Inflation’s Impact on Commercial Real Estate
The rising rate of inflation is on everyone’s minds. From the gas pump to the grocery store, we’re all noticing price hikes. Indeed, the Consumer Price Index jumped 6.8 percent over the last year, the largest increase the United States has seen since 1982.
The Federal Reserve initially described the economic situation as “transitory inflation,” a temporary result of the pandemic and its impact on the nation’s economy. Now, Federal Reserve Chairman Jerome Powell says inflation will likely last far longer than expected.
With the insight that we will need to endure inflation’s impact for longer than anticipated, it’s important to understand the impact it may have on the commercial real estate world.
Hedging Against Inflation
Stocks and other forms of investment tend to react negatively under inflationary conditions. Property value, on the other hand, responds proportionally to the rate of inflation. If you’ve got a loan on a commercial property and locked in a low interest rate, your property’s value will continue to climb even as your costs remain the same. That’s why so many smart investors use commercial property to hedge against the impact of inflation.
Supply and Demand
Some of our current inflation can be traced back to supply chain issues caused by COVID-19. As products and materials become scarce, prices increase. When prices go up, so too does the cost of labor. Rising material and labor costs could cause some developers to pump the brakes on building new properties. In turn, demand for existing properties may increase.
Property owners lose market share every time a new building opens its doors. As development slows, owners maintain market share. While it’s impossible to predict how long inflation will continue to impact the economy, this dynamic ensures that owners have the upper hand when setting rental rates and terms.
It can be tough to navigate the commercial real estate world without a broker. If you’re considering making an investment, allow the team at Insight Property Group to guide you through your options. Contact our professionals now!