“Inflation has gotten out of hand,” said NAR’s Chief Economist Dr. Lawrence Yun, who recently presented at the Industrial, Commercial and Investment Conference in Harrisburg.
Yun blamed COVID-19 for leading the country into its current state, noting that the massive budget deficit to help the country survive the pandemic has led to today’s higher inflation and the “most aggressive interest rate policy since the 1980s.”
Despite these challenges, Yun said the market is calmer, but that doesn’t mean it’s a weak market. “My opinion is that the Fed should stop increasing the interest rate. Monitoring policy has a huge lag time. What they do today impacts the economy in 6-12 months. In 12 months, I think the inflation numbers will be calmer. There is no reason to raise interest rates. The inflation rate is calming down already. It is trending in the right direction. Things are more expensive, around 5%. High inflation can cause a lot of disruption,” said Yun.
“The Fed is making a mistake,” added Yun. “Inflation is calming down, but rent is still rising.”
However, Yun said the U.S. is at a 40-year high of apartment construction. He said that will help balance the cost of rising rents, as more supply continues to come into the market. The apartment sector continues to remain strong.
While the apartment and also the industrial sector remains positive, the office and retail sectors are still struggling, Yun said. “Half of office buildings are empty on any given workday,” he said. “The vulnerability is really office buildings. The solution is more people returning to the office and that doesn’t seem like it’s going to happen.” For retail, sales only rose 1.5%, that number should be closer to 5%, Yun said.
Despite the collapse of several small-sized banks, Yun predicted there wouldn’t be any panic, as large banks “just keep getting larger.” Yun said that he thinks the number of overall commercial real estate investments, those $2.5 million or above, will decrease in 2023 due to the struggle of smaller banks. He added that commercial real estate investors tend to use small banks as opposed to large banks.
“There is an increase of people not in the labor force, which jumped during COVID-19. If we can get more people back into the workforce, it could possibly cut inflation rates. But we have an elevated, lingering number of people who are not working,” said Yun.
“Commercial real estate is facing little changes right now. It’s about the interest rate. Interest rates have shot up. Consequently, borrowing on everything is expensive. It’s more expensive on commercial real estate because it doesn’t have the government guarantee. Commercial real estate will be impacted more,” he added. “The Fed should cut interest rates to help fix this. It will give breathing room to small-sized banks.”
The conference was hosted by the Greater Harrisburg Association of Realtors®, Lancaster County Association of Realtors®, Lebanon County Association of Realtors® and the Realtors® Association of York and Adams Counties.