Consumer Sentiment Sours Over Inflation Concerns

Consumer sentiment has fallen as inflation and rising prices associated with the Iran conflict persist.

Preliminary April data from the University of Michigan Consumer Sentiment Index shows that sentiment fell from 53.3 in March to 47.6 in April. This comes as consumers expect prices to rise at an annual rate of 4.8% over the next year and 3.4% over the next five to 10 years.

The economic pressures stemming from the conflict in Iran and uncertain access to the Strait of Hormuz, the recent main drivers in rising prices, aren't helping calm worries.

The consumer price index increased to a seasonally adjusted 0.9% last month, putting the annual inflation rate at 3.3%. The price of regular gasoline in the U.S rose 25%, from $2.91 in February to $3.64 in March, The New York Times reported.

Small businesses continue to feel uncertain about the state of the economy, a trend that predates the conflict in the Middle East.

Small-business optimism has fallen for the second consecutive quarter, according to the U.S. Chamber of Commerce Small Business Index. The index shows increasing unease over military action in Iran and rising inflation, Axios reported.

Concern about the economy may disrupt what so far has been a fairly stable, if unspectacular, beginning to the year for the commercial real estate industry.

The first quarter was the office market’s most active period since before the pandemic, with tenants signing 120M SF in new leases. The activity was the highest quarterly total since 2018.

Although activity has been strong, the leases signed have been smaller and shorter-term, partly due to the lack of new hiring taking place.

On the retail side, large retail landlords have been on defense, trying to protect themselves from any surprise economic hurdles. Nationally, retail vacancy stood at 4.3% at the end of Q4, but landlords have been scrutinizing tenants for their economic viability.

Lenders' cautious behavior is showing up in the rise in special servicing activity across the industry.

Trepp's CMBS special servicing rate rose to 11% in March, up nearly a full percentage point year-over-year, according to Trepp. The office and multifamily sectors had the largest increases in special servicing rates.