Inflation has continued to edge higher, while the unemployment rate remains historically low. As part of its ongoing response, the Fed is expected to continue raising rates in an effort to bring inflation under control. This is in spite of expectations that further hikes will continue to raise the cost of financing for businesses and consumers and eventually lead to upticks in unemployment.
The Fed has already had a historic three rate hikes of 0.75% this year. And, while we may not see a fourth hike of such size in November, the Fed’s recent efforts will certainly represent the greatest 12-month increase in rates in over 40 years.
In fact, the last time the Fed undertook such drastic rate hikes was in an effort to curb not just inflation, but so-called stagflation—a period of overall economic stagnation, coupled with double-digit inflation, which led to high unemployment and a period of great social unrest.
Increased consumer demand in Q3 2022 has resulted in positive demand for the seventh straight quarter. This may be due to the world returning to normal in the wake of COVID-19. However, it’s likely also due to businesses looking to take advantage of historically high prices resulting from inflation.
For all we hear about the U.S. housing supply failing to keep up with demand, the same can be said for commercial space—including retail–in many major markets. And, with interest rates continuing to rise and increasing the costs of developing and holding commercial property, retail rents aren’t expected to decline anytime soon.
Still, slowing holiday sales growth as a result of rising interest rates and a number of lay-offs by American companies could have implications for some commercial real estate. Investors should pay close attention to jobless figures and earnings from retail brands in the coming months to understand likely future growth in this space.
The strength of the U.S. dollar in the wake of inflation has dealt a blow to domestic manufacturers trying to sell their goods overseas. In spite of these challenges, the strength of the U.S. dollar has made assets stateside—including real estate—increasingly attractive for international investors.
These investors have already seen high returns in real estate due to historically-high rents and rampant price appreciation. Now, these returns are being compounded even further with gains relative to their home currencies. And, while the Fed is expected to take further action to bring down inflation in the U.S., the impact of these actions on the strength of the dollar remains uncertain.
Foreign investors still largely flock to the dollar as a safe haven in times of uncertainty—and the currency is certainly providing that today. Ultimately, the dollar is likely to extend gains relative to other investments, continuing to make U.S. assets highly desirable for overseas investors.
It’s estimated that national median rent fell by 0.2% month-over-month in September. Still, rents in most major markets are up at least 10% from this time last year. Rents have been increasing dramatically as housing supply has failed to keep pace with demand, and this remains the case. Rents are strongly higher on the year, driving gains and continued investment among landlords.
Moreover, this decline is not expected to continue and is more likely seasonal, as fewer Americans look to move as the school year gets underway. With rents now considerably higher than they were 12 months ago (along with interest rates), fewer Americans are planning to move headed into the fall and winter months. It remains to be seen whether rents will continue to increase in spring 2023.