Does CRE have a problem with stagflation?

CoStar Group seems to think so.

There is no official body or organization that would formally declare when the US economy is entering a period of stagflation – an economy characterized by slow economic growth, high unemployment and high inflation. It is highly debatable whether the US economy is suffering from these conditions or will do so in the near future. However, a growing number of observers believe that CRE in particular, including most recently CoStar Group, has a problem with this.

It notes that the current increase in borrowing costs coincides with a significant slowdown in income growth across most real estate sectors, as real estate income peaked at 8.4% year-on-year in the first quarter of 2022 but has since declined to 3.6% in the first quarter of 2024. “The current drastic reduction in real estate income signals stagnation in the commercial real estate market, with sluggish income growth across all sectors averaging 3.6%, barely above the headline inflation rate of 3.4% in April 2024.” – it was written.

So far, the impact of stagflation varies significantly by sector, she added, noting that REIT-owned manufactured homes, industrial facilities and healthcare facilities have seen significant average annual revenue growth of 8.4%, 7.8% and 7.6%, respectively. %, while the housing sector showed a modest annual income growth of 2.5%. In contrast, average property income growth in the office and self-storage sectors turned negative, with average income growth in each case around -0.3% year-on-year.

However, while CRE may be struggling with elements of stagflation, the current U.S. economy is by no means a reflection of the conditions seen in the 1970s, when stagflation was widely perceived to be rampant. Inflation then reached staggering levels, with the Consumer Price Index peaking at 14.8% in 1974 and remaining in double digits until 1982. Moreover, real GDP declined in 1974 and 1975, and although current data indicate a slowdown growth, a complete decline is expected and unlikely.

However, in the face of such an uncertain economic situation, there are fears that it may enter a period of stagflation. In an April interview with Related pressJPMorgan Chase CEO Jamie Dimon expressed hope that the Federal Reserve could lower inflation without causing a recession, but did not rule out stagflation.

“You should be concerned” about the possibility of stagflation, Dimon said.

A month earlier, strategists from Bank of America he wrote that the macroeconomic picture is “turning from Goldilocks to stagflation,” which they defined as growth below 2% and inflation between 3% and 4%. Inflation is higher in developed and emerging markets while the U.S. labor market is “finally bursting,” Michael Hartnett wrote.