Following another increase in annual inflation, economic prospects for 2022 have dampened significantly. The annualized CPI increased 9.1% in June, the highest price jump in more than 40 years. As a result, many forecasters now believe that inflation will remain persistent for some time. According to David Solomon, CEO of Goldman Sachs, inflation is deeply embedded into our economy and volatility is likely to remain through at least the end of this year. While the job market remains strong, with nearly 400,000 new jobs added across a wide variety of sectors in June, companies are beginning to tighten hiring as the expectation of a recession increases. The Fed will likely raise short-term rates 75 or 100 basis points next week, and all signs point to additional increases until inflation begins to cool.
Operating fundamentals are starting to weaken quickly as the economy softens. All key metrics were flat or negative on a week-over-week basis except for NER growth. While NER grew, its 10-basis point increase is the slowest weekly gain this year. Annual NER growth is down to 8%, marking a significant deceleration from early 2022. As interest rates increased, for sale properties are re-trading at discounts of 10-15% while other deals are falling apart completely. Lenders, especially those providing floating rate loans are requiring buyers to lock in expensive rate caps or increase interest escrow. As a result, returns are not penciling the way they were even 3-6 months ago for many deals.
Key Takeaways – Data as of 07/17/2022
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