Silver Inflation Lining for Housing and Offices

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It’s painful when prices skyrocket for everything, but there are at least two segments of the real estate market where inflation can actually ease the transition to a new status quo.

As the United States enters its third year after the arrival of Covid-19, there are clear winners and losers resulting from the way the pandemic has changed our ways of life. A big loser was residential real estate in high-cost communities, as people took advantage of remote work to escape dense urban centers and move to lower-cost locations. The second loser, also from the remote working phenomenon, has been office buildings as employers and workers grapple with what the future of work will look like.

There is no need, however, to prepare for soaring vacancy rates, defaults and bankruptcies on the scale we experienced in the aftermath of the 2008 recession. And for that, we can thank the ‘inflation.

To understand why, start with the apartment market. According to Apartment List, several metro areas in the Sun Belt, including Tampa, Phoenix and Miami, have seen their rents increase by more than 30% since March 2020. Meanwhile, two metros still have rents below March 2020 levels: San Francisco and San Jose, California. Other high-cost coastal markets like Washington, Boston and Seattle have seen rents rise in the single digits over the past two years. (New York City is an exception here, as it has seen a robust rebound in apartment demand.)

But that’s in nominal dollars. The measure of consumer price inflation that excludes the volatile components of food and energy has increased by 8.2% since March 2020, meaning that on an inflation-adjusted basis, rents in San Francisco and San Jose have fallen by double digits and remain flat in other high areas. – cost of coastal markets.

The office market was weaker almost everywhere. To keep buildings occupied, landlords had to resort to months of free rent and other financial incentives. Despite this, vacancies have increased in many cases and a wave of leases are expiring over the next few years. With travel patterns remaining well below pre-pandemic levels, it is unclear what the resolution will be.

Worrying as it sounds, things would be much worse without the kind of high inflation we’ve seen. If the economic recovery over the past two years had been more like the one we experienced after the 2008 recession, inflation could have averaged 1% per year. This means that the double-digit declines in inflation-adjusted rents in the San Francisco Bay Area would likely have been realized in nominal rents instead.

A slump in nominal rents would have been much worse as the prices of certain goods and services are often rigidly downward. Landlords and building owners might not want to set a new standard of much lower rents, so they might have chosen to accept higher vacancy rates for a while until prices recover. These higher vacancy rates would not only have worsened the short-term housing shortage, but they would have signaled apartment developers to hold back on construction, which would reduce the development pipeline in the future, resulting in even less new homes over the next few years. .

The situation would probably have been even worse for the office market. He took heavy incentives to keep some buildings rented even with runaway inflation. In a disinflationary environment where money was tighter, more companies would likely choose to let their leases expire and weather the storm until there was more clarity on future business models.

For building tenants, inflation leads to a kind of “heads up, tails up” dynamic. If travel habits normalize over the next couple of years, businesses will be glad they kept their office space. And even if commuting remains light, thanks to all the inflation we’ve had – and may continue to have – rents could drop 15% or 20% on an inflation-adjusted basis. , softening the blow of retaining underutilized office space.

This inflation dynamic has geographic winners and losers. The biggest winners were owners of apartments and office buildings in high-cost cities like San Francisco and New York, where office culture was a big part of the local economy. The biggest losers have been tenants in low-cost states that aren’t as office-centric — perhaps people like service workers in Arizona and Florida — where rents have soared thanks to a influx of national migrants from higher cost cities.

So when we think about the economic impacts of the pandemic and inflation, we have to keep in mind that we managed to avoid some localized real estate crises that might have been unavoidable in other circumstances. High inflation is painful, but the alternative would not have been a picnic either.

More other writers at Bloomberg Opinion:

• Inflation angst spurs real estate gold rush: Chris Bryant

• Searing house prices freeze low incomes: Jonathan Levin

• Back to office presentations need updating: Sarah Green Carmichael

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Conor Sen is a Bloomberg Opinion columnist and the founder of Peachtree Creek Investments. He has contributed to the Atlantic and Business Insider and resides in Atlanta.

More stories like this are available at bloomberg.com/opinion


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