This year, the annual U.S. inflation hit its highest rate since 1981 and investors do not foresee it coming down anytime in the near future.
These past few years have brought their fair share of difficulties in what seems to be a nonstop slew of world altering events, such as Covid-19 and more recent conflicts in Ukraine. With the supply chain continuing to be affected, and sanctions putting pressure on the oil and wheat industries, these events have caused prices to keep rising. In the face of such adversity, can commercial real estate be an asset to invest in additional income? It depends…
Real estate has been used as a successful inflation hedge for many years. When prices are increasing at a moderate rate, real estate can give the best return. According to UBS analyst, Charles Boissier, Wall Street Journal, “For listed real estate investment trusts, the inflation sweet spot is two to 3.5 percent.” With these conditions, owners can easily raise rent while the economy opens opportunity for higher commercial property demand and lower vacancy rates. Although, if inflation rises too high, then it can be a tricky road to navigate. Once the inflation rate rises above 4 percent, you may find it difficult for real estate stocks to outperform the wider market.
Today, the U.S. inflation rate has now reached 8.54 percent. So, what can commercial real estate do for investors in the current economy? According to the Wall Street Journal, inflation today is difficult to navigate due to it being driven by expensive raw materials, labor and energy, which is affecting overall economic growth. However, there are some clues regarding which types of real estate stocks may be a safer bet. In the fourth quarter of 2021, we saw 45 percent of total commercial real estate investments in multi-family housing, compared to its average of 28 percent over the four years pre-pandemic, according to CBRE data. Also, industrial assets with inflation-linked rent reviews are in remarkably high demand. The outlook for some retail and office spaces is difficult. Some property owners may struggle to raise rent as the transition to remote work for many businesses lessens the demand for space.
Real estate property can provide shelter during inflationary struggles, but only if supply and demand trends are favorable to the property type. For our current inflationary recovery, it is not like rapidly sliding down a mountain. Instead, it is like you have slowly climbed to the peak of this mountain and it is now time to be repelled gently down from the levels of inflation. For now, sit tight and let’s see how increased interest rates affect demand and value of property over the next six to nine months in the Dallas-Fort Worth market.
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