Are Commercial Real Estate Assets Protected from Inflation?
Commercial real estate has historically been a resilient asset that is safeguarded from the volatility of the market, making it an ideal investment option for my clients. In fact, real estate is often used to hedge against inflation, because unlike stocks and other types of investments, the value of real estate property reacts proportionally to the inflation rate.
As interest rates climb at breakneck speed, investors who already own property with a locked-in interest rate are experiencing a rise in the value of their investment while their costs remain the same. But many wonder, will it last or will commercial real estate assets fall victim to inflation?
It’s been predicted that the inflation we’re experiencing will get worse before it gets better, and inflation rates are already at their highest point since the early 1980’s. But let’s look at the bright side of this predicament: we are experiencing inflation as a response to strong economic growth and demand. Supply is low and demand is high, thus increasing the value of goods – and CRE assets.
In part, the inflation we’re experiencing can be attributed to supply chain issues that originated during the pandemic. As material prices increased due to a lack of supply so did the cost of labor, which has halted some new developments and caused an increased demand in existing CRE properties. Think back to 2021, when we saw record-breaking cap rate compression and transaction values for most CRE asset types, especially industrial and multifamily.
While building costs are increasing, interest rates are also climbing which makes it a less opportune time to borrow money, also impacting new development that may compete with existing CRE assets. All this works to the benefit of landlords – if their property is in high demand, they can continue to raise rent and increase net operating income to offset rising inflation.
In this current environment, certain asset classes are considered more resilient to inflation and that hinges on the length of lease terms. Hospitality, multifamily and self-storage all allow for frequent rent increases due to shorter lease terms, whereas a single-tenant NNN investment could be locked into a rigid rent schedule and will be more susceptible to the impacts of inflation.
Ultimately, real estate still offers long-term appreciation and attractive yields. It’s still a good time to buy investment property, especially properties that allow for regular rent increases to counteract inflation. And for those looking to sell – now is the time to get top dollar for your CRE assets!
Justin Langlois, CCIM is a Commercial Real Estate Investment Advisor with Stirling Properties servicing Baton Rouge, Louisiana and surrounding markets. Please reach out to Justin to discuss your real estate investment strategies.