While August’s CPI report suggested a potential cooling in inflation, consumers and businesses are still feeling the pressure from rising prices. Federal Reserve officials have argued that the current inflationary environment is temporary because it is a result of short-term supply constraints and the fact that prices fell substantially last year causing this year’s inflation figures to appear, well, inflated.
With energy prices soaring and supply-chain issues worsening in recent weeks, the argument for inflation as a transitory phenomenon is weakening. In any case, real estate investors would be wise to monitor inflation trends closely. Why? Persistent inflation will force interest rates up, potentially leading to higher cap rates & lower property valuations. If the dollar is expected to cheapen, lenders will have to charge higher rates to compensate for the reduced purchasing power. This can happen independent of the central bank’s economic outlook and monetary policies.
Levered businesses, such as most real estate investors, should take advantage of the low rates currently available in the market. Investors should consider securing long-term financing to weather the economic uncertainty ahead. Furthermore, favorable prepayment terms are available if borrowers need flexibility to transact or refinance before their loan is due. While asset prices remain high and interest rates still low, this is a great opportunity for real estate investors to strengthen their balance sheet, reduce debt service, and monetize illiquid assets; don’t waste the opportunity.
–Casey Crane, Senior Associate