FORECASTING 2021 AND BEYOND There are three primary challenges for the second half of 2021 — primarily inflation , along with workforce shortages and rapid price increases for real estate .

For decades , the Federal Reserve has worried more about deflation than inflation , following the 1998 CMBS market disruption that affected commercial real estate and then the 2009 Great Recession that saw home prices decline for the first time since World War II ( by anywhere from 25 percent to 50 percent ). My question is : Has the Fed forgotten how to recognize systemic inflation ? Or do we have a vaccinated version of inflation the Federal Reserve is now labeling “ transitory inflation ?” I fear we have systemic inflation . While I hope I ’ m wrong , a look back on history may be enlightening .

It ’ s easy to draw a parallel between what we are facing today with what the U . S . confronted a century ago . After enduring World War I and a global pandemic in 1919 that killed millions , we entered the Roaring ‘ 20s . If we take this comparison a bit further , it ’ s important to remember how that decade ended — with the Great Depression and 10 years of economic strife that took decades to recover from . Nobody wants to revisit the 1930s and ‘ 40s . To make matters worse , tariffs were the spoiler that led to more systemic economic problems . And then , like today , asset prices ( stocks and real estate ) soared beyond sustainable levels , and we lacked structural safeguards ( like the FDIC ) to halt an economic crash . Today , stocks and real estate prices are soaring like they did in the 1920s , and once again there are disconnects and a lack of safeguards on entities like the Federal Housing Finance Agency ( FHFA ).

There are warning signs right now , and the Fed and Congress are masking them

WHAT A DIFFERENCE 6 MONTHS MAKE

with reckless monetary and fiscal policy that is undermining the value of the U . S . dollar and forcing rotation of capital out the risk curve , inflating prices to levels that don ’ t make sense . This situation is potentially leaving our most economically ill-prepared generation ( millennials ) at risk to hold the bag and a tax burden for the losses from our most populous generation ( baby boomers ). What could upset this delicate balance we are enjoying today ? Inflation . And if it ’ s systemic inflation , price increases would be embedded across market sectors and commodities .

For an understanding of this scenario , don ’ t think of the 1930s . It ’ s time to flash forward to the 1970s , when reckless deficit spending to fund the Vietnam War — later masked by “ price controls ” under President Richard Nixon ’ s administration — detonated with an oil embargo and ensuing energy crisis that spread throughout the economy , resulting in a 21 percent prime lending rate in 1981 .

There are parallels to 2021 . Substitute untamed deficit spending , reckless monetary policy , and a pandemic in place for the Vietnam War deficit spending , an OPEC oil embargo , and a resulting energy crisis — you have all the ingredients for a 1970s-type systemic inflationary cycle . If you think this scenario is far-fetched , reflect for a moment on three items :

1 . Fed Spending . Note the growth of the Fed ’ s balance sheet — from $ 1 trillion preceding the Great Recession to $ 4 trillion by 2014 and then to today ’ s $ 8 trillion , created mostly over the last 12 months in reaction to COVID-19 . The dollars used by the Fed to expand its balance sheet are printed money by the Treasury , and better described as incendiary inflationary currency .

2 . The U . S . Deficit . The federal government debt now stands at $ 28.2 trillion , well above a 100 percent debt-to-GDP ratio . Congress has allocated more than $ 5 trillion in stimulus to help the economy through COVID-19 — and more deficit spending is ahead . Congress is debating an infrastructure bill that could be in the trillions . The U . S . budget deficit FYTD passed the $ 2 trillion mark in May , despite record inflows of tax receipts that surpassed $ 464 billion in May ( the second highest on record , according to CNBC ). So how much debt is too much ? When does the rest of the world quit funding our deficit spending ? We could be close to getting answers to both those questions .

3 . Rising Asset Prices . Whether its stocks , homes , autos , or any commodity , we are experiencing double-digit price increases . The latest CPI ( Consumer Price Index ), PPI ( Producer Price Index ), and PCE ( Personal Consumption Expenditures ) all show 5 percent to 6.6 percent YOY inflation — rates similar to what was experienced in 1977-1981 .

And if these figures are not sufficient to germinate concerns about inflation , reflect on real estate prices . According to the National Association of REALTORS ®, the sales price for the median existing single-family home rose to $ 319,200 in May , registering an annual increase of 16.2 percent — a record high according to records dating back to 1989 . And this increase was not just in a few MSAs — 89 percent of MSAs recorded double-digit increases , according to NAR .

Kastle Back to Work Barometer : City-by-City Weekly Occupany Rates in Offices

34 COMMERCIAL INVESTMENT REAL ESTATE MAGAZINE SUMMER 2021