Fed shifts, ROAD to Housing Act, and CRE as an inflation hedge

Welcome to the CRE Exchange Podcast, where we deep dive into the global trends and challenges of professionals across all sectors of the commercial real estate industry. We engage with experts in this space to bring you innovative insights into industry practices, opportunities and challenges to better inform your decisions. This episode is brought to you by AllTisGruit, a leading provider of CRE intelligence. We connect data, analytics, applications, and expertise to power CRE performance. Welcome everyone to another exciting episode of the CRE Exchange. I'm Cole Perry, your host and associate director of research at AllTisGruit. I'm joined by Omar Al-Tarai, our senior director of research. Together we'll share the latest news and trends in the US commercial real estate market. Omar, great to be with you again. This is our 100th episode. It's very excited about that. And we've got a lot to talk about today. So, how did you tell us what we're going to be talking about? Yeah, so we'll start it off with some of the big headline news, including some of our takeaways from the Fed's meeting last week, as well as some pretty big housing legislation and housing policy news. And then we'll run through some fresh econ data, including housing data and some retail sales data. And then we'll touch on a upcoming report that dives into the relationship between commercial real estate and inflation. I think saying stuff. So, Omar, what's going on with the Fed? Yeah, so even though there was little surprise by the continued hold announcement on the 17th last week, the Fed kept the Fed funds rate at 3.5 to 3.75 percent. You know, that was what the markets were expecting coming into the meeting. But I think the more significant news was around what's coming from the Fed in the future. The significant changes that were largely alluded to or hinted at. And these don't necessarily have to do with the policy rate, but actually have to do with how the US Central Bank approaches monetary policy. So, the Federal Reserve is really seems like it will be rewriting its playbook of how it approaches and handles monetary policy going forward. As of recording Tuesday the 23rd, markets are pricing in one to two 25 basis point hikes through the end of the year. But don't think that the rate is really the major news coming out of Kevin Worsh's first meeting and Fed decision. There were really kind of two main themes or takeaways for me from last week's statement in press conference that I want to quickly highlight given that, you know, I'm sure many have either tuned in and watched the press conference or read the statement themselves. The first is that there seemed to be task forces for everything. I was trying to come up with something catchy about like, you know, there's an app for that. I got the sense that there's a task force for that. We seem to be Mr. Worsh's response to a lot of the questions that he got during the press conference. Overall, these task forces are really diving into and assessing the key areas that Fed wants to either change or adapt. I think that this really is a positive given that the economy continues to change substantially, whether that's dealing with the kind of mass injection of liquidity from the pandemic to structural changes that we're seeing flowing through the real economy caused by AI. But despite all the formulas and math that's used as well as the jargon that alludes to kind of hard sciences, you got to remember that the world of finance in the world of economics, those are soft sciences. They're navigated by theory, not governed by laws or scientific laws. And monetary policy really kind of fits between that economics and finance those two realms. So it's kind of like said another way, finance and economics are not solved games. And so finding ways to adapt to the reality of the situation is absolutely needed. And I do think that that's the intent behind these task forces is. So the five task forces that are underway are dealing with communication strategy, which we'll touch on briefly, balance sheet policy, data sources, labor and inflation. But I suspect that we're going to see some kind of big findings come out of these task forces that are then going to give us more color as to what that monetary policy rewrite actually looks like going forward and what it will look like in practice. The second big thing that stood out to me is shift towards really reading the tea leaves. It was very clear that Mr. Warsch plans to cut back on Fed signaling, whether you look at the FOMC statement, you can look at the press conference in terms of the length or even the substance of the responses to the questions that were taken during the press conference or even the summary of economic projections that the FOMC puts out, which is really kind of showing the dot plot and where all the FOMC members kind of view the path going forward. All of those were either shorter, they were more concise, they dodged certain questions. Mr. Warsch kind of made it very clear that the Fed will be less transparent with the market going forward. Mr. Warsch acknowledged that he left his dot out of the dot plot and really wasn't kind of leaning one way or the other, but all of this goes to the same trend of really less transparency coming from the Fed going forward. I think that that shift may give the Fed a bit more power in terms of ultimately being able to control the message, being that they'll be putting less message into the market, less guidance and it avoids scenarios that I think Mr. Powell had to face around transitory and the market's getting caught up on that, but it also reintroduces kind of this potential surprise of the markets. If they're not bringing the markets along and if they cut back on some of the transparency of how different FOMC members see the situation, what the plan is at all times, then that opens it up for essentially just more market surprise and market surprise usually takes the shape of volatility. So it's kind of a double edged sword there, but you know, these are certainly things to watch, but you know, the policy rate did not move. Markets are pretty much pricing in one to two hikes through the end of the year and it's an interesting time to really be pulling back on transparency, but I think that's the direction we're going. I know you were paying attention to some other big news. What caught your attention from DC? Yeah, so I think if you invest in single-family rentals, build to rent or just broadly touch multi-family, there was a bill that cleared the Senate yesterday and by the time recording, that was June 22nd, that's I think important to pay attention to. This is the 21st century Road to Housing Act and this is the latest legislative attempt at approving affordability, removing barriers to housing construction. By some accounts, probably one of the largest and most significant housing bills we've seen in decades. So thank you for our listeners who are interested. Wanted to walk through how we got here, what this is slated to do and some of the positives and negatives for us in CRE. So cold, this has been a rather long process and perhaps one that not all of our listeners are familiar with. Can you give us a sense of kind of like the timeline to get to where we are now? Yeah, so we can think of the timeline as basically a year-long tug of war between the US House and US Senate. So let's go back to July of 2025 to the Senate Banking Committee and the advanced version of the Road to Housing Act and it was a 24 to nothing vote. This was something pushed by Senator Stimpscott and Elizabeth Warren, full Senate passed this unanimously on October 9th and something to note here is that the version of this bill at that point did not include the institutional investor ban as we'll call it. So purely supply side reforms that eventually the House passed a competing version of in February of 2026, 330 to nine votes, so effectively unanimously. Then we have a big moment on March 2nd. So Senator Scott Warren merged the House and the Senate bills. The process is typically called reconciliation and the merged version added something that was in neither of the originals, which was the restriction on large institutional investors buying single-family homes. That is the piece that brought the Trump administration on board with the legislation. So that was straight out of his executive order from early in 2026 and that was titled Stopping Wall Street from competing with Main Street Home Buyers. So now you have this hybrid of the house. in the Senate bill that now includes this slotted in piece from the administration. Senate passes that hybrid version, 89 to 10. The House then revises it in May. They keep that investor ban, but they strip out a seven year resale requirement for build to rent properties. And then just yesterday, June 22nd, the Senate passed the final version 85 to 5. So as of this recording, it has not gone back to the House yet, and it is not law. It does still need President Trump's signature, and it does need another passage from the House. But this is, you know, increasingly looking like it will get there. So thanks for the play by play. But what does the bill actually do? Glad you asked. And we could think about this as three buckets. And so the first, which is from that road to housing act, the original one from Senator Scott and Warren that cuts red tape for housing production. So streamlines, environmental review, and right sizes, the National Environmental Policy Act review for small and infill projects. So attempting to get them to construction faster. It adds new construction as an eligible use under HUD's Community Development Block Grant program, which is historically for like redevelopment and repurposing. And then there are some funds for a pattern book, which is pre-approved housing designs to speed up some of the permitting. And then it modernizes some of the manufactured housing rules attempting to expand. I think what's in our industry called the naturally occurring affordable housing supply. So that's the first bucket cutting red tape. The second, I'm is expanding financing. So this is the, you know, directly investor friendly part of this. So requires the federal housing authority to raise multifamily loan limits, lifts bank public welfare investment cap from 15 to 20%. Hopefully expanding banks capacity to invest in affordable housing. And then what's interesting about this is that there's no net new federal spending, which was an important piece to kind of keep this bipartisan. The third bucket, which the interesting one is that this is the institutional or quote institutional investor ban. So it does define a large institutional investor as any for-profit entity that controls 350 or more single-family homes in the aggregate. And so many reads and SFR funds squarely fit inside that definition. A single-family home is defined as a structure of two or fewer units. It does exclude manufactured homes. So manufactured housing, anything three units in up and land do fall with outside the ban. The restriction phases in after enactment existing homes owned by these entities are grandfathered. So you're not forced to sell which you already own. But, quote, "purchase" is defined pretty broadly. So mergers, new construction, foreclosures, bulk purchases all fall within the ban. Let's look at the positives and the negatives. Where does this cut for CRE or where does it cut against CRE? So we'll start with the positives. If you are a developer or a multifamily owner, manufactured housing investor, it's possible this is a bit of a tailwind. So faster permitting, lighter environmental review, higher FHA multifamily limits, possibly more bank capital flowing into housing, all attempting to lower your cost and time to build. And then if you are an existing owner of SFR, your grandfathered in. So your current book is protected entirely and there's not a terrible amount of competition from institutions going for it. Now on the negative side, if your growth model depends on acquiring SFR at scale, the 350 home ceiling does reshape your pipeline. No more bulk buying, no more foreclosure pickups, no more M&A roll ups. So you're really limited. I would say that the sharpest risk is really on the build to rent side. It's technically an exception to the ban, but in the Senate version, those homes have to be sold to an individual buyer within seven years. So you can build to rent, but you cannot hold it long term. So this is the piece that a lot of industry groups, including the Institute of Real Estate Management are fighting to strip this requirement. It would effectively eliminate the build to rent production pipeline. And frankly, this is already playing out. We've seen some of the major build to rent developers already pause construction in the Sunbelt, in anticipation of passage. So there's a bit of a swing factor that decides which way this breaks, at least for BTR, the house version dropped that seven year requirement entirely. But again, this has to go back up to a vote. So whether or not that BTR divestiture requirement clock, it comes through is really dependent on the next couple of days year in the house. That's super helpful. Let's push a little bit further. What is ultimately your read on this? Yeah, a couple of points I wanted to make on this. I think that the passage comes at a pretty politically obvious moment. Affordability is the top concern for households. We currently have Republican majorities and Republican president that are looking for some tangible wins ahead of the midterms related to affordability. So I think the supply side reforms make a lot of sense. Expand the financing tools, support manufactured housing, improved small dollar mortgage access, a streamlined NEPA review, etc. All great if the goal is to boost housing production. But I think this is trying to do a lot of conflicting things at once, trying to satisfy a couple of different political impulses. This institutional SFR band seems a little performative. It probably pulls well, but the core issue of affordability is that there is a shortage of homes in high demand markets. So it doesn't really seem ideal to treat private capital as the enemy at the same time, the rest of the bill is trying to unlock it. The proposed BTR divestiture timeline sounds like an easy fix, but it ignores how these assets actually work. Build terrain communities may look like single-family housing, but they often function like multi-family projects. There's just a different physical form, but they often have shared infrastructure, professional management, and much different financing and exit timelines. So forcing a blunt divestiture timeline could make these much harder, if not impossible, to finance and ironically reduce a new housing production. So I think if you're just asking me, better approach would be to focus relentlessly on production, permitting infrastructures, owning flexibility, financing, not scapegoating one category of buyers for a crisis that is fundamentally about scarcity. Excellent breakdown. Let's stick with housing, but move out of the legislation and policy space and actually move into some of the econ data that we've seen. So tell us about the most recent housing report from the census. The Census Bureau's May Housing Data Showed a pretty meaningful pullback. You saw starts overall, so single, multi-family, everything from duplex to four units. It starts fell 15.4% for mapril, so a big drop to just around 1.2 million. So that's down quite a bit on the year. If you go further up the pipeline, you see that permits were more resilient. They slipped just 1% to 1.4 million. So some activity is holding, but if you go much further to completion, so what's actually coming online, they fell 8% on the month, 14% on the year. So across the board, production of housing units, everything from single up to multi-family is softening. Multi-family was the thing that drew some big headlines. Super sharp drop on the month to just 284,000 units that is over 40% on the month. So well outside the confidence interval that the census reports. And I just looked at this, but before we record it, that's the largest monthly drop in that data since February of 2011. Over the past couple of years, the story in the Sun Belt has been this supply pressure, a wave of new completions kind of bearing down on occupancy and rents. But you see starts contracting, meaningfully, permits now contracting. Completions are way down relative to where they were just a couple years ago. So the wave is clearly thinning. Now, I think you're going to start to see this really play out in terms of rent stabilization, perhaps occupancy recovery over the next 12 to 18 months, but this is going to vary by market. We only get this data at the regional level, but I think we'll see some interesting stuff happening. Now on the single family side, the census numbers and the NAHB or National Association of Home Builders, Wells Fargo Housing Market Index, they were released back to back. So that index came out on the 16th, around the 15th, just a day before we got the housing data for May. Pretty consistent story. The HMI, which measures kind of how confident builders are, I mean, it's a net number, you know, how many are positive versus how many are negative. So the the break even is 50. That came in at 35 in June. And that's a combination of current sales conditions, buyer traffic, and and a few other figures, but current sales conditions were at 38, buyer traffic at just 25. Builders are responding 35% reported cutting prices 62% or using some form of incentives. That's the 15th consecutive month that that's been 60% or higher. Now single family starts did only decline 1.9% in May. Permits actually ticked up, but again, builders pretty cautious. The HMI and starts data are historically very tightly correlated and they are showing constrained activity in the future, but not a collapse. So single family home ownership, still out of reach for why there's renter retention, likely staying pretty strong, multi-family demand has as a pretty durable floor underneath it. And I would say if you're looking at this from a CRE Capital Markets perspective, supply restraint across property types definitely reduces downside risks. So your NOI assumptions and strengthens the relative value case for existing multi-family in this higher for longer rate environment where construction is thinning. The housing wasn't the only kind of big econ release that we got. I know you're looking at the retail sales data. What'd you see there? Yeah, and this is also census data. They released their kind of economic indicators all right in a row. And we got the advance estimates for retail and food service spending for May on June 17th. So total spending was around 764 billion, up.9% from April and close to 7% above the same month a year ago. Retail trade sales, which do strip out food services, were up 1% on the month and 7.5% annually. But I want to caveat this, these figures are nominal. They're not adjusted for inflation. So the 6.9% annual gain does likely overstate a real volume growth in spending. But these are outpacing a couple common measures of inflation. So possible that the breadth increases is a good sign that super spending is holding up heading into the summer. Few categories were singling out non-store retailers. Effectively e-commerce was up 12.2% on the year. So again, structural shift away from physical storefronts. But possibly also a positive signal on the industrial side for your last my logistics and in fill light industrial space. But I also wanted to highlight food service, which is up just 2.7% on the year, which means it likely could be declining in real terms. And then I also wanted to flag that some of that monthly and annual growth is coming from gas stations. Top monthly performer growing 3.4% on an annual basis up close to 27% in the headline. Furniture and home furnishings was the only category in negative territory down 1% annually, which is pretty consistent with the broader housing market slowdown. We were just talking about this. People are not moving. They are not furnishing. So for retail landlords, flat readings and food and beverage, building materials, combined with the mild decline in food service, suggest that experiential and necessity-based categories that anchored a lot of post-pandemic leasing are not the growth drivers that they once were. But if strength is concentrated in e-commerce and energy, neither those fill shopping centers. So I think something to keep an eye out for folks that are in that space. So Omar, we've been talking a lot about inflation on this episode. It's in the retail numbers. It's in the housing data. It's a caveat on everything we've cited. So that brings me to something that we should pull on a little bit more. There is a piece of conventional wisdom in this industry that I think and you think deserves a bit of scrutiny. And that is commercial real estate as an inflation hedge. So I know that you've got some interesting findings here. What can you share with us? If you look at amazing inflation numbers, we're absolutely hot, right? And whether you're looking at CPI, Core CPI, PPI, they're all running hot and rising. Really kind of suggesting that the pricing pressures remain in the prices that we see as well as in the supply chain that really feeds the end consumer experience. So that's the PPI leading into CPI. As we're recording now, PC has not been released, but honestly, I expect usually when CPI and PPI are trending in the same direction, PC does follow that. And again, that kind of alluding to it at the Fed decision day takeaways. We might be seeing change in the kind of preferred inflation gauge, but when all of these are signaling the same in terms of price pressures, just growing and prices rising, you can almost take your pick of whatever the preferred inflation gauge is going forward. Have all heard whether you're reading it in a pitch deck or if you hear investors or I think it's almost common, it seems like it's common knowledge that commercial real estate is an inflation hedge. That's something that it's partially right, but honestly, it's pretty wrong. It's wrong in a way that if you're underwriting a deal, investing in a deal or selling any of that, it's worth being mindful of and actually understanding the relationship that's there. I've written a research note that will be publishing over the next coming weeks. It's timely now. You don't need to wait for the press, even though, you know, or publication, even though I do encourage you to read it when it does come out. We wanted to cover off a few of the big key findings. And so what this was doing was really looking at the relationship between commercial real estate, fundamentals and inflation over a 26 year time frame, as well as looking at it from multiple geographic cuts, including, you know, census region, census divisions, and on top of that, it's pretty much all the naikrief NPI subtypes to find where is commercial real estate actually an inflation hedge and where is it not? So six key findings here first is that the inflation hedge potential is real, but it is very narrow. The hedge is very concentrated. There are only three property types that really do the work. It's industrial, residential and retail and inside those, if you look at the subtype level, the only property subtypes that actually serve as an inflation hedge are warehouse within industrial apartments within residential and then mall and strip retail within retail. That's the list. Everything else is between neutral to actively bad as an inflation hedge. The second major point has to do with office. Office is the only major property type with a negative N.O.I. correlation to inflation. It was pretty definitive. If you chase the reason through the numbers, it's pretty clear as to why that's true. Office expenses rise with inflation, utilities, maintenance, insurance, yet office income does a very poor job of moving with inflation. Think urban office baserence really being fixed, which means that in an inflationary environment, they correlate negatively with the price pressure that everything else is experiencing. Long fixed leases clash with or meet this rising operating cost environment. Therefore, NOI is getting squeezed on both ends and ultimately less cash flow and not only does that hurt the operating fundamentals of the property but also the valuation. If you're running a DCF that assumes any sort of like CPI linked to NOI growth or you're just a growing, unconfirmed or uncontracted future rents, just marking them up to inflation. Inflation is not a tailwind for office. It's an absolute headwind. The third finding that I would highlight from the analysis is what I would call kind of a hotel head fake. This might be a finding that lands better with a narrow portion of those that are quantitatively curious, I guess, but this was one of my favorite findings, so I included it. But when you look at the Pearson correlation between hotel, NOI and inflation, hotel really kind of looks like a disaster. It has a negative 0.47 correlation. However, switch your correlation method to spear in and it actually becomes a positive correlation. It'll be at a still pretty weak. It's only about eight basis points. That Pearson reading was ultimately dragged down and can be explained, but the COVID demand collapse, which happened to coincide with an inflation spike. That gives that kind of misdirection. In the analysis, I'm essentially running through Pearson's spearmen and then also Kendall just to get confirmation of correlation and confirm that the relationships do hold even in kind of monotonic patterns. But the fourth finding has to do with geography. The kind of reflex in this industry is to assume that certain regions win at everything at different times. We recently went through this kind of the rising sunbelt and just everything looked better in the Sun Belt than elsewhere. And then you started seeing that kind of level off and that narrative shifted. But when you look at the full history, the numbers really kind of say otherwise. The strongest inflation hedging region over the last 26 years is actually the West. Average N-Y correlation of 0.18 against 0.04 to 0.09 everywhere else. But in the 2020 to 2026 or that most recent inflationary spike period, that gap ultimately vanished. So all four regions were running within nine basis points, correlation range, so 0.2 to 0.29 correlation. And the geographic opportunity to select your region to hedge better or worse ultimately collapses and disappears. So if you translate that take away into something a little bit more actionable, the geographic relationships between series, fundamentals and inflation can be used as a kind of cycle timing lever or kind of a tool to tilt your hedging at certain periods. But it's not really a permanent hedge. Ultimately, you get paid for picking the right region during normal inflation regimes. But nothing when inflation spikes up and deviates from the historic norm like the period that we're living through now. The fifth finding comes down to property taxes. This comes down to, you know, valuers and underwriters, property taxes are usually treated as a cost that really only go up. But again, this is where the data, if you look at that long time series of data, it does say something a bit more nuanced and arguably a bit more interesting. So property tax expense really correlates negatively with inflation across most property types. And, you know, if you ask, okay, well, why is that? Well, that's because assessed values reset on lags. So those millage rates move slowly. So when CPIs ripping taxes don't catch up for a year or two. So property tax actually contains inflation, which might be something that might inform more detailed underwriting. The lines that really are leaking inflation happen to be other expense line items, including utilities, maintenance, management fees, all that really kind of worth knowing when you're building out those performers. And then the sixth and final inflation hedge in commercial real estate is not a property type story. It really is a lease structure story. Apartments reprise every 12 months roughly. So apartments are able to hedge better than property types that have longer dated leases or if they're regular step ups that are baked into lease contracts. Well, again, that's going to hedge better than those that are fixed for their term. And see our inflation protection not at the asset class level, but it's at the intersection of property type lease structure and to a degree geography dependent on where you are in the inflation cycle. So that intersection of all of those, that's going to determine if a hedge actually exists or if it doesn't. And in a large part, it's not all see hurry is the same. So you can't use the same kind of blanket assumption across the board. So Omar, super interesting stuff. Where will folks be able to find this research? Yeah. So I would encourage you to check it out on the altis website. It'll be published over the coming weeks as we're headed into summer. It's getting hot outside. And if these inflation brids keep printing hot as well, hopefully this can, you know, cool your understanding about the relationship. That was a forced that was a forced joke. We'll see if Johannes keeps that one in there. And then ultimately if you don't find it on the site, you can also shoot us a note and we're happy to send it to you. All right. Well, I think that's all the time we've got for our 100th episode. But before we sign off, want to encourage our listeners, if you like the show, we'd love it if you could rate it. Please give us five stars on Apple and Spotify. Leave us comments there as well. We'd be happy to read them. Or feel free to send us an email at [email protected]. We'd love to know what topics you'd like covered on future episodes. In the meantime, Omar, it's been a pleasure and I look forward to speaking with you on another episode of the CRA Exchange. Have a good one. Thank you for listening to the CRA Exchange podcast. 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