It's 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 rent growth to inflation? The simple 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. Rent growth is a function of dynamics occurring in the market where a property operates.
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
For 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 peg their 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 is $80 for a tank of gas.
Market Dynamics Drives Rent Growth
More than any other factor it is market dynamics that drives 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 sub-market. 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 a complete non-factor in pricing rent growth, however, it is ancillary to head-to-head competition.
Property managers must consider year-over-year revenue gains accounting for vacancy, concessions and other detractors from revenue. Property managers cannot rely on inflationary gains to rescue revenue growth. They must manage with long-term objectives in mind irrespective of the price movements in corn, copper or gold.
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