Inflation will be story in real estate in ’22

By: J. David Chapman/January 6, 2022

Every new year, I’m asked to predict the story for the coming year. I hate to pile on, and certainly hate to confirm the obvious, but I must. Inflation will be the story of 2022. Inflation will be the catalyst that creates the next story – the Fed’s attempt to gradually increase interest rates to curb the runaway inflation. Both of these will lead to my main prediction of 2002 – increases in rents for both residential and commercial product.

Residential renters in Oklahoma are likely paying about 9% more now than they did in 2021. It’s difficult to determine because Oklahoma has many small operators and more single-family rentals and fewer multifamily rentals than most states. We get accurate rate reporting from large multifamily operators, but not from mom-and-pop landlords.

This 9% increase is one of the lowest nationally and will certainly increase as landlords, property managers, and owners feel the pressure of inflation to increase rates. Other states are seeing residential rental rates in the neighborhood of a 20% increase.

A local analysis of residential rental product shows a shortage of multifamily product and an adequate number of single-family “rent houses.” We typically have a higher percentage of single-family rental homes than multifamily rentals. This availability of single-family homes has kept home rentals near the lowest price per square foot nationally. With a lack of multifamily product being constructed in Oklahoma, and record occupancy numbers, the rents of single-family homes are likely to increase significantly in 2022. This is music to landlords’ ears as their rents have been low for an extended period.

Inflation in residential rents is tricky because most residential rents are one year in duration. So, renters have a modicum of protection, but not much. The landlord normally has one opportunity per year to raise the tenant’s rent, depending on what they believe market conditions will allow and future costs will dictate.

Commercial real estate is normally a hedge against inflation by offsetting the impact by adjusting rent. Commercial leases usually set rents for a three-year period. If market conditions allow, a more astute landlord will build in an annual increase in rent based on some index, maybe even an index protecting for inflation or cost of living, or it may simply be an arbitrary annual increase negotiated between tenant and landlord.

J. David Chapman is a professor of finance and real estate at the University of Central Oklahoma (jchapman7@uco.edu).