When you hear the word inflation, what comes to your mind?
Are you focused on its negative impact—high cost of living but no bump on your work-related income?
These are the hard truths when you’re going against inflation—higher costs of rent, gas, food, and utilities. Even as an investor, you can’t escape this. However, there’s one way to hedge inflation— through commercial real estate investing.
Commercial real estate investing involves buying real assets such as apartment complexes, office buildings, retail shops, and industrial warehouses, for business purposes. Commercial real estate is an asset class used by most investors to reduce the impact of inflation over time.
Theoretically, there are two causes of inflation; demand-pull and cost-push.
Inflation due to demand-pull takes place when the demand is higher than supply. In this scenario, the demand for real estate properties increases. As a result, the prices of rent and property values go up. That’s why most investors take into consideration the location where they put their capital into. Ideally, you’d want to invest in areas where there’s no control in rent so you can increase periodically especially on your properties with long term leases. Having the ability to move up the rent is one of the benefits that CRE investors can take advantage of to hedge inflation.
On one hand, cost-push inflation occurs when there’s a price hike on goods and services. This economic scenario is less desirable most especially for consumers because it slows the economic growth. When this happens, developers and investors in the commercial real estate space could be paying high construction prices because of the import tariffs imposed on the building materials. With the rapidly increasing costs in construction, there will be a decrease in new building constructions. And yet, this still benefits the commercial real estate investors because they could expect less competition from new site constructions.
Commercial real estate investors stay ahead of the inflation curve because they are in a better position to recover from economic downturns.
Commercial real estate is an asset class that most investors use to reduce the impact of inflation over time. When there’s high inflation, commercial property values go up.
In any economy there’s inflation; commercial real estate investors take advantage of this by actively monitoring their properties in order to increase rents and protect themselves against economic downturns. Commercial REITs trade on what’s called an equity index which measures how well these investments have performed over time. As one would expect, when inflation spikes so do CRE ETF values.
Needless to say, when the economy is growing, inflation increases. If you have positioned yourself as a CRE investor, you’d have the upper hand to increase rents and have less competition from new developers and investors.