The Real Estate Capital Scoreboard® – June, 2022


Chicago, Illinois, June 1, 2022 – Inflation continues rampaging international markets, and the United States is no exception.  The annual inflation rate climbed to over 8% at the end of April.  And the Russian invasion of Ukraine, now in its fourth month, only worsens the inflation picture.  Tightened global energy supplies exist as Kremlin-controlled oil accounts for about 12% of the world’s share.  Furthermore, Russian and Ukrainian wheat production accounts for over 25% of global output.  Although the United States hardly relies on Ukrainian wheat or Russian energy, worldwide demand remains high as Europe searches for other energy sources.  In contrast, many third-world countries rely on grain from these two nations.

Given global instability, commercial real estate pricing, particularly for debt, behaves more like gas prices than credit markets.  Both fall in the four-to-five number range.  Like energy costs, real estate mortgages are hit with increased rates (wholesale gas prices) and wider spreads (more profits at the pump).  Before the Ukraine crisis, overall permanent mortgage rates hovered in the three-to-four-percent range.  The national average for gas was about $3.25/gallon.  Now, permanent mortgage pricing increased at least one hundred basis points, fluctuating in the four-to-five-percent range.  The national average for gas prices exceeds $4.60/gallon, the highest price in American history.  Furthermore, no relief is in sight as summer fuel usage peaks.

Ironically, in some regions in the county, mainly California and parts of the Northeast, gas prices exceed $6/gallon.  However, capitalization rates remain highly competitive in these markets, ignoring the gas-to-mortgage-rate correlation.  And bargain hunters seeking better pricing remain sidelined, as valuation adjustments from higher debt costs have yet to take hold during this price discovery period.  Instead, many investors bet on inflation to help navigate commercial real estate through any challenging market cycles as most markets are still supply-constrained.  And, international demand for American real estate remains healthy as an investment hedge against global instability.

John Oharenko, the director of The Real Estate Capital Institute,®advises, “Black Swan events such as the invasion of Ukraine, pose threats for world order.  International investors will continue to flock to the United States as a haven, regardless of inflation or other fears.”

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