For the first time in over 30 years, consumers are faced with the rising specter of inflation. May saw the largest monthly increase in the Consumer Price Index (CPI) in the last 13 years due rises in airfare, furniture and apparel.
Other disruptions to the CPI are expected as early as August due to the expiration of the nationwide eviction moratorium. The temporary assistance given to renters and homeowners is set to expire on July 31. Housing, which makes up 42% of the weight of the CPI, was kept artificially low during the pandemic. According to a May 2021 household pulse survey from the U.S. Census Bureau, one in six tenants are behind on rent payments and 6.5 million homeowners have deferred their mortgage payments. The September 2021 CPI numbers will be the first month without these price controls in place and the inflationary impact could be immense. While these short-term CPI disruptions theoretically have no impact on longer term price levels, the Federal Reserve has promised to not intervene and let the economy “run hot.”
Consumers and businesses are feeling the heat as supply chain dislocations have led to temporary price increases for lumber, steel and oil. The resumption of economic activity is also putting upward pressure on wages. The first quarter of 2021 saw the largest increase in the Employment Cost Index since the 1990s and further increases are expected. These higher levels of transitory wages and commodity price increases may ripple through the economy in unexpected ways.
For real estate developers, these surging input prices are wrecking the underlying assumptions that underpin development deals, resulting in now unprofitable projects that must be postponed. Notably, this may decrease the pipeline of popular “5-over-1” apartment construction projects, which are five stories of wood-framed, multifamily dwellings over a concrete parking podium. According to the U.S. Census Bureau, there has been a significant decrease in housing starts with numbers dropping by 30.2% in April, down 29.7% compared to a year earlier.
It remains to be seen if the reopening of the economy is of the temporary “supply shock” variety and price levels will revert to their 30-year deflationary trend, or if something new is amiss. Persistent long-term inflation has not been an issue in for three decades and would need to be accounted for in calculating accurate rates of return for all real estate investors.
Thomas Galvin is a manager in market research based out of Transwestern’s Los Angeles office.
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