1. INFLATION’S IMPACT IN THE 1970’S
WINNERS
BORROWERS
INVESTORS IN REAL ESTATE
INDIVIDUALS WITH HIGH SKILLS AND/OR JOB MOBILITY
INDIVIDUALS EMPLOYED IN GROWTH AND HIGH-TECHNOLOGY INDUSTRIES
MOST GOVERNMENT TAX COLLECTORS
LOSERS
LENDERS
INVESTORS IN FINANCIAL ASSETS
INDIVIDUALS WITH FIXED INCOME AND/OR NO JOB MOBILITY
INDIVIDUALS IN MATURE AND/OR ENERGY-INEFFICIENT INDUSTRIES
MOST TAXPAYERS AND SAVERS

2. THE WEALTH TRANSFER EFFECTS OF INFLATION

3. EFFECTS OF INFLATION ON EXISTING-PROPERTY ECONOMICS

4. WHY MAY INFLATION AFFECT EXISTING AND NEW-DEVELOPMENT REAL ESTATE DIFFERENTLY?
SHORT-RUN IMPACT
COSTS OF FINANCING
COSTS OF GOODS AND SERVICES
INTERMEDIATE IMPACT
VACANCY RATES FALL
RENTS INCREASE
LONGER RUN IMPACT
EXCESS DEMAND
NEW INCENTIVES TO DEVELOP
CYCLICAL SWING BACK (MAY OCCUR)

5. THREE ELEMENTS TO PROTECT REAL ESTATE PARCELS FROM CYCLICAL VAGARIES:
STRENGTH OF REAL ESTATE MARKET
NATURE OF LEASE CONTRACTS
FINANCING RATES AND TERMS

6. GRAPH FROM III-56

7. IMPACT OF INFLATION, BY LAND USE
URBAN LAND
AGRICULTURAL AND FOREST LAND
RESIDENTIAL PARCELS
- OWNER - OCCUPANT UNITS
- MULTI-FAMILY PARCELS
COMMERCIAL SPACE

8. INFLATION AND MACRO-CYCLES AND REAL ESTATE INVESTMENT STRATEGIES
LONG CYCLES
WENZLICK
CASE
SHORT CYCLES
CONSTRUCTION CYCLES
MORTGAGE AVAILABILITY CYCLES
OTHER CYCLES
URBAN AREA / CITY CYCLES
NEIGHBORHOOD CYCLES
PROPERTY-SPECIFIC CYCLES
NEW CONCEPT / OVERKILL
HOT MARKET / OVERKILL

9. EXHIBIT 7-10

10. ECONOMIC RISKS RELATE TO THE EXTENT INFLATION IS PROPERLY ANTICIPATED VERSUS UNANTICIPATED

11. IMPORTANT INFLATION RELATED CONCEPTS
ANTICIPATED VS. UNANTICIPATED INFLATION
RELATIVE REAL RATE OF RETURN AMONG VARIOUS ASSETS
- REAL ECONOMICS
- TAX EFFECTS

12. EXCEL CHARTS

13. EXPECTED INFLATION, REAL AND NOMINAL INTEREST RATES, AND CAPITAL MARKET EQUILIBRIUM
A CHANGE IN THE EXPECTED RATE OF INFLATION MAY CHANGE THE REAL RATE OF INTEREST
CHANNELS FOR THE CHANGE IN THE REAL RATE OF INTEREST ARE:
- INCOME SAVINGS EFFECTS
- WEALTH EFFECTS
NOTE: THERE MAY BE DIFFERENCES IN SHORT RUN VERSUS LONG RUN IMPACTS OF CHANGES IN INFLATION.

14. INFLATION AND THE AFTER TAX REAL RATE OF INTEREST

15. LENDER RETURN UNDER INFLATION: EXAMPLE
ASSUME:
DESIRE 2% REAL RETURN AFTER TAXES
IF NOMINAL RATE IS 12% AND THE EXPECTED INFLATION RATE IS 10%, WHAT IS THE REAL RETURN FOR THE LENDER?
LENDER IS IN 50% TAX BRACKET

16. INFLATION AND DEPRECIATION: THE FIRM
NET AFTER TAX REAL REVENUE FROM INVESTMENT PROJECT
= (1 - TAX RATE) X (SALES REVENUE - PRODUCTION COSTS)
NOTE:
GENERAL INFLATION HAS NO REAL IMPACT IN PRINCIPLE!
BRACKET CREEP CHANGES CONCLUSION
DEPRECIATION EFFECT ALTERS INCENTIVE TO INVEST
In sum, the firm will require a lower real rate of return (i.e., and cost of financing) if high inflation persists. Hence, as inflation increases, nominal interest rates must rise less than the change in the inflation rate.

17. INFLATION AND THE AFTER-TAX REAL RATE OF INTEREST
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18. INFLATION AND DEPRECIATION
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