices increased by 8.5% annually in July but were unchanged from June levels, largely due to falling fuel prices. Core inflation, which excludes food and energy prices, increased 5.9% from a year ago and 0.3% from June. These elevated rates ensure that the Fed will continue to tighten monetary policy to bring inflation closer to 2%.
Impacts on Commercial Real Estate
Multifamily
Falling gasoline prices were offset by rising shelter and food costs in July. Rents rose 5.7% annually, food increased by 10.9% and “food at home” (groceries) increased 13.1%. Challenges in the single-family housing market due to higher mortgage rates and broader affordability issues, along with a strong labor market, continue to support multifamily fundamentals. However, rent growth may slow as economic conditions weaken and consumer budgets are stressed.
Industrial
The nearly 8% drop in gasoline prices last month provided some relief to the logistics sector, although gasoline was still 44% more expensive than a year ago. Continued supply chain improvement bodes well for the industrial & logistics sector, but a worsening economic outlook may weigh on demand for warehouse and distribution space.
Office
Prices for services (excluding energy) rose by 5.5% year-over-year in July. A more uncertain economic outlook will continue to weigh on the office market. However, leasing demand should pick up next year.
Retail
Retail sales will continue to come under pressure as inflation erodes consumer spending power. Prices for “food away from home” increased by 7.6% annually. Apparel fell by 0.1% month-over month as retailers began discounting items to offload large inventories. We expect a slowing economy will weigh on consumer spending later this year, particularly for restaurants and travel-dependent sectors.
Hotels
Airfares fell by 7.8% and hotel average daily rates by 2.7% month-over-month in July. Post-pandemic travel demand may wane as higher prices for essentials (food, shelter, gas) limit consumer spending.
Looking Ahead
CBRE expects that inflation will subside as interest rates rise and supply chain disruptions ease. CBRE forecasts that inflation will finish the year at 7.4% and fall to 3.0% by year-end 2023. We expect the federal funds rate will peak around 3.75% next year. Tighter financial conditions and a weaker macroeconomic environment will weigh on real estate fundamentals and investment volumes will decline but remain relatively strong on a historical basis.