GlobeSt. – Asset prices are rising amid the Fed’s tightrope act between low interest rates and inflationary pressures.
In June, the headline inflation reading came in at 5.4%—the highest level since 2008.
Fed Chairman Jerome Powell says that inflation is well above their 2% target. But he thinks this is a temporary phenomenon.
“The Fed still expects inflation to be transitory, driven up over the short term by logistics bottlenecks and a surge in consumption,” says John Chang, senior vice president and director of Research Services at Marcus & Millichap, in a recent video. “The Fed still expects inflation to come back down over the next six months. That said, Chairman Powell left the door open for taking action if inflation proves not to be transitory.”
Chang says the Fed is walking a tightrope by keeping interest rates down and money flowing despite inflation pressures.
“It sounds to me like they’re playing for time,” Chang says. “They’re trying to extend the runway into the fourth quarter to give the economy time to mend from the pandemic and to support job creation. But in the process, they’re running inflation that can get away from them. If that happens, the Fed will be forced to tighten the reins faster and more aggressively than they’d like.”
Chang thinks many of the issues driving inflation are temporary, with commodities like lumber, steel and copper skyrocketing. “But as the pandemic abates, commodity supplies should increase and pricing pressure should relax,” Chang says.
But those aren’t the only pressures on pricing. Chang says hourly wages are up 3.6% over the past year. “Wage growth tends to stay with us,” Chang says. “And as wages rise, they put upward pressure on other prices. Likewise, housing costs have surged dramatically. The median home price is up 24.4% in the last year.”
Chang says wages and housing inflation tend to stick. “That implies that at least a portion of the elevated inflation will still be out there in six months,” Chang says. “Ultimately, whether it’s three months from now or six months or longer, the Fed will have to take some action.”
Chang predicts that it will most likely start by tapering their $120 billion per month purchases of treasury and mortgage securities. That could happen in late 2021 or early 2022. “When they slow their purchases, it’s likely that long-term interest rates will rise,” Chang says.
For CRE investors, the current environment holds many opportunities but the buying window may only be open for a limited period.
Vacancies are declining in most property types and rent growth is comparatively strong, according to Chang. Apartment rents have risen 4.3% yearly, and industrial rents are up approximately 5.7%. Self-storage rents have gone up 9.7% and retail rents are up by about 1%.
“In addition, interest rates are still exceptionally low, and lending liquidity is high,” Chang says. “So investors can lock in fantastic financing right now. But competition for assets is strong, and prices are generally pushing up between that and the prospect of rising interest rates. The strong buying window will not be open for long.”
With this window wide open, some investors are considering selling. “Right now, there are a lot of buyers out there and many are trying to go direct, making unsolicited offers in an effort to get properties at prices below market value,” Chang says. “Those offers might sound good, but values are changing fast and selling direct often leaves money on the table.”