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Persistent Inflation Could Send Cap Rates Higher, Negating Any Rent Growth Benefit

June 10, 2022

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CBRE Econometric Advisors expects U.S. inflation to peak this summer, easing pressure on the Federal Reserve to further tighten monetary policy. It’s also plausible that inflation could remain elevated through year-end and into 2023. Such a scenario would force the Fed to take more aggressive actions that send interest rates sharply higher, perhaps tipping the economy briefly into a recession in 2023.
Higher inflation could be a boon to properties with near-term lease expirations, resulting in higher-than-expected nominal rent growth. However, stronger rent growth will not necessarily translate into better investment performance. If elevated inflation lingers, aggressive monetary policy will likely push cap rates higher in 2023, perhaps by 20 basis points more than CBRE Econometric Advisors currently expects. Stronger rental growth will not be enough to compensate.

FIGURE 1: Growth of Capital Values and Rent, Y-o-Y

persistent-inflation-could-send-cap-rates-higher-negating-any-rent-growth-benefit-v2NCREIF, CBRE Econometric Advisors

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