Inflation & Commercial Real Estate

It’s no longer speculative that inflation is rising, and the Federal Reserve is stepping in to temper the spike. We’re feeling it at the pump, in the grocery store, and with many everyday purchases. While the rate of inflation may cause concern in several business sectors, it can positively affect commercial real estate.

Let’s talk about why inflation and commercial real estate can benefit each other and why investors should be optimistic about this trend for the remainder of the year.

Inflation Hedge or Not?

There’s lots of speculation based on previous recession data and current projections that commercial real estate can be a hedge against inflation. In a recent article from NAIOP, the Commercial Real Estate Development Association, the theory is sound as long as investors can secure or have already secured financing for the commercial real estate properties and investments at a set low-interest rate. The property value will rise, and yet their rates will not. In terms of the overall market, the hedge-against-inflation theory is still speculative, especially since rates have not risen so sharply since the recession in the early to mid-1970s. Still, our sources are optimistic about the likelihood that commercial real estate will remain relatively stable in the next twelve months.

Demand for Leased Space.

Considering that commercial real estate investments are one of the best stabilizing options for investors during times of inflation, it also makes sense that the leases within those commercial properties will become more profitable, and the demand for leased space will likely go up. In a recent Forbes article on the topic, they state that “In dense real estate markets and commercial centers, high demand and limited supply contribute to the appreciation of prices for real estate, which is positive for investors. So, if the price increases are more than the inflation rate, the relative return stays mostly positive.”

Staying the Course.

Above all, this is not the first time in history that a period of high inflation has occurred, and it won’t be the last. Our owner and principal broker, Amy Cecil, has been in commercial real estate and property management for the past two decades, and her perspective is grounded in this currently reactionary marketplace.

In the late 70s, and early 80s investors raised concerns about their assets and business owners felt the burden of higher lease rates, but the lessons from that time apply today. Stay the course with your business or investment, and do not let the inflation-driven market sway your plans!

Are you interested in a property lease or commercial property for sale? Let’s chat!