Inflation

Commercial Real Estate Investors Balance Rate Relief With Cost Pressures

Rising costs, slower spending test retailers. Hiring over the past three months has slowed to its weakest pace since the pandemic, raising the risk of softer consumer spending. Lower-income households pulling back on big-ticket discretionary items may limit retailers’ ability to raise prices to match higher import costs. In the latest CPI report, categories such as consumer electronics and sporting equipment showed stable pricing, while other tariff-affected goods such as household furnishings and apparel recorded modest increases, indicating limited pass-through so far. Large retailers with strong balance sheets and established supplier relationships are likely to be better positioned to absorb higher tariff costs than independent operators with limited financial resources, potentially putting greater strain on inline tenants at neighborhood and strip centers.
 
E-Commerce growth sustains last-mile demand. Online spending increased 8.0 percent year over year in July, underscoring resilient e-commerce growth that should continue to uphold tenant demand for last-mile delivery facilities. Warehouses under 20,000 square feet reported vacancy near 3 percent in June, with second-quarter leasing volume reaching its highest level since 2021. For investors focused on small-bay industrial assets, triple-net leases will be critical in managing expenses, particularly as utility costs rose 6 percent year over year in August. Meanwhile, larger warehouses recorded vacancy above 7 percent. Firms have grown more cautious about big-box commitments, underscoring investor emphasis on high-credit tenants.

Rate cuts boosts CRE investment outlook. Still-moderate inflation and weakening job growth is expected to push the Federal Reserve to lower the overnight rate at its next meeting, potentially easing pressure on long-term yields and spurring CRE investment. Reduced funding costs for banks could encourage more lending, particularly for high-quality, stabilized multifamily, retail and industrial assets. Further cuts will likely depend on continued labor market softness, however, as rising inflation could still push long-term rates higher.