CEO Of Multinational Firm Weighs In On Industry Response To Inflation

While U.S. inflation is at its highest point since the 1980s, it has been showing signs of steadying.

Trading Economics stated that in Q3 2022, inflation reached 8.5% in July but decreased to 8.2% by September. During this time, some commercial real estate sectors have continued to show strong performance while others have continued to feel the impact of the economic uncertainty. 

Jeff Rinkov, CEO of CRE brokerage Lee & Associates, sat down with Bisnow to assess how inflation impacted the performance of three major CRE sectors — multifamily, retail and office — during Q3 2022 and to provide an outlook for the rest of the year and into 2023.

Rinkov said a common theme between the three sectors is the recent flight to quality among investors.

“As capital markets have fluctuated and responded to a changing interest rate environment, investors have increasingly been drawn to quality assets in high identity markets," Rinkov said.

Of the three sectors, he said, multifamily has consistently shown the greatest resilience. In Q3, that was marked by an influx of tenants moving back to urban regions as well as growing rent prices. 

“There’s a great liquidity in multifamily as well as a large cross-section of ownership types, from independent buildings to REITs who own tens of thousands of units under ownership and management,” Rinkov said. “Another strong part of multifamily is the underlying strength of the tenant and their liquidity, especially in a climate where we’ve seen wage growth help support higher rental rates.”

Like multifamily, Rinkov said retail also saw some positive activity within Q3, with people going to brick-and-mortar stores and increasing their overall spending. In-person shopping combined with online shopping also leads to demand for more industrial spaces for storage and last-mile delivery.

“The sophistication of the supply chain and logistics is growing, which is helping to strengthen the warehouse and distribution industry,” Rinkov said. “We’ve seen massive rental increases based on efficient use of these spaces.”

Rinkov said having retail spaces adjacent to dining and entertainment has contributed to the sector’s positive performance. While this is good news, the state of the retail sector is also typically dependent on people’s shopping habits, which can be impacted by a recession.

“The retail resurgence has a lot to do with the sustainability of the customer and how willing they are to dip into their funds and leverage their personal balance sheets forward, especially in light of recession, continued inflationary pressures and the sustainability of an economy that is supporting an employment rate of more than 96%,” Rinkov said.

Despite the high employment rate as well as increased office rents, the office sector has been experiencing turbulence in Q3, with many companies opting for remote and hybrid solutions rather than going back to the physical office, he said.

“We continue to see corporate America struggle with their return-to-work program, which is continuing to put pressure on creating office footprints for small and larger users,” Rinkov said. “There is a risk that the lack of definition and the lack of corporate America to get larger groups of employees back to the office will cause them to take smaller footprints on renewals and on site selections.”

Zombie offices — or deserted office space — can hurt the performance of the sector, but they can also create opportunities for other buyers to come in and repurpose the buildings, he said.

Rinkov added that having offices with convenient locations that offer a wide range of amenities could help with attracting and retaining tenants.

“The new developments in the office sector that are well-located and offer a range of amenities are doing really well, as they’re achieving high rental rates and rapid absorption, which is a positive sign,” Rinkov said. “Additionally, offices need a combination of private and collaborative spaces to draw people back in.”

Mixed-use spaces, with any combination of multifamily, retail and office can be mutually beneficial for all the businesses that call them home, he said. 

While inflation is an ongoing concern, the future has some bright spots. Kiplinger’s forecast showed that while inflation is expected to be at 8% by the end of this year, it is predicted to fall to 3.5% by the end of next year.

Rinkov echoes the sentiment, saying that 2023 looks “generally positive,” though only time will tell the true impact of inflation on CRE, especially if a recession occurs. 

While industrial is likely to remain stable, the multifamily and retail sectors could see both positive and negative effects, he said. Additionally, within the office sector, a recession could cause some companies to reduce their workforce.

If inflation stabilizes, the sectors are likely to veer in a more optimistic direction.

“There’s a tremendous amount of capital that sits on the sidelines, and it has yet to be determined where the economy settles,” Rinkov said. “Hopefully through the end of the year, the economy cools down enough that the Fed can slow down inflation, so that the asset classes will start to rebound and risks can be reversed.”

This article was produced in collaboration between Lee & Associates and Studio B. Bisnow news staff was not involved in the production of this content.

Studio B is Bisnow’s in-house content and design studio. To learn more about how Studio B can help your team, reach out to studio@bisnow.com.