Median Inflation Expectations Hit New Series High

Here’s what that could mean for CRE.

Median inflation expectations hit a new series high in June, according to a new analysis from the Federal Reserve Bank of New York’s Center for Microeconomic Data.

The New York Fed’s June 2021 Survey of Consumer Expectations showed that median inflation expectations increased 0.8 percentage point at month to 4.8% at the one-year horizon. They are unchanged at 3.6% at the three-year horizon. At the same time, households’ labor market expectations improved, with expectations of unemployment reaching a new low. Year-ahead income and spending growth expectations also continued an upward drive, as did home price growth expectations.

“The increase in the short-term measure was driven mostly by respondents who have some college education,” the New York Fed noted in a statement analyzing the data. “Our measures of disagreement across respondents (the difference between the 75th and 25th percentile of inflation expectations) reached new series’ highs at both horizons.”

A recent report from Nuveen highlights the growing expectation among investors that while interest rates and inflation are both likely to continue to accelerate over the course of this year, “historically, higher interest rates have not necessarily resulted in lower property values and total returns.”

Against that backdrop, real estate will likely remain an attractive hedge, since both rents and property values are “highly correlated” with rising consumer prices, according to Nuveen. In addition, most long-term leases have rent escalation clauses that are tied to inflation, protecting income generation, while new leases allow investors to take advantage of rising rents.

“The relative stability of real estate during the COVID-19 pandemic was the result of stable income generation during times of price volatility,” the report notes. “This inflation and rate outlook highlights the importance of diversification and a highly active and localized approach to real estate investing.”

And while increases in building materials like lumber will likely continue to constrain supply in some asset classes, that will also support valuation.

“While rising long-term interest rates may impact real estate values, the net impact largely depends on the speed at which long-term rates increase and the driver of those increases,” the Nuveen report notes. “If increases are due to increased economic growth expectations, the overall impact of rising rates and a reflationary environment should be positive for real estate.”