In order to properly forecast the state of the Ventura County economy for 2022, we must first analyze the headwinds resulting from macroeconomic US trends. There is no conversation regarding the Conejo Valley climate without understanding what headwinds are taking place within the larger geography that bear on our community. This is especially true given that we don’t have a relevant comparable to an unprecedented economic shut down for a 2-month long period. Considering GDP as the primary metric for economic stability, the United States actually returned to prepandemic levels as early as April 2021. However, we are expecting slower economic growth in the long term as a result of such policies and other pandemic responsive infrastructure. Another well recognized macro-trend weighing on the overall welfare is the Great Resignation – a dramatic decrease in the size of the US labor force. For the first time, there are now two jobs for every unemployed person living in the United States. Now, as the pandemic seems well enough in the rear-view mirror, the next economic barrier seems to be the ever-present inflation.

US inflation accelerated to a forty year high at 7.9%, or as high as 30% including gas and food. Initially, many predicted that this is transitory and will resolve on its own, however, that notion is starting to dissipate. There is a very strong fiscal component to the inflation we are experiencing due to some of the federal relief programs. Much of this was essential relief for displaced persons, but the size of that relief and way in which it was distributed is filtering directly into the inflation. Take a family that qualifies for every federal relief program since 2020, the maximum benefit they would be entitled to is $110,000 in California. The average benefit collected is $65,000 which is very close to the median income in California. Though the relief was designed to protect the vulnerable members of our community, those very same people are the ones most impacted by the inflation we are grappling with. Only 25% of PPP dollars went to workers who would’ve lost their job and the cost of jobs retained in the US was $250,000 per job. There’s been a dramatic increase in family bank accounts causing savings rates to surge from 7% prepandemic to 33%. There is still $2.7 trillion in excess dollars still sitting and until those dollars are back in circulation, this inflation we are experiencing will only continue. Average weekly earnings are down 3% from a year ago even though wages have increased. This is because the Federal Reserve “opened the floodgates” and pumped a near endless amount of money into bank accounts rather than into the economy. At this point, the total debt is greater than the size of the US economy, equaling approximately 135% of our GDP. 

What does all of this mean for the real estate market?

Real estate is not immune to inflationary periods, where all prices increase. There are a multitude of contributing factors, but the supply chain disruption is at the forefront. Construction costs are at an all-time high due to the inability to acquire building materials. However, there is no better market to be in during such a time. Real estate is one of the main ways for investors to hedge against inflation. We are in a window of opportunity for investors to capitalize on cheap money – low interest rates – offering investors the chance to avoid paying higher interest rates in the future. Rental rates are also increasing at a rapid pace – evidently in the retail market as well. In Ventura County alone, retail rents have increased over 12% in the past 5 years. Commercial real estate is historically a more stable investment during times of rapid inflation because office, retail, and apartment rents are directly tied to consumer prices and rise with inflation, subsequently pushing up property income. A strategy that I have seen owners utilize in the past six months is the incorporation of a CPI floor and ceiling to mitigate risk in lease contracts and remain concurrent with inflation.

There is plenty of opportunity to benefit from rising asset values as well. As property is becoming steadily more expensive over time, there is an opportune moment for investors to acquire properties that will only appreciate in the coming years. This is especially true in markets of rapid growth, where multifamily and affordable housing is being built. Thousand Oaks is on the fast track to becoming a downtown hub for mixed-use and multifamily apartment units. There will be an explosion in critical mass in the next 5-10 years, which is why this is a high zone of opportunity for investors/developers.

Interest rates will continue to rise to curb current inflation, which will require higher down payments. Existing debt, however, becomes cheaper as inflation rises because the relative cost of your debt decreases. Since residential real estate tends to outperform during inflationary periods, I see a silver lining in the rising mixed-use development trend. This asset class is already increasing in popularity, so it offers retail yet another opportunity to be at the forefront of activity. There is considerably less trust in the reliability of ecommerce since the supply chain disruption. Brick and mortar retail is beginning to see higher visits and a return to traditional shopping behavior. 

While the cost to borrow may be higher, commercial real estate can be used as a tool to hedge inflation if done correctly. As inflation rises, as do rents and property values. Especially in Class A markets and products. Westlake and Thousand Oaks is a highly affluent community among the top 5 safest cities with the top schools and abundant amenities. The Conejo Valley is also amid a period of transformation, making it a great candidate for investment opportunities.