Recent inflation data offered a temporary reprieve for investors, with the June Consumer Price Index easing to 3.5% on the back of lower oil and gasoline prices. Yet commercial real estate stakeholders are being cautioned not to assume that this softer reading marks the end of the elevated inflation cycle.
In a recently released Marcus & Millichap video titled “Inflation Risk: Headwind or Opportunity for CRE?” Vice President John Chang outlines why inflation may remain a persistent factor for the broader economy and for property markets. He points to renewed tensions in the Middle East as a key risk, noting that continued conflict could sustain an extended period of elevated prices, particularly through higher energy costs.
Chang explains that a prolonged rise in energy prices can keep headline inflation higher, even as other components show more modest increases. He highlights that categories such as food, housing and medical care are currently running at comparatively lower inflation rates in the 2% to mid-3% range. By contrast, energy is more volatile and has an outsized impact on transportation costs, feeding through to a wide range of goods and services.
One implication of this backdrop is the potential for another federal interest rate hike by year-end if inflation pressures do not ease. However, Chang notes that the risk of further rate increases has already been largely incorporated into Treasury yields and lending rates. As a result, he suggests that the cost of debt capital for commercial real estate should remain relatively stable, assuming no major surprise shifts in monetary policy or inflation data.
Despite the macro uncertainty, Chang argues that commercial real estate continues to demonstrate resilience. He characterizes the sector as one of the few investment categories with some degree of inflation resistance, given its ability in many cases to reprice rents over time. According to preliminary second-quarter reports he cites, all four major property types are currently experiencing positive space demand.
Office assets posted a ninth consecutive quarter of positive net absorption, signaling that demand has remained constructive despite well-documented structural challenges in parts of the sector. Apartment properties saw demand strong enough to push vacancy rates lower, while retail and industrial properties recorded relatively stable vacancy levels, pointing to a generally steady operating environment.
Chang also notes that a de-escalation or resolution of the Middle East conflict could contribute to lower inflation and stronger economic momentum. Such a shift would likely be supportive of real estate fundamentals, potentially improving demand and income trends across property types. Looking ahead, he suggests that investors focus on the durability of commercial real estate income streams and the sector’s inflation-resistant characteristics, with the view that the asset class could benefit further when the economic cycle eventually turns more favorable.
