Inflation impacts all aspects of the economy, and commercial real estate is not immune to the impact of both inflation and rising interest rates. At a time when many investors are considering CRE as a way to weather the storm of increasing interest rates, there are other issues to consider when determining if this is the right time to invest.
In most cases, making generalized statements such as higher interest rates and inflation have a negative impact on the market; it is important to consider different aspects of CRE. Looking at the specific type of CRE is still a critical factor in deciding if this is the right time to get into the market or add to existing CRE holdings.
Protection Against Inflation
Typically, inflation is a positive for commercial real estate investment. In studies over long durations of the market, including natural inflation cycles, CRE tended to hold its own and actually do better than other types of investments, providing a slightly higher return to investors than the rate of inflation. While not a huge difference, this is very different than other asset classes that do not offer any return during times of inflation.
Change in Where to Invest
Inflation combined with the pandemic and the ongoing impact of this radical change on many businesses continues to shift how businesses and companies operate. The commercial real estate that is moving with this shift and responding to the demands can ask for a premium price in most markets. The limited supply of office space and workspace designed to handle hybrid work environments has created a significant need for these locations, adding to the returns for investors. Another significant change brought on by these factors is the demand for warehouse space. With retailers moving to an online sales model, warehouse space demand has pushed this aspect of the CRE industry into positive territory. As a result, warehouses are outperforming expectations, and there is little indication that this trend will change in the upcoming years.
Interest Rates and Commercial Real Estate
This year, supply chain issues are less problematic than during the height of the pandemic when materials and supplies were often difficult, if not impossible, to obtain for small and large-scale projects.
Interest rates are a concern for most CRE investors. As interest rates increase, lenders become more cautious, and it is only made more challenging by not knowing where the rates may be in a few months. However, these changes tend to be less problematic for long-term investments as the natural movement of the market will come into play. The type of purchase or new construction project will also make a difference, with speculative types of investments more problematic than properties that historically are more stable in the market. Experts in CRE also acknowledge that the gradual increase in the interest rate, which is not likely over, is also a way to help prevent a recession, adding a benefit to any commercial real estate investor for the long term.
