August data showed that overall consumer prices have continued to rise through the end of summer. However, rates of increase have slowed in several sectors, including construction, durable goods, and energy costs. On the other hand, prices of consumer staples, including food, have continued to rise. While these patterns have significant impacts on average consumers, the trends make prices considerably more predictable for commercial real estate investors.
Speculation continues as to whether the Federal Reserve will impose additional rate hikes in an effort to curtail inflation. This would raise the cost of debt service for real estate investors, but it would also help to combat the recently elevated prices of construction materials and property maintenance costs.
So, while the direct costs of construction or property maintenance should be less worrisome for real estate investors, concerns remain about the marketability of properties being developed, rehabbed, or maintained–whether tenants will be able to afford increases in rent remains to be seen.
To date, the Federal Reserve has already raised interest rates four times this year, including two “jumbo” rate hikes of 0.75%. In response, many investors have been drawn to adjustable rate mortgages (ARMs). These typically offer below-market “teaser” rates in the early years of a loan until the rates adjust to higher fixed rates—typically after three, five, or seven years.
While these ARMs can help investors save on interest in the early years of their loans, uncertainty remains as to where interest rates will be when the loans reset. Likewise, it’s unclear whether borrowers will be able to afford long-term debt service based on cash flow from their properties.
It’s expected that many of these investors will sell their properties, take advantage of an opportunity to refinance into long-term fixed rate loans sometime before their loans reset, or otherwise restructure their financing before their rates reset in three to seven years.
With home prices having risen more than 20% since the beginning of 2021, many homebuyers have been priced out of regional markets. This has led to a slowdown in the residential property market, with far fewer sales and mortgage applications being reported in many major markets.
The consensus among experts is that housing prices will not likely fall in the next 12 to 24 months. Still, uncertainty remains as to whether interest rates on home loans may fall during that period to spur homebuying and mortgage lending. Such a move would likely be in contrast to the Federal Reserve’s stated objective of raising rates to curtail rising prices—but it could be brought on by increased competition from lenders increasingly starved of borrowers.
One notable benefit from this recent drop-off in activity is that, for investors willing to pay slightly elevated rates for new debt, mortgage lenders nationwide are happy to compete for business from qualified borrowers.
More than two years have passed since the outbreak of the coronavirus pandemic, and approximately 80% of the US population has received at least one dose of the vaccine. Nationwide, life is returning to normal, and people are resuming their pre-pandemic routines.
One beneficiary of this return to normal is the fitness industry, as millions of Americans resume their workout routines and memberships at local fitness facilities. Though gyms and fitness studios faced mandatory shutdowns just two years ago, new facilities are now opening in thousands of shopping centers nationwide.
At the same time, growth in home fitness offerings appears to be on the wane, with cycle giant Peloton recently seeing its CEO step down and undergoing a wave of lay-offs.
In addition to gyms, heavy industry has also benefited from the new normal, as manufacturing activity picked up to meet pent-up demand left over from last year’s mandated economic slowdown. This spur in activity has led to expansion by many manufacturers and rising demand for new industrial developments. Recent reports by Crexi show notable upticks in turnover among warehouse, industrial, and industrial flex spaces nationwide—especially relative to multi-family and office listings.
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