Inflation and the real estate market: the residential, industrial and commercial sectors are the most exposed, while the office segment remains the most resilient
Inflation has become a hot topic for the real estate market, because all players in the sector (renters or investors), suffer in one way or another from the effects of rising prices, the sectors most exposed to pressures inflationary being residential, industrial and retail, with much more resilience in the office segment.
However, we believe that energy price volatility could accelerate the process of companies relocating to green and energy-efficient buildings where ESG standards have been implemented.
Bogdan Sergentu, Head of Valuation & Consulting Cushman & Wakefield Echinox: “The economic measures adopted during the pandemic, amplified by the effects of the war in Ukraine and the sanctions imposed on Russia, have led to a surge in inflation to levels unprecedented in the recent history of the Western world. The measures adopted by most central banks focus on a gradual increase in monetary policy rates with the hope of a “safe landing” that would not create too many shocks for the economy. The problem here is that a second set of measures that could boost production, and therefore increase supply, are being delayed as global policymakers focus on lowering demand.
The current global real estate market has seen developers struggle due to lack of building materials and also due to rising land acquisition costs, while asset managers are grappling with building costs. unstable operations as investors face uncertainty regarding funding costs.
Occupants of office space are directly impacted by this current record level of inflation which will drive up occupancy costs, costs that now account for up to 10% of a business’ operating expenses.
It should be noted, however, that office rental levels are largely determined by market conditions, which means that an increase in rents is more a phenomenon related to local market fundamentals and vacancy rates and less related to trends. inflationary.
A very important element for office tenants concerns the early establishment of the number of workspaces required and therefore of the rental strategies, taking into account the impact of the increase in fitting-out costs, but also of changes in how employees work.
Companies active in the retail sector have recorded increases in turnover given the current inflationary environment, which makes the rent stable as a percentage of turnover. However, rising utility costs could not be countered.
Although retail sales have generally increased due to rising prices, this trend may change in the near future as shoppers become more price sensitive due to higher costs of gasoline, food and beverages. other essentials. In order to maintain in-store traffic and maximize sales conversions, retailers will need to take into account the changing buying habits of customers and adapt their entire omnichannel strategy to these particular changes. In terms of costs, the increase in operating expenses will significantly reduce operators’ profitability in this inflationary environment.
The industrial sector has been the best performing segment of the real estate market over the past few years, but tenants occupying industrial space face pressures related to operational, labor and real estate costs.
However, inflationary pressure will manifest differently in the industrial and logistics market, given that around 3 million m² of such space is owner-occupied in Romania, in addition to the around 5.6 million m² available for rent, with retail chains and car manufacturers being the most active in this regard.
This means that a higher share of occupants in industry and logistics are vulnerable to market instability compared to other real estate sectors. Indeed, occupants whose strategy is to acquire or build their own spaces must face an increase in land prices and construction costs. In addition, they must also fill the labor gap in construction. The unexpected increase in occupancy costs is the main challenge for tenants in industrial and logistics spaces. Overall, the occupants of these spaces will also be affected by rising inflation, albeit in different directions, whether they are tenants or owners of the spaces in which they operate.
Bogdan Sergentu, Head of Valuation and Advisory Cushman & Wakefield Echinox“Inflation and rising interest rates will certainly have an impact on the residential real estate market, a sector strongly linked to lending practices and policies. The decline in purchasing power may also affect retailer sales and could also lead to lower demand for warehouse space. We believe that the office sector will be more resilient, as current events can only affect the market if they persist in the medium to long term.
In a market where the annual inflation rate was 14.5% in May, a rate fueled by rising electricity, gas and central heating prices (more than 40% year-on-year), tenants will be more concerned with finding energy-efficient solutions in order to carry out their activities.