Here’s How Inflation Is Impacting Core Property Types

Repricing is happening across every property sector, and no asset class appears immune. But the non-core lodging sector faces perhaps the highest potential risk, as the asset class is closely tied to the overall economy, according to Green Street. 

The firm lowered its overall estimates for near-term rents, occupancy and NOI growth for core property sectors as of the middle of this year, and its Commercial Property Price Index for the month of June shows that property values have dropped by nearly 5%. But in spite of rising inflation, Green Street predicts just a “mild recession” that will be reflected in moderating employment growth in the fourth quarter.

Still, rental and occupancy rates, as well as investment sales transaction volume, are almost immediately impacted during an economic shift, according to Michael Knott, Green Street’s US head of REIT Research, with some property sectors feeling inflation’s impact more than others. Namely, he says, the non-core lodging sector faces the highest potential risk since it’s tied so closely to the economy.

Here is Green Street’s take on other CRE sectors.

Office market RevPAF growth, the firm’s proprietary measure of rent and occupancy growth, was -8.4% in 2020 and 6.2% in 2021. The firm estimates another 3.5% drop in this metric this year before it shows modest positive growth next year. Office property values fell by 4% in June 2022 and are down 9% over pre-pandemic levels, and transaction volume is also markedly lower than pre-COVID numbers.

The industrial sector will likely also see a deceleration in market-RevPAF growth, which is currently at 18%, in 2023.  Green Street predicts that growth will slow to about 3% per year through 2026.

The apartment sector remains a bright spot: Green Street’s market-RevPAF growth outlook for apartments “remains healthy,” with 2022 predicted to be one of the strongest years yet for the sector. Market-RevPAF growth is predicted to increase 10% by the end of the year and to remain positive at 3% in 2023.

And retail strip centers have also surprised analysts.  The sector “staged a strong comeback” in the second half of last year with market RevPAF growth ticking up into positive territory at the end of 2021. It is expected to accelerate to 3.1% by the end of this year.