Recent data showing higher-than-expected September inflation is feeding a commercial real estate narrative centered on a more expensive cost of capital and rising operating and construction costs. The U.S. Bureau of Labor Statistics reported that the consumer price index increased 3.7% year-over-year in September, while the producer price index for final demand advanced 6.3%, underscoring broad price pressures flowing through the economy.
In a recent video, Marcus & Millichap Senior Vice President John Chang said the strongest drivers of the latest inflation readings have been energy and transportation costs. He cited energy prices rising 20.4% year-over-year and transportation costs climbing 7.8%, highlighting categories that directly influence both property operations and development budgets.
Chang emphasized that the national inflation rate masks wide variation across local markets. On a year-over-year basis, he noted that inflation was 1.3% in Houston, 1.9% in Tampa and 2.5% in Phoenix, all well below the national figure. By contrast, inflation stood at 4.5% in New York, 4.7% in San Diego and 5.2% in Hawaii, illustrating that some high-cost coastal and island markets are absorbing much faster price growth.
Diesel prices, which Chang called a primary driver of inflation, show a similar pattern. Nationally, diesel averages about $6.30 per gallon. In North Carolina, South Carolina, Georgia, Texas and Louisiana, prices run closer to $5.60 to $5.80 per gallon, easing some logistical and operating pressure. At the other extreme, California diesel prices are around $8.50 per gallon, with Washington, Oregon, Nevada and Hawaii in a range of roughly $6.75 to $7.30 per gallon. Chang argued that these disparities demonstrate why national averages do not fully capture conditions on the ground, and said the same principle applies to commercial real estate performance.
He acknowledged that elevated inflation, slower job creation and higher interest rates are creating headwinds that influence cap rates across property types. However, once investors drill down to particular metros, submarkets and assets, cap rate behavior is far from uniform. Office cap rates, for example, vary significantly depending on property specifics. Apartment cap rates also span a wide range, reflecting differences in local demand, supply pipelines and investor risk appetite.
Chang said many investors are likely to seek higher returns in the months ahead, and that some motivated sellers are already reassessing their pricing, which is creating distinct investment entry points. He added that while current economic and capital markets headwinds are real, they are not evenly distributed across markets or assets. Over time, as those headwinds ease, he expects core commercial real estate fundamentals, including demographics, slowing construction activity and pent-up demand, to regain influence over performance and pricing.
