Why inflation is impacting everything from Amazon to commercial real estate – Daily Bulletin
Inflation is a disgusting tax that reduces the purchasing power of all Americans, rich or poor.
Granted, those on the upper income echelon may not feel the pinch of those earning minimum wage, but there is an impact nonetheless. Our current inflation rate is at an annual rate above 8%. We hadn’t seen that since the Carter years in the late 1970s!
Obviously, not everything we buy is considered. Take, for example, industrial real estate rents. A small percentage of our company leases manufacturing and logistics buildings. Those who do and have the unfortunate timing of a lease expiration experience a doubling or tripling of their rates. In many cases, we are seeing a 100% increase in that homeowner’s check! We’ve seen rents rise nearly 31% a year since the slump of 2010.
Why, you might wonder? In reality, it is simply a lack of available space (supply) to meet expanding business activities (demand). Landlords are optimistic and demanding higher rents. After all, where will the operation move?
In order to compete and win a deal, the rates charged are often exceeded. We launched a rental listing three weeks ago. Improved by 30% was our monthly amount offered.
Fortunately, commercial rental rates are not factored into the measurement of annual inflation percentages. Or do they? You see, when a business leasing an industrial address sees a dramatic increase in one of its costs, that cost has to be recouped somewhere.
Labor – especially skilled workers – was scarce before the pandemic. Now that we’re back to work, companies need to pay more in wages, benefits, and benefits to attract and retain quality employees. Therefore, another layer of costs is added to the product produced or shipped.
What about fuel? A manufacturing company must receive raw materials to manufacture its goods. These components arrive via burning trucks… yes! Diesel fuel.
So rents, labor and delivery costs are all out of control. Therefore, for a business to remain profitable, it must charge the consumer more. And the rhythm continues.
In an effort to control inflation, our government has adopted a policy of increasing interest rates. Now, in addition to rent, labor and materials, the cost of money is higher. When the Fed tightens credit by charging banks more, the trickle-down effect on consumer prices eventually breaks down.
And so, purchasing power is further reduced. Watch what happens to housing. When a home buyer has to pay more for a 30-year mortgage, the price they can afford goes down. Of course, a share of the houses is bought for cash without a loan. But when does it end?
You are now beginning to understand why Amazon is holding back its expansion and why Target and Walmart posted abysmal profits last quarter. People who buy stuff can’t afford that much.
Short term? More pain is on the way as the pendulum swings. But know that inflation fears will pass. Our last fight was followed by the greatest economic expansion in the history of our country.
Allen C. Buchanan, SIOR, is a principal at Lee & Associates Commercial Real Estate Services in Orange. He can be reached at [email protected] or 714.564.7104