Q2 2021
Inflation Concerns on the Rise
Inflation Running Hot Compared to Prior Recoveries Graph
As the U.S. economy has begun to recover over the past few months, consumers have growing concerns surrounding inflation. Why the increased concern? Prices fell during the first five months of 2020 and economic activity slowed, but then by the end of 2020, prices had recovered and began to accelerate. Pent up demand on many goods and services caused by the pandemic shutdowns, has caused prices to rise as supply is limited due to strained supply chains.

Consumers are beginning to feel the impact of price increases on everyday goods, such as gas, groceries, clothes and dining. In a survey performed by Shopkick, which surveyed 19,000 consumers, it’s reported that 42% are planning to tighten their spending due to the uptick in inflation.

The annual inflation rate in the U.S. climbed to 4.2% in April 2021 from the reported 2.6% in March 2021; market forecasts were predicting an increase to 3.6%. Inflation in May was up 0.6% from April, pushing the year-over-year rate to 5%. It’s important to note that nearly half of the increase was due to the comparison to last May when prices across the board were falling due to COVID-19.

Source: CoStar News
Increasing Rents Likely to Boost CPI chart
Inflation's Impact on Commercial Real Estate

According to the National Association of Real Estate Investment Trusts (Nareit) midyear outlook for REITs and commercial real estate, a full-bodied recovery is no longer a question of ‘if’, but, ‘when’. Several economists are predicting the economy to grow at a 6% annual rate over the remainder of 2021. The increase in business activity is expected to boost the demand for commercial space, resulting in higher occupancy rates. Increasing occupancy across all sectors will in turn create higher earnings among owners and thus creating higher property values.

Since the beginning of 2021, the price of oil, steel, copper and lumber have significantly increased, making new construction costly. As of Q2 2021, for office, retail and industrial, there has been a combined 258,377 square feet of new construction starts in all of Larimer and Weld County, as compared to 523,014 square feet in Q2 2020. Increasing material prices are expected to slow the amount of construction starts for the remainder of 2021 and into 2022.

Construction Starts - Larimer & Weld County chart
Peering into the Crystal Ball
Feds & Consumers Aligned on Inflation Uncertainty Graph

The effects of inflation will continue to differ among the various sectors of commercial real estate through the remainder of the year. Office occupancy and rents are expected to stabilize and begin to recover towards the beginning of 2022. It’s anticipated that multifamily will continue to boom as demand increases due to the lack of affordable housing, resulting in lower vacancy rates and accelerated rent growth. Lodging/resort property markets have begun to improve as vaccination rates continue to increase. Retail is slowly recovering, but vast improvements are unlikely unless shopping patterns get close to pre-pandemic trends.

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CoStar Market Reports - Larimer and Weld County
Q2 2021