Research Brief: Inflation November 2022

Inflation Downshift Unlikely to Restrain Fed; Rapid Rate Increases Have Hampered CRE Sales

November 2022

Excerpt of Full Report:

Inflation falls to slowest pace since the start of the year. Headline CPI increased 7.7 percent over the 12 months ended in October, the smallest year-over-year increase since January 2022. While a notable deceleration compared to recent months, October’s downshift is unlikely to dissuade the Federal Reserve from raising the overnight lending rate again in December. The Federal Open Market Committee noted in its most recent forward guidance that it is looking for a clear trend of inflation normalizing toward the 2 percent target. Even so, the FOMC has also acknowledged that there is a delay between when monetary policies are put in place and when the economy responds, and last month’s slower price climb, paired with an uptick in unemployment, support a more moderate rate hike. The current expectation is for a 50-basis-point December rise in the fed funds measure, capping the fastest year of increases since the early 1980s

High housing costs reflect long-term apartment need. Over half of last month’s CPI increase was driven by higher housing costs. The rapid ramp-up in single-family home prices over the past few years has stalled recently amid a fervent ascension in mortgage rates, yet the combined result is the same — substantially higher barriers to ownership. While multifamily rents have also climbed notably since 2019, the pace is about half that of the typical home payment. Apartments continue to offer living cost and lifestyle advantages that appeal to the aging millennial generation, as well as up-and-coming Gen Z. In recognition of these housing needs, multifamily construction activity is set to hit a record magnitude next year. While the new supply is warranted in the long-run, in the short term it will drag on fundamentals, especially as high inflation and rising interest rates weigh on economic outlooks and prompt more households to stay put in 2023.

October’s inflation offers mixed outlook for retail real estate. The food price index climbed more slowly last month than in September, due to some cheaper items found in grocery stores, a helpful factor for shopping centers anchored by these vendors. Meanwhile, prices at restaurants have kept a consistent pace, but have risen less overall than at grocers. In contrast to the food segment, gas prices increased in October, ending three months of declines. Higher energy bills will, in turn, affect consumers’ decision making as they enter the critical holiday season. Nationally, retail vacancy has continued to tighten, and rent growth has improved over the course of this year

Core shift may foretell growing disinflation factors ahead. In a positive change from the last few months, core CPI inflation — which excludes the food and energy categories — also decelerated last month, in conjunction with the headline metric. Outside of a faster jump in housing costs, the prices for some commodities fell in October, including apparel and used motor vehicles, as well as the fees for certain medical services. These may be early signs that less disrupted supply chains are alleviating some of the structural drivers of inflation.

Denver Office:

Adam Lewis Vice President, Regional Manager

Tel: (303) 328-2000 | adam.lewis@marcusmillichap.com

Prepared and Edited By:

Benjamin Kunde Research Analyst | Research Services

For Information on national multifamily trends, contact:

John Chang Senior Vice President, National Director | Research Services

Tel: (602) 707-9700 | john.chang@marcusmillichap.com

The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no representation, warranty or guarantee, express or implied, may be made as to the accuracy or reliability of the information contained herein. Note: Metro-level employment growth is calculated based on the last month of the quarter/year. Sales data includes transactions sold for $1 million or greater unless otherwise noted. This is not intended to be a forecast of future events and this is not a guaranty regarding a future event. This is not intended to provide specific investment advice and should not be considered as investment advice. Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; Real Capital Analytics; RealPage, Inc. © Marcus & Millichap 2021 | www.MarcusMillichap.com