Comments Off on US Natural Gas Prices Spike To 14-Year High. Here’s Why:
New York(CNN Business)US natural gas prices have skyrocketed to levels unseen since 2008, a spike that threatens to offset the benefits of falling prices at the gas pump.
Natural gas futures surged 7% on Tuesday to close at $9.33 per million British thermal unit (BTU), the highest closing price since August 1, 2008.
Although natural gas futures cooled off a touch on Wednesday, they remain up about 70% just since the end of June. And natural gas is up a staggering 525% since closing at $1.48 in June 2020 when Covid-19 had shut much of the US economy down.
The summer spike is being driven in part by high demand as scorching temperatures through much of the country force Americans to crank up the air conditioning. That in turn has chipped away at relatively low inventory levels.
“We’ve had this perma-heat wave cooking the United States,” said Robert Yawger, vice president of energy futures at Mizuho Securities.
As temperatures drop this fall and winter, the natural gas spike signals sticker shock for families. Not only is natural gas a leading fuel source for the electric grid, it’s the most popular way to heat homes in America.
“Depending on the weather, it could be a challenging winter,” said Rob Thummel, senior portfolio manager at Tortoise Capital Advisors. “But not as challenging as in Europe. They are at risk of running out of natural gas. We aren’t.”
Europe’s natural gas prices are seven times higher
Europe’s natural gas crisis is being driven by its reliance on energy from Russia, which has slashed natural gas flows to Europe in response to Western sanctions.
The European Union has been forced to lay plans to ration natural gas, a drastic step that will hurt families and businesses. Natural gas prices have skyrocketed so high in Europe that it threatens to send the continent’s economy into recession.
For context, Europe’s natural gas prices are trading at levels equivalent to about $70 per million BTUs, according to Andy Lipow, president of Lipow Oil Associates. That is roughly seven times higher than prices in the United States.
But that is little consolation to Americans grappling with high prices at the grocery store, clothing stores and at restaurants.
Even as natural gas prices surge, oil prices have tumbled, helping to drive gasoline prices sharply lower. The national average for regular gasoline has dropped 64 days in a row, according to AAA.
Exports pick-up to Europe
Analysts say Europe’s natural gas crisis is contributing to the higher natural gas prices in America, although it’s not the main driver.
“Higher global prices are trickling down to the US. Natural gas has become a global commodity with the emergency of LNG,” said Thummel.
The United States has stepped up its exports of liquefied natural gas (LNG) to Europe in an effort to mitigate the impact of the loss of Russian gas.
“Every spare molecule we can find, we are shipping to the eurozone,” said Yawger.
US natural gas production is lagging behind
But the bigger issue for US natural gas is the fact that inventory levels are below historical averages, leaving the market with less of a buffer and driving up prices.
“We entered this year at beaten-down levels and we never caught up,” Yawger said.
Supply has failed to keep up with strong demand for gas. Thummel pointed to how US oil and gas producers are under pressure from Wall Street to spend less on expensive drilling projects and more on dividends and buybacks to shareholders.
“We need more US natural gas production. The production levels are too low,” Thummel said.
The good news is that higher prices should, eventually, incentivize more production. And investors are not betting today’s high prices will continue. The futures market indicates natural gas prices should be almost 50% lower at this point next year.
Then again, very few people thought a year ago natural gas prices would be at 2008 levels. And yet here we are.
Original Article by Matt Egan, CNN Business on August 17, 2022.
Comments Off on Fear. Uncertainty. Challenging Economic Times.
Fear. Uncertainty. Challenging Economic Times.
For many Americans, these feelings and beliefs have embedded themselves into our cultural fabric. Reminders of uncertain, and for many, challenging times are plentiful. Gas pump prices have soared over the past 12 months. A gallon of milk is 11.2% higher in the same time period. Your favorite morning coffee tastes a little less fulfilling with the higher price tag. Our society has shifted from one cultural extreme to another – enduring a long stay-at-home mandate that stressed the core of human interaction needs to an economy flooded with out-of-control inflation. Why is this happening? What comes next? Our team of experts has thoughts and ideas. Before reading further, please know these thoughts, beliefs and predictions may make you uncomfortable. They are observations and beliefs; not a crystal ball reading. Time will tell how things play out.
Inflation is the new frowned-upon visitor knocking on doors around the country.
Most of our nation’s current inflation can be pinned to two primary factors. The first factor is stimulus money. The federal government injected over $5 trillion into America’s money supply over a 24 month period via Covid relief funds. This amount represents roughly 27% of the current money supply in circulation. More money in citizen pockets led to increased spending. The higher velocity of spending creates inflation. To combat this velocity, the federal government utilizes one of its key control levers, interest rate fluctuation, to control spending habits. The goal of increasing interest rates is to decrease spending in an effort to slow down the economy. The Feds recent rate increases illustrate the government’s concern that inflation is running too hot. The impending challenge is the Fed’s interest rate hikes are only geared toward addressing the demand (spending habits) side of the equation. It does not address the supply side. The Fed faces an unprecedented task of reining in high inflation with 40% additional money in play.
Simply put, our dollars today are significantly less valuable (lower purchasing power) than they were 12 months ago. Stimulus money aims to help those most in need; those individuals most vulnerable and lowest on the earning potential food chain. The irony is disheartening… Our government over-injected for short-term benefit, thereby creating a long-term inflation challenge. The band aid (government stimulus checks) has been pulled while the wound has intensified. Printing money and more government spending is it the answer to stop the bleeding.
The second factor is energy costs.
Under President Biden, an extreme focus on sustainable, clean energy has resulted in an under supply of oil and gas. In the long run, most agree this will be better for our planet and the sustainability of our nation. Others will point out this goal is a multi-decade process to reach a level of production and reliability to avoid power shortages and blackouts. In the short term, President Biden’s regime eliminated the ability to drill on most federal lands. The recent stay-at-home mandate also resulted in lower power consumption which led drilling companies to halt operations. Sanctions placed on Russia are also in play. The following article goes into great detail about how high energy costs greatly affect inflation: https://www.nytimes.com/interactive/2022/06/14/business/gas-prices.html
Where are we heading? How will commercial real estate valuations be affected?
It is impossible for any individual to look into their crystal ball to decipher the outlook 1, 3 or 5 years out. Nonetheless, our team has put together a list of educated guesses.
Our team believes the federal government will continue to push interest rates higher. The government’s goal is to decrease inflation by slowing our economy. Black Diamond Realty projects a 1.5-2.5% increase over current rates within the next 9-12 months. If you are facing a refinance event within the next 2-3 years, lock in rates now. Most likely, they will not be lower 2-3 years from now.
As interest rates continue to rise, CRE valuations will experience downward pressure. The following two sub-bullet points explain why.
Cost of borrowing funds, a buyer’s expense, directly ties into debt service coverage ratios. Many banks seek a minimum 1.2-1.25 DSCR while amortizing loans over 15, 20 or 25 years. We anticipate banks will quickly enter a period of greater scrutiny in which “stress testing loans” will become more laborious similar to policies and procedures observed following 2008-09’s Great Recession.
Cap rates will go up. As the cost to borrow funds increase, a similar rise can be expected to cap rates. Institutional grade deals should retain value while more mom/pop tenants and shorter lease terms will pose greater risk and a corresponding heightened cap rate.
A transition from “cash is trash” back to “cash is king” in the CRE marketplace. Cash has been trash for the past dozen years. Bank and government loans could be achieved at rates slightly above historical inflation figures. This provided tremendous purchasing power to less sophisticated and lower capitalized individuals. Black Diamond Realty observed many deals 90-95% leveraged with creative financing and bank loans leveraging the asset. It is anticipated some investors will still highly leverage assets but we predict at a much lower frequency. Greater cash down will become a returning norm. Cash offers with quick closes will carry greater weight. In summary, rising interest rates will make cash more powerful in the months and years ahead.
Real estate will remain one of the greatest wealth building tools known to mankind. The deal structure and valuations are changing but the fundamentals behind real estate investing’s power remain intact. Real estate is a tangible asset. Historically, real estate has been a tremendous investment tool to hedge against inflation. This centuries long truth will remain strong albeit with changing deal structures and valuations compared to the past half decade.
Please note that statements based on forward-looking estimates may not materialize; there are no guarantees of future economic performance.
Warren Buffet has profited billions with a simple, straightforward investment strategy. Fear creates irrational decisions which lead to opportunities. “Buy when there is fear in the market.” The world’s current fear, uncertainty and challenges will result in tremendous buying opportunities.
The fundamentals of successful commercial real estate investing is changing. Our team of experts recommends keeping the following tips in mind.
Create a 12 month rainy day fund. Calculate your monthly expenses and multiply by 12. Make sure you have this money “set aside” in the event you need to draw from it.
Have some of your liquidity positioned in relatively low risk investments which will allow you to access cash any moment an investment opportunity presents itself.
Take advantage of one of the greatest wealth building tools offered by the federal government – IRS Code 1031. Lever up into larger, higher cash flow and appreciating assets.
Know the asset class you are investing in. Understand the current fundamental strengths, weaknesses, opportunities and threats (SWOT) for each sector of commercial real estate that you are considering.
Look for stabilized, cash flowing opportunities while not shying away from value add plays if the ROI and time/effort required make sense for your personal situation.
We live in a world of challenges. Fear and anxiety are at all time highs for some. We survived the 1973-81 recession and will certainly overcome the present day’s hurdles. The United States has proven, many times over, to be a dynamic and resilient culture with the ability to overcome adversity. Proceed with caution, be prepared to pounce and consistently monitor opportunities. Buckle up. Remember rainbows only show after periods of rain. Challenging times present wealth building opportunities.
Our Black Diamond Realty team can help guide you. Please call Black Diamond Realty’s Morgantown (304.413.4350) or Martinsburg (304.901.7788) office to set up a consultation with one of our experts.
Comments Off on Inflation hits another 40-year high. What does that mean for shoppers and the next Fed rate hike?
Inflation jumped again in June on a persistent climb in gas, food and rent costs, notching another 40-year high and likely solidifying the Federal Reserve’s plans for another big rate hike this month.
Prices increased 9.1% from a year earlier, up from anannual rate of 8.6% the prior month and the largest gain since November 1981, the Labor Department’s Consumer Price Index showed Wednesday. Economists surveyed by Bloomberg had estimated inflation would rise to 8.8%.
On a monthly basis, consumer prices increased 1.3%, the largest such leap since 2005, compared with a 1% rise in May.
“Ouch,” Ian Shepherdson, chief economist of Pantheon Macroeconomics, wrote in a research note of the latest surge in prices.
Amid signs that inflation is poised to gradually ease, he, along with other economists, noted June likely marked its peak, though a similar pronouncement in the spring proved premature.
Stock market reaction
The report bolsters the Federal Reserve’s plans to raise its key interest rate by a hefty three-quarters of a percentage point for a second straight month as part of an aggressive campaign to curtail inflation.
The development disappointed already dour investors. After the latest figures were released, the Dow Jones Industrial Average sank by more than 300 points. The S&P 500 fell by 37 points, roughly 1%. And yields on 10-year notes popped. In midmorning trading, they hovered at 3.03%.
What is causing inflation?
June’s surge again was led by gasoline prices, which increased 11.2% from the prior month and 59.9% annually. The good news is unleaded regular averaged $4.65 Tuesday, down from $5 a month ago.
Grocery prices rose by 1% from May and 12.2% over the past 12 months. Both gas and food costs have been elevated largely because Russia’s war in Ukraine has disrupted global supplies of oil, wheat, corn and other commodities.
In June, cereal prices rose 2.5% from the prior month and 14.2% from a year ago. Bread was up 1.6% monthly and 10.8% annually. Chicken costs increased by 1.5% from May and 17.3% yearly.
There were some encouraging signs. Bacon prices fell 1.9%, its second straight large monthly decline. And beef and veal prices decreased 2.3%.
Will food prices go down?
Commodity prices have tumbled recently amid recession fearsand ebbing consumer demand. That already has pushed down gas prices and set the stage for more moderate food price increases within months, says Wells Fargo economist Sam Bullard.
Barclays economist Pooja Sriram, however, believes higher fertilizer costs for farmers could keep grocery prices fairly high throughout the year. Russia is the leading exporter of fertilizer and the Ukraine war has driven up the cost of that commodity as well as its chief ingredient, natural gas.
Core prices, which exclude volatile food and energy items, increased 0.7% in June following a 0.6% rise the prior month, That nudged down the annual rise to 5.9% from 6% in May, teh third straight monthly decline.
What is rent inflation?
Rent climbed 0.8% monthly and 5.8% over the past year as people who hunkered down with family members during the pandemic moved into their own apartments.
There were some positive developments for summer travelers. Despite surging demand, airline fares fell 1.8% while hotel rates declined 2.8% but they’re still up 34.1% and 10% from a year earlier, respectively.
There are hints that inflation will likely soften in the months ahead. Besides falling commodity prices, supply chain troubles are abating, wage increases may be moderating and retailers’ bloated inventories are triggering big discounts for shoppers.
Also, consumer purchases have started shifting from goods to services, such as dining out and traveling, now that the pandemic is broadly easing.
“This will be the last big increase,” Shepherdson of Pantheon Macroeconomics says.
Does the report raise recession risks?
Yes, at least to some extent. Higher inflation leads consumers to rein in spending, which makes up about 70% of economic activity, and could mean bigger Fed rate hikes, which would hurt borrowing. Bank of America says the report is consistent with its call for a recession in the second half of the year.
Is this close to the worst inflation since World War II?
Not really. In March 1947, inflation hit a dizzying 19.7%. The spike was rooted in effects from the end of the war — the elimination of price controls, supply shortages and pent-up demand, according to a White House blog.
Original Article by Paul Davidson on usatoday.com, June 13, 2022
Comments Off on How Will Inflation Impact Commercial Real Estate?
We’ve all noticed the change — at the supermarket, gas pumps, and nearly everywhere else. Whether it was the cost of your Christmas tree or your New Year’s Eve champagne, prices are significantly higher today than they were just one year ago. In fact, the Consumer Price Index has climbed 6.8% in just the last year, the largest inflationary jump the U.S. has seen since 1982.
Initially, the Federal Reserve had categorized our current economic situation as “transitory inflation.” In other words, a temporary and predicted result of the pandemic and its impact on our economy. In the last month, however, Fed Chairman Jerome Powell has admitted that our current inflation will likely last longer than initially anticipated.
With the knowledge that we may need to endure inflation for longer than expected, it’s time to examine how inflation could impact commercial real estate.
Real Estate as a Hedge Against Inflation
Many investors purchase real estate and other tangible assets to hedge against inflation. While most investments, including stocks, tend to react negatively in inflationary conditions, the value of property reacts proportionally to the inflation rate and appreciates as inflation climbs. In other words, if you have a loan on a commercial property, and have locked in a low interest rate on that loan, the value of your property will continue to rise with inflation, even as your cost remains the same.
Knowing the relationship between inflation, costs and interest rates allows us to make other predictions about the impact of inflation on commercial real estate.
The impact of Supply and Demand on Leasing
Our economy is influenced by countless factors, including supply and demand. Some of our current inflation has been caused by the supply chain issues that have plagued the globe for well over a year. When materials and products are scarce, prices of those items increase. And when prices increase, typically the cost of labor also escalates.
Increasing labor and material costs could force some developers to put the brakes on building new properties. As a result, demand for existing properties would then climb, and property owners would be able to raise rental rates.
At the same time, we could also expect to see owners offering shorter-term leases. While a shorter term doesn’t offer owners the same stability in occupancy over time, it does provide owners with the opportunity to adjust rental rates more frequently and take advantage of the increased demand for their space.
The Impact of Inflation and Interest Rates on Market Share
Just as increased costs make it more difficult for developers to build, increasing interest rates will make it more difficult — or at least less advantageous —to borrow money. The Federal Reserve is expected to raise interest rates as many as three times this year and anticipates raising rates at least three more times by the end of 2024. The combination of higher inflation and higher interest rates will not only cause developers to build less, but existing property owners will likely choose to hold on to their assets.
In a rapidly developing real estate market, property owners lose market share every time a new building opens its doors. However, when development slows, owners maintain their market share. Again, this will give owners the upper hand when setting rental rates and terms.
How Long will These Conditions Last?
Just as it has been difficult to predict how long the coronavirus pandemic will last, it is also a challenge to forecast how long our pandemic-influenced economic conditions will prevail. It has become apparent that inflation is not just a transitory blip on our economic radar, and we’ll be dealing with the repercussions of rising prices for at least another year.
While some of us who recall the economy in the 1970s are anxious about our current conditions, history is unlikely to repeat itself in another “Great Inflation.” The economic drivers behind our current conditions are different from those in the 1970s, and economists are better prepared to manage inflation than they were 40 to 50 years ago.
The Fed will attempt to temper inflation through adjustments in interest rates and reduced bond purchases. However, Fed Chairman Powell has acknowledged that our high consumer prices will continue well into summer 2022, and investment group Goldman Sachs is projecting that inflation will get worse before conditions begin to improve. But for those who currently hold commercial real estate and those who are considering adding property to their investment portfolios, our current economy could provide opportunity.
Comments Off on Reflecting and Projecting, BDR’s Outlook on 2022
Macroeconomics (think interest rates and national productivity) greatly impact the commercial real estate markets we serve. Three major macro topics of 2021 were inflation, interest rates and labor participation. The most recent data released by the federal government indicates year-over-year inflation is at 6.2%, which is a rise from the previous quarter’s 5.4% and a multi-decade high. From higher price tags at the gas pumps to greater expense at the grocery store, inflation causes the dollars we have in our possession to have lower purchasing power.
The current rate of inflation has initiated discussion about interest rate increases to combat inflationary concerns. Historically, the federal government has utilized one of its key monetary policy levers, interest rate control, in high inflationary periods. The Federal Chairman, Jerome Powell, and his team anticipates three interest rate hikes in 2022 and another three in 2023. BDR projects interest rates to rise 75 to 125 basis points in 2022. On average, BDR has seen commercial real estate interest rates hover around 3.5% (3.25% – 3.75%) in 2021. If BDR’s projected 2022 increase is accurate (utilizing 1% interest rate increase), a $1MM loan will be $6,322.68 more per year when amortized over 20 years.
In 2021, BDR saw a significant increase in demand for investment commercial real estate. Investors are looking to diversify. Low interest rates is one key reason. Other contributing factors include high inflation, speculation the stock market is due for a correction and investors desire to move into tertiary/rural markets. Black Diamond Realty’s thoughts behind these contributing factors include:
Low Interest Rates: The low cost of borrowing funds allows purchasers to pay more which helps meet seller valuation expectations.
High Inflation: Commercial real estate has historically been an excellent hedge against high inflationary environments. Income producing assets (investment properties) are in highest demand. In some markets, rising rents can keep up with, or ideally exceed, the rate of inflation. Some commercial leases have automatic CPI adjustments. In other growing markets, demand outpaces supply which allows rents to be pushed beyond inflation.
Speculation of a Forthcoming Stock Market Correction: Markets react in unique and complex ways to variables. History tells us the average bull run lasts ~8 years. Excluding the ~6 month pandemic-initiated recession, the stock market has been on a bull run since 2009. History tells us a correction could be coming. Some believe it. Others do not. Nobody knows when but the fear surrounding this variable encourages investors to make diversification decisions.
Increased Demand for Tertiary Market Investments: The pandemic has created a shift in mindset, beliefs and practices that has hurt many metro markets but has also created positive momentum for some tertiary markets that boast high quality of life. Eds, meds and government are seen as recession-resistant sectors. Morgantown, WV and Bridgeport, WV are excellent examples of cities that are thriving in the midst of the pandemic. Demand for these areas has increased as remote working concepts have gained popularity and individuals are transitioning out of densely populated areas.
The factors above have resulted in compressed cap rates and corresponding higher valuations. It is a great time for a seller to exit an asset while a difficult time for purchasers to find deals. Black Diamond Realty has experienced a significant increase in off-market deal activity and we anticipate this trend to continue.
North central WV and southwestern PA are enjoying many economic highlights as our nation moves further beyond the Covid pandemic. Some of the north central WV highlights are captured below.
WVU Medicine continues to expand with the forthcoming opening of its 10-story Children’s Hospital on WVU’s main campus.
WestRidge Development continues to expand its footprint as new uses are introduced to the Morgantown, WV market. Most notably, Bass Pro Shop and Menards opened its door in 2021. Many more uses and buildings are in the works.
Morgantown Industrial Park is expanding to create additional, large pads in Phase II of the development which are anticipated to have more direct access to I-79. A 47-acre sale sparked Phase II’s development.
David and Rick Biafora are investing significantly into the revitalization of Middletown Mall, now called Middletown Commons. The total projected investment is ~$40-50 million which should have a significant positive effect on South Fairmont and White Hall’s local economy.
Mitsubishi hires 400-500 additional workers at North Central West Virginia Airport location in Bridgeport, WV.
Charles Point continues to expand which will soon include 50-60 acres of retail including anchor retailer, Menards.
Bridgeport introduced a state-of-the-art, 156,000 square foot multi-purpose facility to its community. The Bridge Sports Complex brings tremendous recreational and quality of life opportunities to Harrison County and beyond.
Ascend WV is receiving positive national highlight reel exposure and has helped reverse a decades old trend of individuals migrating out of WV. According to WAJR, “Between July 1, 2020 and July 1, 2021, West Virginia had a net migration of 2,343. More people moved into the state than out of it.”
West Virginia’s Grant and Tucker Counties won big in securing Virgin’s Hyperloop. This multi-state, competitive process was successfully secured on an 800 acre site in central WV.
New River Gorge National Park System was introduced as West Virginia’s first federal national park.
BDR worked hard to achieve its clients’ goals in 2021. The BDR team closed 87 deals in 2021 with 61% leases versus 39% sales. BDR added a new colleague, Caleb Wooldridge, to our growing team. Caleb joins BDR as a recent WVU graduate who majored in Economics and interned with David as an undergraduate. We are excited to watch Caleb flourish in the years ahead.
In his fourth year, Jeff Stenger continues his climb by surpassing production year after year. Jeff’s empathetic, hard-working and detailed-oriented demeanor adds tremendous value to the clients he serves.
Chris Waters has been dubbed the medical marijuana and industrial guru in BDR’s office. Last year was a breakout year for Chris and 2022 looks to continue that growth.
In her first full year with the team, Kim Licciardi set a BDR record for Year 1 production. Kim’s underwriting knowledge, business acumen and confidence have quickly propelled her onto a path as a top producer.
BDR’s sales team would not be where it is today without the skillset, support and moral fabric that Janelle Zeoli and Andrea Cooper provide daily. These two women are invaluable to the BDR team and continue to support our growth and development.
As we close the 2021 chapter, we are pleased to announce BDR is aggressively and actively working toward opening a second office in Martinsburg, WV. We will be recruiting and hiring key team members in the market with a specific focus on fostering client relationships and fortifying vendor contacts. We are optimistic our presentation, process and people will be well received in this new market. There will be more to come in a future announcement.
Our team promises to continue to strive to raise the standard while exceeding expectations in this new year and beyond. Thank you for your trust and confidence and we look forward to making 2022 a great year, together.
Comments Off on Inflation Uptick, What You Need to Know and Should Expect
The recent pandemic has caused significant construction supply chain challenges. Material costs have increased drastically; lumber futures are up 280%, steel mill product costs are up 55.6%, and gypsum product costs (plaster, drywall) have increased 12.5%. On top of the cost increase, lead times for construction materials have doubled or tripled, in many cases.
One example to offer…a BDR client recently called a contractor for a 6,000 square foot build-to-suit retail structure. Upon giving the bid, the contractor stated, “We will hold this pricing for two days.” This is in stark contrast to the typical pricing hold of 30 days. The urgency on both sides is a result of supply chain challenges.
Tensions like these extend beyond material cost increases. The Federal government recently injected an estimated $6 trillion dollars into our economy. Many businesses, communities, and families depended on this money to sustain their livelihood during the government shutdown. While the government took this step to rescue our economy in the short-term, the long-term impact should not be overlooked.
Inflation is a reality we will face in the years to come. Dating back to 1914, the yearly inflation rate in the United States has averaged 3.23%. The highest single month of inflation was in June 1920 when it skyrocketed to 23.70%. Since 2009, inflation has averaged 1.5-2% per year. According to tradingeconomics.com, April 2021’s inflation (most recent data point) is 4.2%. Each month in 2021 has seen an upward inflation trend.
There are several reasons inflation can uptick. Some of the causes include:
Injecting money into an economy. During the COVID-19 pandemic, the United States government injected around $6 trillion in the economy, which has ballooned our national debt to an astonishing $25 trillion. Since February 2020, the monetary supply in the United States has increased 26%. This is the largest one-year jump since 1946. According to USA Today Money, “Creating too much money that chases too few goods leads to price inflation, decreasing the purchase power of the dollar.” To note, there is more US currency in circulation today than ever before.
Demand-pull effect in an economy. Staying at home has led many folks to save up money (fuel cost, eating out for lunch) while consistently living hours in a single space (home). The reality many have lived for the past 12+ months provides an abundance of opportunity to find things to upgrade within a home. This COVID-sparked phenomenon has led to a surge in demand for goods and services. Look at the current residential housing market. Virtually any residential real estate agent will emphatically tell you it is currently a seller’s market. This extends well beyond our home base in Morgantown, WV, to the entire country.
Cost-push effect in an economy. In addition to increased demand, suppliers have been unable to maintain pace due to labor and raw material shortages. For an extended period of time, factories were shut down or stalled due to the pandemic. The effect is large gaps in the supply chain across many sectors – from chicken wings to construction materials. Increased and/or consistent demand with a decrease in supply results in higher prices.
These signs and more point to high rates of inflation. The volume of currency (USD) circulating in our system, pent-up demand for product and current supply chain issues are key indicators of increased inflation, which means tomorrow’s dollar will be worth less than today’s dollar.
One way to invest smartly given this circumstance is an inflation hedge. An inflation hedge typically involves investing in an asset expected to maintain or increase its value over a specified period of time. The investment goal is to secure assets close to, at, or greater than the rate of inflation. Investors should weigh their options across all investment opportunities.
Real estate is considered a strong hedge against inflation because property values and rents typically increase during times of inflation. Real estate has intrinsic value, is in limited supply, and is a yielding asset. People need to have shelter regardless of the value of their currency. Real estate investing also allows investors to utilize other people’s money, include the banks’, to make money.
Interest rates are still hovering around all-time lows which makes real estate a particularly attractive option in the current investment environment. When the rate of inflation goes up, fixed-interest rate financing costs less than when the loan was taken out since the dollar has lost some of its value. The borrower is essentially paying the lender back money that’s worth less than when the borrower took out the loan. This allows investors/borrowers to pay back loans using cheaper dollars.
“A dollar today is worth more than a dollar tomorrow.”
At Black Diamond Realty, we have seen an uptick in demand for multifamily assets and other investment properties, income producing assets, across all sectors. We anticipate this trend to continue due to many of the reasons highlighted in this article. West Virginia has received tremendous positive economic momentum. From the Hyperloop announcement to the Smith’s Ascend WV program, momentum is building in WV. North Central WV remains an economic shining star in the state.
Call Black Diamond Realty today to explore your investment options. We have a team of professionals who understand complicated dynamics driving the various markets we serve. Let us underwrite your next investment project. Hedge against inflation wisely.
Article by: Article by: David Lorenze, Caleb Wooldridge Edited by: Dr. Stephanie Lorenze