Thinking about inflation? You’re not alone. According to Google Trends, searches for the word hit an all-time high in May 2021, returned to average in August and spiked again in December. As long as inflation is on everyone’s minds, we thought it would be helpful to do a deep dive into statistics provided by the Yardi Matrix U.S. Multifamily Outlook 2022.
Will inflation affect multifamily for better or for worse in 2022? Let’s look at the data to find out.
The good news about inflation
To understand how inflation has affected multifamily over the past year, we first need to look at this sector within the context of the overall economy. Since the Great Recession, federal interest rates have stayed near-zero. They rose slightly, starting in 2016, before sliding back to near-zero territory in response to COVID-19. In 2021 alone, inflation rose about 7%, the fastest rate since the 1980s. Between record-low interest rates and rising inflation, there have been concerns of an overheated economy that could cause inflation to get wildly out of control.
Which brings us to multifamily’s performance in the midst of all this turmoil. And incredibly, it’s done quite well. Driven by a combination of government stimulus checks, low unemployment and rising wages, the economy grew by 6% in 2021. This was the highest single-year growth rate in 40 years. These positive conditions helped renters afford rising rent rates, which grew a whopping 13.5% nationally.
While that rate of growth is likely unsustainable, Yardi Matrix predicts multifamily rents will continue to grow 4.8% in 2022. That’s why, despite fears of an overheated economy, inflation has the potential to increase multifamily property managers’ bottom lines in the short term.
The bad news about inflation
Soaring economic growth brought with it an outbreak of inflation that could hurt the economy in the long term. We already mentioned that inflation skyrocketed in goods and services, as well as rent. This has the potential to offset the benefits of wage increases. The math is pretty simple: Rents went up 13.5%, goods and services by 7.5% and wages by 4.7%. That means the average consumer’s income is being outpaced by the cost of living.
Because no one knows when and whether intervention by the Federal Reserve will ease some of this pain, multifamily investors and property managers should be prepared for any scenario. That includes future waves of COVID-19 that could further disrupt economic progress.
The uncertain news about inflation
As the economy reopened in 2021, there was an explosion of spending, which had two contradictory effects:
1. Increased spending boosted commercial revenue and economic performance
2. Increased spending also strained the supply chain to a breaking point, leading to extreme shipping delays, further raising the price of goods and services
As the most basic principle of economics states, a drop in supply alongside high demand leads to higher prices. So that part was expected. What wasn’t necessarily expected was how high inflation would get and how long it would last.
In other words, the mid- and long-term multifamily outlooks on how inflation affects multifamily remain uncertain.
Ending on a high note: reasons to be cautiously optimistic
Not sure how to feel? We’re with you. Here’s Yardi Matrix’s analysis on how inflation affects multifamily:
Multifamily’s capital conditions could scarcely be more favorable as we enter 2022. After a brief dip in commercial real estate market activity in the spring of 2020, the market came roaring back in 2021 and has resumed its place as a favorite asset class of investors. Transaction activity and pricing have reached all-time highs, while debt is plentiful and cheap.
So yes, prices are are rising too much, too fast. On the other hand, the overall positive performance of multifamily should alleviate most concerns in the short term. We’ll keep up with this story throughout the year. Read the full report if you’d like to keep learning.
And by the way, check out Yardi Matrix if you haven’t already. It’s the property management industry’s most comprehensive source for market intelligence and will keep you up to date on inflation and other important industry insights. Pair it with property management software to operationalize our research for your business.