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HOW THE INFLATION RATE HITS A LITTLE TOO CLOSE FOR CRE

Written by: Anjee Solanki

Anjee is National Director, Retail Services USA, of Colliers. Based in San Francisco and with 28 years of experience, she provides strategic leadership to over 500 specialized retail professionals across 163 offices. Check out her post on Colliers Knowledge Leader here.


Health epidemic. Financial crisis. Civil unrest. War. It sounds like the line of a Billy Joel song, but it’s the harsh reality of 2022. The annual inflation rate has accelerated to nearly 8% for the first time in four decades. And you don’t have to be an economist to understand the potential impact of the inflation rate, along with embargoes and sanctions, will have on global and local economies.


What this means for retailers

The supply and logistics chain, already under pressure from COVID-19 repercussions, struggles to manage the fluctuations in demand from the manufacturing industry. In addition, the energy crisis was well underway before the current state of world affairs, and Russia’s continued threats against Ukraine bring to the surface the impact of potential gas shortages and how that will affect production manufacturing lines.


Consumer spending is on the rise, but the allocation of discretionary income is likely to shift downward for non-essential items like apparel and entertainment, with widespread price surges for essential things like energy, food and shelter. Despite reports that the unemployment rate edged down to 3.8% in February, the increased pricing for consumer goods and services is close to reaching double digits –currently at 8.4%. A pricing arc that outpaces wage increases adds to the financial stressors affecting most folks’ budgets and bank accounts. It’s unclear if pricing will mirror or exceed pandemic costs, but retailers speculate how this economic development will ultimately affect their bottom line.


What it could mean for consumers

A new generation of spendthrift Americans embraced slow living during the pandemic, cooking at home, buying items on resale and becoming financially savvy about purchasing big-ticket items. We learned to accept that production and staffing shortages and supply chain stalls would be a part of the new normal. Although, I don’t know that we expected to feel an increased burn in our wallets as prices for even the most mundane skyrocketed. And, as retailers continue to face cost increases from suppliers, with additional increases pending, there is the concern that the financial burden will soon reflect in consumer pricing.


We already see a surge in gasoline prices. The Pacific Northwest has consistently had the highest per-gallon prices, a price point that has now spread across the nation. According to AAA, the average cost of unleaded gasoline in the U.S. was a record $4.33 a gallon, up 50% from a year ago. The last time gasoline was this expensive: at the height of the 2008 financial crisis. The timing of this increase is a bit precarious considering the push for workers to return to the office and the unlikelihood of corporations to share the burden of cost.


What it could mean for commercial real estate

Analysts have an eye on how the rising inflation rates could impact real estate, retail, and office, particularly. Investment in commercial real estate has been steady, with rental rates and property value likely to increase. In the short term, this is a win for REITs and landlords. Tenants, however, may have a more extensive cross to bear.

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