Declining CPI and Rising Rents
While it’s no secret that there has been a compression of the economy leading to an increase in CPI over the last year and a half. CPI growth did slow down in July, hopefully an indicator of future trends. It’s hard to predict the future based on one month’s numbers, but we are seeing a softening in the market. In April, May, and June, CPI increased an average of 0.84% each month, but in July the increase slowed to 0.33%; still showing signs of inflation but at a less aggressive rate. Major CPI indicators to watch: softening in the growth of the used car market, falling hotel room rates and airfare, and rising home rental rates.
When the nation first opened back up post-pandemic, rental car companies were overwhelmed by demand after taking so many months off while travel restrictions were in place. In an attempt to meet demand, they turned to used car auctions, decreasing the supply for everyday consumers. July showed an increase in used car prices of just 0.2%, where April and May increased by 8.7% and June increased by 10.5%. The used car market is still compressed because the new car supply is down due to the low computer chip supply. The price increases in the used car market should not be confused with inflation, though.
What we are experiencing is a relative increase in the cost of used vehicles that could potentially lead to inflation.
Similarly, the travel industry is experiencing compression of CPI thanks to the Delta variant of COVID. July experienced a 6% growth in CPI, but data from STR, Inc. projects an unchanged CPI in lodging rates for August. Airlines are more difficult to predict, but there has been less travel demand in the last month which points to less CPI growth in the airline industry.
Since the beginning of the pandemic when home rental rates plummeted, we have seen a full rebound. Rental rates account for just over 40% of the core CPI and has been one of the main drivers of the overall core CPI increases.
Low vacancy rates, high home prices, high rental demand, and rising wages are the hallmark of the continued rise of rental rates, with no signs of slowing substantially.
What This Means For Commercial Real Estate
Like so many sectors of the economy, commercial real estate (CRE) has experienced setbacks and declines across the board, though there does seem to be signs of rebounding. As concerns of long-term inflation continue, investors are turning to commercial real estate because returns have typically been tied to CPI; as CPI increases, NOI generally increases, too. This trend stands to benefit our investors because, while we can see inflation on the horizon, we are setting in place long term debt at low rates which will mean our bottom line will grow as rents increase over time but our cost of capital remains stable and low. The opportunity for real estate investors like Starpoint is to capture this delta between rising rents and low debt service to increase returns to investors. As CPI continues to grow, we expect to see gains across our portfolio in cash available for distribution to our investors and will keep you informed as trends develop further.