The Impact of Inflation on Commercial Real Estate

Franklin Corporate Park - Industrial Commercial Real Estate by Wangard Partners

We have all seen the difference in prices in our day-to-day lives; from department stores to the checkout line at the grocery store. The cost of goods and services has escalated considerably compared to 2021. Although inflation can have a substantial influence on the general economy, commercial real estate is commonly considered to be one of the best investments that can withstand inflation.

Throughout various economic cycles in the past, CRE has shown robust performance. Over the course of 25 years (1978-2022), U.S commercial real estate exceeded inflation over 87% of the time. This duration includes high inflation in the late 1970’s and early 1980’s.

Investing in commercial real estate can act as an effective safeguard against inflation in the long run, as the generated revenue helps mitigate its effects. These physical assets tend to increase in value in conjunction with inflation. As consumer prices increase, rental income and property values tend to move in the same direction, showing a strong correlation.  

Inflation has a crucial impact on an individual’s purchasing power. With higher interest rates compared to 2021, fewer people are willing and/or able to purchase property. This results in a higher demand for rental housing. Long-term investors can leverage the increase in demand and high occupancy rates to their advantage by raising rental rates.

Increased inflation and interest rates also have an impact on the supply aspect. The elevated cost of labor, materials, equipment, combined with higher borrowing expenses, makes it more expensive for developers to build new properties. This results in existing properties experiencing an increase in value, especially in the multifamily sector. This appreciation is due to the reduction in the supply of available properties because of the high costs associated with constructing new ones.

For a CRE investor with a long-term outlook, macro environment characterized by high inflation and increasing rates can be beneficial. However, by selecting the appropriate investment, investors can generate the most favorable risk-adjusted returns for their investment portfolio.