Inflation Stagnation

Good morning,

?Investors in multifamily love and hate inflation. We enjoy increasing rents but despise losing net operating income to rising costs. One of the biggest input costs to owning multifamily is interest expense. Economists and market investors originally were hopeful that the FED pause in interest rates would hold, but after the June economic numbers were released, most are now resigned to potentially two more rate increases this year. The effect of overspending during the pandemic continues to make it difficult to tame inflation.

The headline CPI inflation number for June was very encouraging at only 3%. Unfortunately, most of this decline was due to technical factors rather than dropping prices as June 2022 was dropped from the comparison. The Wall Street Journal noted that they are expecting to see the CPI tick back up in July 2023 to a more realistic number. From the chart below, it is clear that prices are coming down but not across the board. Labor and the cost of housing continue to chug higher.

Employment in the US continues to show strength in both numbers and wage increases. Wages were up 4.4% in June while non-farm payroll increased 209K, and ADP reported a jaw dropping 497K new jobs. New jobless claims are up slightly but not enough to impact the 3.6% unemployment rate. A strong labor market is good news for the rental market, but there are still pockets of problems popping up depending on market and property class type, so we are monitoring this very closely.

In addition to the labor market, there are several other areas that continue to increase above the 2% target. Insurance costs across the country continue to increase for both property and automobiles; this is hurting NOI for all multi-family owners. Although car prices have fallen, repair costs continue to climb higher. Restaurants and bars have increased costs 8% year-over-year, making it more expensive to drown your sorrows or celebrate your success.

Although we enjoy a little wind at our back to increase rents, we don't invest in properties that count on organic increases to execute our business plan. We would like to see inflation reduced for insurance, services and labor because it is eating away at our gains on the revenue side. Interest rates will most likely continue to rise, which will make it harder in the short term to find deals that make sense, and for those with variable rate financing, it could be a deathblow.