Inflation is an ugly tax that reduces the buying power of all Americans, rich or poor.
Granted, those at the upper echelon of earnings may not feel the pinch of those making minimum wage but there is an impact nonetheless. Our current inflation rate is running at an annual rate over 8%. We’ve not seen that since the Carter years in the late 1970s!
Clearly, all that we buy is not considered. Take industrial real estate rents, for example. A small percentage of our society leases manufacturing and logistics buildings. Those that do and have the unfortunate timing of a lease expiration are experiencing a doubling or tripling of their rates. In many cases, we’re witnessing a 100% increase in that check written to the landlord! We’ve seen rents increase close to 31% annually since the doldrums of 2010.
Why, you may be wondering? Really it’s a simple case of too few available spaces (supply) to fill expanding business operations (demand). Owners are bullish and pressing for higher rents. After all, where is the operation going to move?
In order to compete and win a deal, asking rates are often exceeded. We launched a lease listing three weeks ago. Bettered by 30% was our offered monthly amount.
Good thing commercial lease rates don’t factor into the metric of annual inflation percentages. Or do they? You see when a business that leases an industrial address sees a dramatic pop in one of its costs, that cost must be recouped somewhere.
Labor — especially skilled workers — was in short supply before the pandemic. Now that we’re back to work, companies must pay more in salary, benefits and perks to attract and maintain quality employees. Therefore, another layer of costs is added to the product made or shipped.
What about fuel? A manufacturing company must receive raw materials to build its wares. Said components arrive via trucks that burn…yep! Diesel fuel.
So rents, labor and delivery expenses are all spiraling out of control. Consequently, in order for an enterprise to remain profitable, it must charge the consumer more. And the beat goes on.
In an effort to quell inflation, our government has adopted a policy of increased interest rates. Now, on top of rents, labor and materials, the cost of money is higher. When the Fed tightens credit by charging banks more, the trickle-down to consumer prices eventually crashes home.
And so, buying power is further reduced. Just look what’s happening to housing. When a homebuyer must pay more for a 30-year mortgage, the price they can afford goes down. Sure, a share of homes is purchased for cash with no loan. But when does that end?
You now start to understand why Amazon is curtailing expansion and why Target and Walmart reported abysmal earnings last quarter. The folks that buy things can’t afford as much.
Short term? More pain is on the way as the pendulum swings. But know that inflation fears will pass. Our last bout was followed by the greatest economic expansion in our nation’s history.
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at email@example.com or 714.564.7104