Commercial Investment Real Estate Fall 2022 | Page 9

PEYTON : This is absolutely correct . The complications introduced by COVID-19 in office and a little less so in retail may offset this sector ’ s inflation hedging potential . The office sector continues to function in the shadow of COVID-19 — there is not any agreement about how the return to office will play out . Office workers in general say they want flexibility . They don ’ t want to be locked into five days a week in the workplace .
But what exactly does this flexibility mean ? A consensus seems to be saying that maybe two or three days a week is a good start . Flexibility could mean the ability to work from home if an employee ’ s child care for the day falls through at the last minute . These are different kinds of considerations that employers are trying to grapple with . It ’ s important to remember the unemployment rate was 3.7 percent in August with a considerable amount of job openings , so employers want to be flexible . They want to keep employees happy .
With the labor market as tight as it is now , the challenges in the office sector are creating a shadow over the valuation and desirability of office as an investment . There is another complication in the office sector that ’ s related to climate change and environmental considerations as we move toward committing to net-zero carbon activities in the years ahead . Looking to 2040 and 2050 , what do you do with office space that would need major investment dollars to retrofit it for a net-zero environment ? Considering all these questions , when you ask if office investments are effective inflation hedges , you ’ re going to get a lot of footnotes . But if you focus on high-quality , newer office assets that have environmental considerations , those properties could be an inflation hedge .
CIRE : YOU MENTIONED LEASE LENGTH AS A WAY TO COMBAT INFLATION . HOW MUCH OF AN IMPACT DOES THIS HAVE FOR INTEREST IN MULTIFAMILY ?
PEYTON : That is one thing , but the other reason for interest in multifamily is the supply is very tight — particularly when you look at more affordable , quality apartments . For renters who can ’ t afford new , expensive downtown areas with plenty of amenities , the demand outpaces the supply . For multifamily , the sector is attractive because of the demand characteristics , shorter leases , and its overall capacity to hedge inflation .
CIRE : AS INFLATION CONTINUES TO BE AN ISSUE , INTEREST RATES ARE ALSO INCHING UP AND MAY CONTINUE TO DO SO FOR THE FORESEEABLE FUTURE . WHAT IMPACT WILL BORROWING
COSTS HAVE ON HOW INVESTORS VIEW COMMERCIAL REAL ESTATE ?
PEYTON : When you look at recent data , the spread on commercial mortgages has increased lately . The 10-year Treasury rate hovered around 3.5 percent in September , but it has increased since COVID-19 . Before the pandemic , it was below 1 percent . So , yes , borrowers are facing higher rates , but that shouldn ’ t be a surprise . The COVID-19 period of extremely accommodative monetary policy was historically unprecedented , so in no way should borrowers have expected that a 1.5 percent 10-year Treasury was going to be around for the long run . Savvy borrowers who look at historical interest rates should have known that it was time to jump in and take advantage of those rates because they were not going to last .
When it comes to knowing if this inflationary period is transitory or something more permanent , the trite answer is that time will tell . But really , you ’ ve got to understand the forces that are driving inflation and make a personal judgment about timing . The variety of forces behind inflation include very clearly transient forces related to COVID-19 , particularly the impact of shutdowns in
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China and lockdowns that disrupt the global flow of products . Is this getting better or worse ? No one really knows because we don ’ t know how long upticks will last . We also don ’ t know if another COVID-19 mutation could come along and start that process all over again . The pandemic is transient but still of unknown duration .
The second consideration is the war in Ukraine , which has taken a terrible toll on trade in agricultural commodities , grain , and fertilizer . How long will it continue ? Nobody knows , but we can look at it and say it ’ s not permanent . The third temporary factor is the support American households received in anti-COVID-19 support payments that were last distributed in 2021 . People accumulated extra savings , so the spending related to those payments is slowly eating away at that money .
But outside of these factors , it ’ s important to dig into the details of the data behind inflation . We have seen some improvements in producer price index , in the consumer price index , and in the price of used cars , for instance . The details in these data points may help address some inflation panic , but the situation continues to evolve .
CIRE : MY FINAL QUESTION IS A BIT OUTSIDE THE REAL WORLD , BUT IF YOU WERE GIVEN THE KEYS TO THE ECONOMY , WHAT STEPS WOULD YOU TAKE TO MINIMIZE INFLATION AND IMPROVE THE ECONOMY AS A WHOLE ?
PEYTON : It ’ s important we have confidence in the Federal Reserve . I think the Fed has responded very well to the COVID-19 situation , and I think the chairman has made
Martha Peyton , Ph . D .
very reasonable comments . Policymakers , politicians , and the media would serve the public interest if they expressed appropriate confidence in the Fed . It ’ s important to discourage hoarding . Thinking back to the early days of the pandemic where people would have a garage full of toilet paper , that behavior is damaging . Right now , I would focus public attention on the good news that we ’ re seeing in the data . We don ’ t need to despair . … Consumers have reasons to be discouraged or unhappy , but it ’ s important to keep people ’ s spirits up . We have reason to believe better times are ahead .
Nicholas Leider
Senior content editor of Commercial Investment Real Estate Contact him at nleider @ ccim . com .
Editor ’ s note :
This article is an adapted excerpt from a full-length Commercial Investment Real Estate podcast . To listen to the full episode , head to SoundCloud , iTunes , Spotify , or wherever you listen to your favorite podcasts . Don ’ t forget to subscribe , rate , and review .
CIREMAGAZINE . COM COMMERCIAL INVESTMENT REAL ESTATE MAGAZINE 7