Executive Summary
• The Consumer Price Index (CPI) rose by 9.1% annually in June—a 40-year high. Core inflation, which excludes food and energy prices, increased 5.9%. Both exceeded economist expectations.
• Based on today’s report, we expect the Fed will raise the federal funds rate by 75 basis points (bps) later this month and most likely by another 50 bps in September.
• June’s 9.1% reading likely will be the peak as energy prices are declining and tightening monetary policy will slow economic activity.
• CBRE expects inflation will end the year at 6.8% and fall to just 2.9% by year-end 2023, which is still above the Fed’s 2% target.
• We expect the economy to slow over the next 12 months, weighing on commercial real estate demand. Nevertheless, real estate fundamentals should remain solid over the near term.
June CPI
Headline inflation increased by a 40-year-high 9.1% annually in June (1.3% month-over-month). Price increases in June remained broad-based, driven by food and energy. Core inflation, which excludes food and energy prices, increased by 5.9% from a year ago and by 0.7% month-over-month. The Fed will need to continue tightening monetary policy to reach its 2% inflation target.
Impacts on Commercial Real Estate
Multifamily
Consumers were particularly hard-hit by price increases in essential goods and services last month. Rents rose by 5.8% over the past 12 months, food increased 10.4% and “food at home” (groceries) jumped 12.2%. A housing supply shortage and strong labor market continue to underpin strong multifamily fundamentals. However, wage growth is not keeping up with inflation and savings are being drawn down. As a result, increasingly strained household budgets will limit renters’ ability to pay higher rents in coming quarters.
Industrial
On a year-over-year basis, gasoline prices rose by 59.9% in June (11.2% month-over-month) but have begun to fall, which is welcome news for logistics operations. While slowing economic growth will cool demand for logistics properties, this will be balanced by a strong labor market, higher inventory levels and fewer supply chain disruptions—all of which support industrial & logistics real estate.
Office
Prices for services (excluding energy) rose by 5.5% year-over-year in June. A more uncertain economic outlook likely will slow the office market’s recovery as 2022 progresses. However, leasing demand should pick up next year as a clearer macro-economic picture emerges.
Retail
Retail sales are beginning to slow as inflation erodes consumer spending power. Prices for “food away from home” increased by 7.7% annually, while apparel rose by 5.2%. Travel, restaurants and tourism-related retail are benefiting from a shift in consumer spending from goods to services. However, we expect a slowing economy will weigh on consumer spending later this year.
Hotels
Airfares rose by 34.1% annually in June, while hotel average daily rates were up 11.5%. The strong labor market and pent-up demand should support the travel sector over the near term; however, discretionary spending will be affected as household balance sheets weaken and broader economic growth slows.
Looking Ahead
CBRE expects inflation will subside later this year due to a softer labor market, better functioning supply chains and slower economic activity. We expect inflation to fall to 6.8% by year-end 2022 and to 2.9% at year-end 2023. We also expect the federal funds rate will peak at 3.75% next year. This will contribute to an economic slowdown but one that will not be as severe as those during the pandemic and the Global Financial Crisis. Real estate leasing and sales will slow in step with weaker economic growth; segments of the hotel, retail and multifamily sectors that cater to budget-conscious consumers likely will be most affected.