Commercial real estate could benefit from its hedge status if inflation continues to ramp up in the United States. In a recent webinar presentation to the Society of Industrial and Office Realtors (SIOR) Canada, U.S.-based real estate economist, Mark Dotzour, predicted mounting investor appetite for real estate coupled with a “once-in-a-generation buying opportunity” as distressed properties flood into the marketplace.

The ballooning U.S. federal deficit is central to his calculations, along with American consumers’ continued spending power. Speaking just one day after the U.S. government unveiled an extensive roster of reciprocal tariffs to be applied on imports from most of the world’s trading nations, Dotzour characterized the early declines in the equities markets as a return to normal after a run of outsized performance.

“These tariffs are going to hit corporate profits because I doubt these companies are going to be able to pass through all of the extra cost involved,” he said. “It doesn’t surprise me the stock market is adjusting downward from record-high prices and ridiculously high price-earnings ratios for all kinds of stuff.”

He hypothesizes several factors will continue to fuel consumer spending and forestall a recession, including:

• a continued decline in household debt service ratios since the highs following the 2008 financial crisis:
• growth in household savings, partly attributable to government stimulus and relief related to the COVID-19 pandemic;
• changing spending habits of millennials shut out of homeownership;
• escalating value of homeowners’ equity lines of credit; and
• general wage growth.

“This is almost like a law of gravity that if American people have money and financial capacity, they’re going to spend it,” Dotzour asserted. “And 70 per cent of our economy is simply just you and me and our neighbours going out and buying stuff.”

He predicts relatively stable interest rates over the next two years largely due to limited growth, or even declines, in residential rents. Those costs equate to roughly one-third of the U.S. consumer price index (CPI), and the assumed annual average rent increase has now dipped to 4 per cent from a 7 per cent peak.

“Slowly, that government calculation of rent increase per month is going to continue to drop for the next two years. The stated rate of inflation will start going up when that one-third component of rent stops going down,” Dotzour maintained. “The next inflation impulse will come in 2026 or 2027 when apartment rents start going up again.”

That could present a window for commercial real estate owners to refinance their properties at today’s interest rates, but he doesn’t anticipate much downward movement given other economic pressures — notably a federal deficit that now hovers around USD $36 trillion and is expanding weekly as bonds mature and are refinanced at higher rates. Annual debt service costs amounted to USD $882 billion in 2024, while a 4 per cent interest rate applied on the entire debt load would push that up to USD $1.2 trillion.

Bullish outlook with a possible black swan

This all translates into Dotzour’s “super bullish” outlook on real estate. He points to the a potential meld of investors looking to guard against currency value loss and a vast pool of motivated vendors.

“As we start to see more and higher inflation expectations, I’m anticipating a very strong growth in investor appetite for real estate of all sorts — all the way from single-family homes up to every kind of investment that you want to talk about, including raw land,” he asserted. “Real estate owners and investors looking to the Fed for a low-interest-rate bailout are likely to be disappointed. What this is going to do, in my mind, is create a once-in-a-generation buying opportunity when we finally get price discovery in commercial real estate.”

For now, the market awaits the tipping point for this activity, which Dotzour describes as a somewhat mystical crossover from hesitancy to enthusiasm. That will rely on early movers to trigger growing momentum.

“When that fear of missing out starts to become the prevailing emotion in the marketplace, it can happen fast,” he said. “I’m telling people, to the best of my ability: be ready to go; have dry powder ready to go; be talking to lending institutions that have troubled assets on their books and get friendly with them because those properties are likely to start coming on the market in a bigger way this year and next year.”

Meanwhile, he calls tariffs a possible “black swan” on the horizon. Mimicking its brief imposition (March 4) and subsequent pause (March 5) on sweeping 25 per cent tariffs on most Canadian and Mexican imports, the U.S. government has adjusted the rollout of the extensive schedule of reciprocal tariffs it announced on April 2 for the majority of the world’s other trading nations.

Incoming goods and commodities from all designated countries (which do not include Canada and Mexico) except China will be taxed at 10 per cent for a 90-day period that should stretch into July. Chinese imports will be subject to a 125 per cent tariff. As well, 25 per cent tariffs remain on all steel, aluminum and automobiles manufactured outside the U.S.

From the perspective of April 3, Dotzour speculated U.S. tariff tactics might largely be a negotiating stance. However, he noted risks of further inflation and/or that other nations could place embargoes on the trade of key commodities required for economic growth in the U.S..

“I hope these (responses) don’t happen, but they are a possibility, and I’d say the possibility of them coming to reality has gone from about 5 per cent to about 15 or 20 per cent,” he said. “We’ll just have to wait to see, but the one bet I know about in commercial real estate is, if prices continue to go up and inflation goes up, people are going to be very interested in buying every kind of quality commercial real estate in the country.”