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Inflation’s Impact on the Economy and Commercial Real Estate

Written on Nov. 18th, 2022
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We are amidst a significant market change. Due to unprecedented events, we are currently facing a time of transition with uncertain long-term impacts. This rapidly-changing scenario has two inextricably linked factors: inflation and interest rates.

Inflation rates are the highest we’ve seen since the 1980s. It’s been top of mind for many consumers, and this expensive environment has not gone unnoticed. When supply cannot keep up with demand, prices of products/services increase. Although many of the pandemic supply chain issues have been resolved, companies continue to charge higher costs and maintain their profit margins. To combat inflationary issues, the Federal Reserve has reacted using their go-to, primary tactic to slow spending and cool the market: raising interest rates.

Fortunately, Salem, Oregon is a semi-balanced market that we expect to remain stable through the rise and fall of rates. As the state capital, Salem has historically seen more conservative growth. When the market swings, the Willamette Valley doesn’t usually experience the explosive booms and disruptive, dramatic drops. For instance, Salem logged less foreclosures during the 2008 financial crisis than other comparable cities around the country. It is anticipated that the same will be true this time around.

Commercial Real Estate (CRE) is not exempt from the effects of consecutive interest rate hikes (three increases since March of 2022 and seems to be heading higher). However, purchasing CRE property generally remains an effective hedge against inflation. We are still seeing great demand and short supply for industrial, multi-family housing, and retail. The office sector has excess capacity and a softer footprint as a consequence of COVID though; this post-pandemic shift is driven directly by a change in the way companies utilize their labor force. Along with evaluating asset classes for investment opportunities, it is imperative to take location into consideration and ensure it is positioned for market growth. We have a high demand for properties near I-5, but the surrounding areas seem to be well-balanced. It’s important to note that the residential real estate market has significantly slowed down, resulting in mortgage companies only doing some fraction of their usual borrowing volume. A reduction in transactions means less loans and limited construction, creating a constriction in the building industry. There are many multifaceted and interrelated issues at play within the real estate market.

While we muddle through this transiency period, the next few months and early 2023 will be foretelling as to how deep or shallow this disturbance will be. Just a year and a half ago, rates were at a notable low during the pandemic. The situation flipped quickly, and it may take a bit longer to rebound from the recent changes that seemingly happened overnight. As the dust settles and we navigate this economy’s new normal, there is hope that price appreciation will regress without major lingering challenges. Based on past cycles, interest rates typically drop as an election year approaches while politicians focus on their campaigns. This will likely be the case again, so let’s see if this trend stays true as we head towards 2024.

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