Page 18 — Multifamily Properties Quarterly — August 2022 Insights THE MARLOWE | Denver, CO Architecture | Branding | Interiors | Planning A s far back as 2019, real estate analysts began pre- dicting pending inflation and increased construction costs impacting new devel- opment. This prediction material- ized and accelerated as a result of the COVID-19 pandemic and, just as we were expecting a recalibration, the Ukraine-Russia conflict further heightened the impacts. While real estate generally is considered a strong investment through all phases of the economic cycle, multifamily, specifically, is weathering the current mar- ket shifts much better than other asset classes. The growth of the renter pool is vastly outpacing sup- ply, and new development will be priced at the top of the market due to increasing construction costs. Acquiring and adding resident- centric improvements to existing assets helps to ensure renters have high-quality housing options with reasonable rents, a concept that’s more important than ever given the current economic climate. n The bad news. Looking at infla- tion from a more macro perspective, we’re seeing the consumer price index crest 8.5%. This is a dramatic increase when you consider that year-over-year changes hovered between 1% and 3% consistently from 2012 to 2021. It’s likely that supply challenges will continue to drive up costs through at least 2023 due to several contributing factors, including China’s management of the pandemic, the Ukraine-Russia conflict and labor shortages. While effective at managing the pan- demic spread, Chi- na’s “zero COVID” policy translated to strict lockdowns that constrained workers and all but halted the entire supply chain. On the heels of these severe impacts, global food and energy markets took another big hit as a result of the Russia-Ukraine war. These issues shined a blinding light on our country’s high level of supply chain concentration risk and began a shift to what U.S. Secretary of the Treasury Janet Yellen termed “friend-shoring,” moving toward partnerships with like-minded, democratic countries. This change in globalization, albeit positive for long-term risk mitigation, will layer on additional consumer cost increases in the short- to midterm. In addition to supply chain issues, the workforce is short millions of workers. As it stands today, the U.S. labor market has more than twice as many job openings than there are job seekers. Over 2 million late baby boomers have retired early due to health risks posed by the pan- demic and the undesirable shift to remote work. We’ve seen more than a million fewer immigrants enter- ing the country due to our current immigration policies and, unfortu- nately, close to a million COVID-19 deaths. The remaining gap likely stems from people deciding to leave the workforce – whether to care for kids, or because stimulus funds, rent moratoriums and increased home equity have made it finan- cially viable to do so. With all these factors at play, the Federal Reserve is continuing to raise interest rates to mitigate inflation. This has driven mortgage payments up 40% compared to this time last year, making homeowner- ship unattainable for many Ameri- cans and driving demand for rental product. n The good news. Amid the rising costs, the good news is that, gener- ally, the consumer is in excellent financial shape right now. Current leverage compared to the gross domestic product is among the low- est on record. Jobs are plentiful, and many companies are offering higher starting salaries and wage increases to recruit and retain top talent. In fact, wage growth is at an all-time high in the past year. With the influx of stimulus money into the economy, there’s an excess of $1.5 trillion in personal savings, up 14% since 2020. For the first time in 30 years, household cash is exceeding debt, and consumer spending over the past few months is 12% higher than pre-COVID-19 levels. All signs point to consum- ers, companies and states still being flush with money generated in 2020 and 2021 to help weather these ris- ing costs. n Impact on real estate. So, what does this mean for real estate? The Macro to micro: How inflation affects investments Kevin Brinkman Co-founder and CEO, Brinkman Real Estate A major data point of inflation is the year-over-year Consumer Price Index change, which dra- matically increased to 8.5% this spring. Please see Brinkman, Page 30