Despite the presidents claims to the contrary in his recent State of the Union address, inflation does not appear to be going away any time soon. Quite the contrary. Inflation is still high and barely moved downward as of last month when it was annualized at 6.5%.
Even this severely understates the problem. Just because inflation goes down, doesn’t mean prices paid are coming back down after having gone up. It’s not like the unemployment rate.
This is why inflation is so pernicious and difficult to wring out of the economy after having been reintroduced by profligate spending on the parts of both former President Trump and President Biden.
Inflation is cumulative. Therefore, January’s inflation rate of 6.4% means prices are still rising at a ruinous rate. Furthermore, this number actually understates the problem where household expenses are concerned. And household expenses are where most Americans spend most of their money.
The headline number of 6.4% inflation is a far cry from the 11.3% increase year over year in the cost of groceries. Electricity is up even more at 12%. I hope you’re sitting down, with natural gas prices up 29%. Airfares are up almost 26%. Rents are up 9%.
So whether it is food, housing or basic energy needs just to keep you warm, Americans are really feeling the pinch.
Therefore, the Fed and its rate hikes may have much further to go. In our opinion, this makes the possibility of a “soft landing” for the economy much less likely.
This is particularly true in light of the White House’ now laughable insistence that inflation was “transitory” in 2021. These are the exact same folks who are now peddling the “soft landing” prognosis to a gullible American public. Fool me once, shame on you, fool me twice, shame on me.
Income property investors must prepare for this and ask themselves the hard question, are continued inflation and double-digit mortgage rates possible?
It certainly can’t hurt to prepare for this possibility. To do so brings us squarely back to the primacy of operating assets in today’s environment.
Remember, operating assets are those properties with multiple tenants and short lease intervals. Multiple tenants may provide investors greater protection in terms of occupancy. If the aforementioned scenario becomes reality and a recession is in the offing, this will be critical to the integrity of invested equity.
As more jobs are lost and wealth destroyed, people and business could pull back. Buildings may go dark as a result. This can have a severe impact on single tenant net lease assets. However, it typically requires even more distress to impact habitational assets in a like manner.
Cash flows can certainly go down as vacancies rise. However, the operative word here is vacancies not vacancy. It generally takes a lot of folks all moving out at the same time to negatively impact the cash flow of an operating asset. This is obviously not the case with single tenant net lease.
You may think this scenario overly pessimistic, however, to quote Warren Buffett, “huge and entrenched fiscal deficits have consequences.”
If continuing inflation and significantly higher mortgage rates really have the potential to be in the cards, it’s best if it’s the final nail in the coffin of the current administrations and not yours.