COMMERCIAL REAL ESTATE ASSET CLASS TO INVEST IN TO HEDGE INFLATION

Q: Reasons people turn to commercial real estate class investments to protect and grow their wealth?

The Dire need for homes R ental Price Increases Appreciation Tax Benefits

Inflation is the general rise in the price of goods and services over time, resulting in a sustained drop in the purchasing power of money. Generally, in times of high inflation, the best assets to own are “hard” assets like commodities, gold, and real estate because their prices tend to rise in tandem with inflation.

Returns from a commercial real estate investor come from two places; income and capital appreciation, which work in tandem to hedge against high inflation.

Hedging Against Inflation

To hedge against inflation, you store your money in assets that appreciate in value over a certain period of time. Store here is a synonym for purchase. Gold is a popular example of a hedge against inflation. As the purchasing power of the U.S. dollar falls, an ounce of gold tends to become more expensive as more investors buy it. As such, the owner of that gold has successfully hedged against inflation. They can sell off that asset and receive more dollars in compensation than they originally invested, compensating for the drop in that currency’s purchasing power.

How Commercial Real Estate Can Hedge Against Inflation

Commercial real estate operates in a similar way to gold in inflationary environments. As the purchasing power of a currency drops, average property values tend to increase alongside new and existing commercial rentals as lease renewal rates increase.

This is largely the case with properties that are already developed and have been around for some time. It’s likely that the interest rates on any loans taken out to purchase those properties were lower before inflation hit.

Once the Federal Reserve begins raising interest rates to combat inflation, the cost of owning the property for the owner stays the same while its value grows. This is not so much so, however, for properties currently or planning to be under development. Inflation often leads to increased costs for labor and materials, slowing down property development as a result.

This means that demand for existing properties rises while demand for new ones falls, placing the odds all the more in favor of existing commercial real estate property owners.

Commercial Real Estate Asset Class to Invest In to Hedge Inflation

Historical data shows that real estate has been somewhat effective as a hedge against inflation. On a global scale, real estate in the past 40 years has had exactly 0% real rental rate growth, signaling a perfect hedge against inflation.

There are various commercial real estate asset classes to invest in to hedge inflation, and they are; Multifamily apartments, Office, Retail, and Industrial properties.

One of the best strategies savvy investors use to protect themselves from the harmful effects of inflation is investing in commercial real estate. It’s served as a high-quality inflation hedge for generations.

There are a number of reasons people turn to commercial real estate class investments to protect and grow their wealth and they are:

The Dire need for homes

It is obvious, but at the most basic level, everyone needs a place to live. When the cost of home ownership rises, tens of millions of people rely on rentals for their housing needs. No matter how high inflation gets, there will still be demand for multifamily real estate; housing is one of the most essential of all human needs.

Rental Price Increases

In today’s market specifically, rent growth has remained strong as the combination of rising interest rates and low supply has made the costs of owning a single-family home increasingly difficult for many. Most commercial leases are only 6 or 12 months, meaning you should be able to increase the rent on your property on a regular basis to keep up with inflation.

Appreciation

Commercial real estate properties tend to appreciate in value over time. This is because they are scarce desirable assets. As long as property prices continue to increase and keep pace with the price rises of expenses, then commercial real estate should remain an excellent inflation hedge.

Tax Benefits

While there’s a tendency to focus on cash flow and property appreciation, there are a variety of tax benefits associated with commercial real estate investments which can be a major component of total returns.

CONCLUSION

The key to commercial real estate investment performance is to construct portfolios that are protected from supply excesses that impair the inflation protection otherwise associated with commercial real estate. Historically, commercial real estate has handily beaten inflation except during periods of severe supply gluts brought about by too much construction or a collapse in demand.

As informed investors we should understand the risks associated with real estate investing and that there is no guarantee. Please do your due diligence.

Contact Estateserve today and realize your cash flow goals.

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