With inflation persisting incessantly, some investors are starting to question the strength of real estate’s defenses against higher prices. Investors purchased a record amount of commercial property and bet big on real estate stocks last year, viewing the sector as a hedge against inflation.
Commercial properties have long been viewed as inflation protection because owners of many property types can raise rents to stay ahead of price increases. Investors also believe commercial property can benefit from some of the same forces now driving inflation.
Inflation has paved the way for rent increases, raising rents in multifamily class A and class B buildings by 10% year-over-year, while class C owners struggle to collect rents from tenants. Even with capital to deploy, smaller institutional investors may face higher barriers to entry than ever before.
While the market remains highly fragmented, commercial real estate’s 20-year trend of institutionalization in which larger investment managers outpace smaller firms and wealthy individuals will continue. Now that the industry is facing high-interest rates and looming recession threats, size might prove more beneficial than ever. The opportunity to capitalize on economies of scale is only growing, creating a strong 2023 outlook for large commercial real estate institutions.
Larger institutions may have access to stronger capital pools at cheaper rates. As buyers, larger institutions can also invest in harsher times than their smaller counterparts, enjoying the flexibility of all-cash offers. Consequently, they can avoid the high-interest rates that smaller institutions that must take loans to finalize deals will incur. These powerful institutions maintain the freedom and flexibility to race forward on long-term investment theses, while smaller institutions may pause until conditions improve.
A Strong Outlook for Multifamily Real Estate As Housing Demand Remains Strong in 2023. Some of the market conditions that accelerated multifamily’s boom throughout the pandemic have faded. Nonetheless, the ongoing housing shortage and high demand for suburban homes will enable multifamily investors to stay their course. According to CNBC, housing inventory remains at about half of the pre-Covid levels as of June 2022. Additionally, many US markets are significantly under-supplied in total housing units due to the under-delivery of new housing, which has compounded over the past decade. High demand continues to increase rents, creating even more profitable opportunities for investors.
After decades of trying to revive B and C-class malls for sales tax purposes, some cities are redeveloping these spaces. That doesn’t mean losing sales tax entirely, as buildings can be converted into mixed-use properties that include apartments along with restaurants, movie theaters, and experiential retail locations.
Commercial Property owners and investors aren’t immune to cost increases. But they can adjust rents annually, sometimes even months to account for market changes. Demand for affordable and workforce housing far outweighs supply.
However, a number of factors will make competing in this competitive market costly for investors. To start, building materials are only becoming more expensive, increasing hard costs for developers even as they navigate a tight labor market. Distressed with complications, supply chains are causing shipping delays, reducing speed to market for developers eager to monetize newly constructed buildings.
The commercial real estate outlook for multifamily is strong in 2023, many opportunities will only be available to larger investors with deeper pools of capital.
Despite new challenges, the opportunity is only growing larger for investors willing to dip their toes into a volatile market’s rolling tides. While asset values and investment strategies may change, the commercial real estate market will continue to transact and the most strategic players will win.
As informed investors we should understand the risks associated with real estate investing and that there is no guarantee. Please do your due diligence.
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What is the difference between commercial real estate and residential real estate?
Commercial real estate refers to properties that are used for business purposes, such as office buildings, retail spaces, and warehouses. Residential real estate refers to properties that are used for housing, such as apartments, single-family homes, and condominiums.
How do I know if commercial real estate is right for me as a hedge against inflation?
The decision to invest in commercial real estate as a hedge against inflation will depend on your personal financial goals, risk tolerance, and investment strategy. It is important to carefully consider the benefits and risks before making any investment and to seek the advice of a financial professional if necessary.