Stu Peterson, SIOR – Broker, Partner
For the first time in well over 35 years, price inflation is once again rearing its ugly head. As a 40-year veteran of commercial real estate, I am one of the few in my business who has seen this movie before. While it is true that past performance is no predictor of future results, this is likely a story that will not have a happy ending.
The narrative in the financial news is this inflationary spike is a temporary phenomenon brought about by supply chain disruptions provoked by the pandemic. The thought is that once the pandemic subsides, supply and demand will level off and return to normal. However, this hypothesis evades wage inflation which is pernicious to the economy. Wage gains are a one-way street; once embedded they rarely decline, short of a seismic economic event.
The principle cudgel the Federal Reserve uses to defeat inflation is to limit the supply of money. This is done with a quiver of blunt weapons such as requiring banks to increase their reserve requirements, increasing the discount rate, and other open market operations designed to tame price increase and ultimately slow economic growth. Slow growth, higher interest rates, and stricter borrowing standards are hardly a healthy recipe for real estate of all types.
If this follows the path of the last tidal wave of inflation in the 1970’s and early 1980’s, the start of price increases appears to help inflate real estate and other hard assets. It also provides an accelerant for demand for real estate and other hard assets as investors realize their cash holdings are being devalued. This leads to high leverage, short liquidity, and declining value and we all know where that ends up.
Let’s hope the Federal Reserve can figure out a way to avoid a repeat of the crash landing of the early 1980’s when they threw up their hands and restricted the supply of money to the level that forced a severe recession on the economy.