Brokers Break Down Inflation’s Impact On Real Estate

From corporate strategy to consumer behavior, inflation is having a profound impact on economic decision-making. The Federal Reserve and U.S. legislators have taken action to try to curb its effects and avoid a recession. In the meantime, the commercial real estate industry is not immune to inflation’s effects. 

Rising costs are creating uncertainty in due diligence and financing, high competition in industrial investment and concerns about occupancy trends for offices. 

Members of CORFAC International, a global network of independently owned commercial real estate firms, are helping clients navigate the implications of these macroeconomic factors on their home markets as they make real estate decisions in the months ahead. 

“The rising cost of construction materials and labor are having a discernible impact on the office leasing market,” said Mason L. Capitani, principal of L. Mason Capitani/CORFAC International. “In many cases, these costs have increased 40% to 50% while office rental rates have not increased.”

He said that as a result, office space that requires major renovation is not leasing because property owners cannot make sense of the investment while tenants are typically unwilling to contribute to the cost of construction.

Capitani and other CORFAC office brokers also point to the growth of hybrid and remote work during the pandemic and the high costs of commuting as factors that may dissuade companies from making long-term office leasing decisions.  

On the industrial side, the outlook is brighter due to super-charged demand from the acceleration of e-commerce. According to Todd Monahan, executive vice president of Wolf Commercial Real Estate/CORFAC International, the industrial distribution market is hyperinflated with rapidly rising rental rates and vacancy at historic lows below 3%. He said that nearly all companies in warehouse and logistics are in expansion mode. 

Frank Schulz, managing principal of The Klabin Co./CORFAC International, echoes Monahan when talking about the effects of inflation and offered his prediction for capital markets in the near future.

“The effect of inflation is mitigated due to congestion and virtually zero vacancy,” Schulz said. “Rental rates have increased over 100% in the past 12 months. I anticipate rates to play a large role in capital markets over the next six months, but demand for space in a market with no space will continue to support rental rate growth.”

Capitani said that with the exception of major port cities, the rising cost of construction has played a role in limiting speculative industrial development. As a result, industrial vacancy rates have remained extremely low while rents and sale values have increased substantially.

The retail subsector is seeing uneven repercussions from the economic trends of the past two years. Small independent retailers continue to struggle as big-box retailers offer lower prices and more options and inventory, Monahan said. Supermarket expansion by companies such as Wegmans, Whole Foods and Trader Joe’s and quality quick-service restaurants are bright spots in retail.

Though inflation may be a global concern, local market dynamics are still shaping deal volume. Inflation is having a dramatic impact on construction costs and interest rates, which is driving up both commercial and residential real estate prices, said David Boyd, managing principal of Boyd Commercial/CORFAC International.

“With the growth occurring in Texas right now, I expect prices to continue to increase in our region throughout the remainder of the year, particularly with a steady stream of relocations coming to the area driving demand,” he said.

On the development side, Charlie Thompson, managing partner at Farebrother/CORFAC International in London, said the amount of capital available to investors is driving continued activity. 

“Cost of borrowing has increased,” he said. “Smaller-sized lot sales are taking longer to get any engagement, but purchasers with larger ‘war chests’ are able to carry on as normal, and trophy assets are still being traded at very confident pricing levels.” 

For prospective owners and tenants, deciphering economic trends and how they intersect with local market conditions can be confusing, especially as conditions evolve with new government policies and changes in consumer behavior. Trusted advisers like those from CORFAC International can tap unique market expertise from their network that help clients make sense of what’s happening now and make forward-looking decisions.  

This article was produced in collaboration between CORFAC International and Studio B. Bisnow news staff was not involved in the production of this content.

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