It is no secret food and fuel prices are increasing. We see it in every trip to the grocer or gas station. The market basket of items utilized to determine the “official” inflation rate is a moving target. How do we tie multifamily rent growth to inflation? The answer is we do not.
We do not tie rent growth to such a broad number as core inflation expectations. This number is a barometer of expectations. Multifamily rent growth is a function of dynamics occurring in the market where a property operates. Granted, inflationary pressures occur based on input costs associated with operations. This is industry specific inflationary inputs and has little to do with global commodity variances.
What is core inflation?
A definition from Investopedia:
Core inflation is a measure of inflation that excludes certain items that face volatile price movements. Core inflation eliminates products that can have temporary price shocks because these shocks can diverge from the overall trend of inflation and give a false measure of inflation. http://www.investopedia.com/terms/c/coreinflation.asp
A further explanation of core inflation from Investopedia:
Core inflation is most often calculated by taking the Consumer Price Index (CPI) and excluding certain items from the index, usually energy and food products. Other methods of calculation include the outliers method, which removes the products that have had the largest price changes. Core inflation is thought to be an indicator of underlying long-term inflation.
For multifamily property managers and owners, I believe core inflation expectations represent just one metric for measuring projected rent growth; it is not the be-all-end-all number to watch. I know owners that tie annual rental increases to the rate of increase in social security benefits- regardless of market dynamics. This is not a reasonable or sustainable rent growth strategy.
Commentators project inflation is “X” percent excluding…. auto and aircraft OR excluding food and commodities OR excluding fuel and natural gas. Can anyone just tell us the real inflation number- please~! According to macro-economist the reason for excluding items with “price shocks” is because they are “transitory”. Certainly, it does not seem that way when it cost $80 for a tank of gas.
Market Dynamics Drives Rent Growth
More than any other factor it is market dynamics that drives multifamily rent growth; the competitiveness of your asset as compared to other assets in the cohort. And price is not the sole dynamic. Multifamily property competes against other multifamily property in its submarket. Property does not compete against core inflation expectations.
Livability, safety, access to job centers, responsiveness, positive management control, energy efficiency, landscaping…. most of these are not directly correlated to price so much as property management and ownership philosophy. I am not suggesting inflation expectations is an absolute non-factor in pricing rent growth, however, it is ancillary to head-to-head competition at the property level.
Property managers must consider year-over-year revenue gains accounting for vacancy, concessions and other detractors from revenue. Multifamily property managers cannot rely on inflationary gains to rescue revenue growth. They must manage with long-term objectives in mind irrespective of price movements in corn, copper or gold.
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