The latest reading of the June Consumer Price Index showed headline inflation easing to 3.5%, helped by a pullback in oil and gasoline prices. While that offers some near-term relief, the underlying dynamics suggest commercial real estate participants may still be operating in an environment of elevated inflation risk.
In a recently released video, “Inflation Risk: Headwind or Opportunity for CRE?”, Marcus & Millichap Vice President John Chang examined how renewed tensions in the Middle East could affect energy markets and, by extension, the broader inflation outlook. He noted that an extended period of higher energy costs could translate into a prolonged cycle of elevated prices, keeping inflation pressure in place rather than allowing it to drift back quickly to lower levels.
Chang also pointed out that such a scenario would likely increase the odds of another federal interest rate hike before year-end. Even so, he indicated that this potential move is not catching markets off guard. According to his commentary, expectations of higher rates are already embedded in Treasury yields and lending benchmarks, suggesting the cost of debt capital for commercial real estate may remain relatively stable rather than facing a fresh round of repricing.
Beyond energy, Chang highlighted that inflation in key categories such as food, housing and medical care is currently tracking in the 2% to mid-3% range. However, because energy prices feed directly into transportation and distribution costs, any renewed upswing in oil and gas could keep headline inflation more elevated than these core components alone would imply.
For commercial real estate investors, Chang framed the current environment as challenging but not unfamiliar. He emphasized that the risk of higher rates is largely recognized and that commercial real estate has historically provided some degree of inflation resistance. Despite geopolitical uncertainty, tariff-related pressures and the prospect of an extended inflation cycle, he noted that all four major property types are still seeing positive space demand.
Preliminary second-quarter data cited by Chang showed office properties registering a ninth straight quarter of positive net absorption. Apartment demand has been strong enough to push vacancy rates lower, while retail and industrial properties are experiencing comparatively stable vacancy trends. These indicators suggest that underlying real estate fundamentals remain intact even as the macro backdrop grows more complex.
Chang added that a resolution to the conflict in the Middle East could help bring inflation down and support stronger economic momentum, which in turn would be constructive for property performance. In the interim, he indicated that investors should focus on the durability and inflation-resistant characteristics of commercial real estate, positioning portfolios so they are ready to benefit when the broader economy eventually shifts into a higher gear.
