Current Inflation Struggles Signal Importance of Long-Term Investments Such as Commercial Real Estate
It’s no secret that in recent months, Americans have noticed an incredible surge in prices of goods and services, from gas to groceries to construction. The impacts of a multi-year-long pandemic, economic uncertainty and labor shortages have led gas prices to jump above $5 per gallon in some states and interest rates to soar. Furthermore, the Consumer Price Index, the widely-accepted inflation gauge, increased 7.9%—the fastest rate of inflation in 40 years. Despite the Federal Reserve previously categorizing these current circumstances as a “transitory inflation” (aka temporary and short-term), the organization is now treating it as long-term inflation.
So all this begs the question: What does this nationwide inflation mean for real estate?
Residential Real Estate Inflation
As a point of comparison, let’s start with a brief overview of single-family home increases. Depending on the location, many homebuyers can expect to see sweeping residential property real estate inflation. This includes:
- Higher mortgage rates
- Increased housing prices
- Higher construction costs
- A rise in the cost of building materials
Inflation & Real Estate in the Commercial Market
While residential property may experience the many negative effects of high inflation, commercial real estate tends to act as a hedge against it. This means commercial property can be an investment that protects real estate investors from the declining purchasing power of the US dollar.
Inflation’s Effect on Real Estate in the Commercial Sector
There are three major ways commercial real estate protects its investors from inflation:
- Demand and Supply: Property Scarcity
Many companies continue to grow despite inflation. If you own commercial property—whether a multi-family rental or a shopping center—in an area with little supply, but high demand, there is a greater opportunity to increase rent or sell for a profit.
- A Rise in Rental Rates
If you took on a commercial loan during times when rates were low, your operating expenses will likely stay the same throughout periods of inflation. When you increase rental prices, you can increase your net operating income, appreciating the value of your property.
- Change in Rental Terms
During times of inflation, commercial real estate owners can provide shorter-term agreements and adjust lease agreements to include regular rental increases that remain higher than the inflation rate, ensuring a higher net operating income.
Commercial Property Price
Adjusting investment and property management strategies can yield a positive return on commercial property prices if the goal is to sell. Typically during times of inflation, your commercial property price will appreciate.
It’s important to note that commercial property only acts as a hedge against inflation for real estate investors who already own property and have secured low-interest loan rates. During times of inflation, commercial property prices could soar, so it’s always wise to carefully and strategically consider when and where to purchase your first investment property.
Established in 1998 and headquartered in Simi Valley, CA, Extensia Financial offers competitive commercial real estate loans by partnering with credit unions and brokers to connect them to investors across the United States. Additionally, we uniquely support and guide our partners through the entire loan process. For more information or questions about commercial real estate funding during times of inflation, contact Extensia Financial today.