How Inflation Risk is Affecting Commercial Real Estate
The U.S economy is slowly returning to shape after the COVID-19 pandemic, but one of the consequences of the pressure placed on supply is inflation. People are having conversations about inflation, given the current state of the economy and how it may affect the general market, primarily commercial real estate investments. This brings us to an essential aspect of this conversation- how inflation risk can affect commercial real estate.
This article will let you in on what you need to know about how inflation risk affects commercial real estate. You will get to know the benefits of owning commercial real estate in high-inflation environments, how investors typically prepare for rising inflation rates, and the future of commercial real estate in light of current economic trends.
What Do Inflationary Risks Entail?
Inflation occurs when there is an increment in the prices of goods and services. Inflation is usually caused by pressure on the economy’s demand and supply. Naturally, inflation weakens consumers’ purchasing power, and the dollar value lessens. When inflation happens, the only way to maintain one’s purchasing power is to have an income or investment that matches the inflation.
The inflation risk refers to the probability that the value of one’s asset may plummet if the asset cannot keep up with inflation. This is a significant concern for investors when there is an inflationary risk.
How much can inflation affect the value of one’s assets?
Sometimes inflation affects investments so much that in years, property value reduces drastically that it almost holds no value in the present world. Inflation may tremendously reduce the value of many kinds of investments and assets.
For instance, in some cases, the value of stocks rises since companies have an increased profit that rises alongside inflation. The disadvantage is that it may not be as fast-paced as inflation and will not do well in high-inflation environments.
Unlike intangible investments, commercial real estate investments are more likely to do well with inflation and are suitable for cushioning inflation’s effects. The more expensive goods and services become, the more the prices of rental properties and houses increase.
How Do Investors Prepare For Rising Inflation Rates?
Naturally, investors put certain things in place to ensure that if inflation occurs, the value of their property is protected, and their purchasing power is maintained. Investing in assets that are known to match or even beat inflationary conditions is a common way investors prepare for rising inflation rates. Some of these assets are discussed below.
Commercial Real Estate Investments
Generally, investing in real estate is a fantastic way to beat inflation. Commercial real estate properties have their prices surge just as general goods and services increase, and this helps an investor beat inflation. Also, the rental value of the commercial real estate may be reviewed as prices of goods and services increase.
Landlords can increase rent annually to match the inflation. Most times, leases are set to create space for an annual rental increase. The value of commercial properties increases just as the prices of goods and services. Even mortgages rise in the face of inflation, which is to the investor’s advantage.
Private Money Lending
Investing in private money lending is also an excellent way to keep your assets from being heavily affected by inflation. As a private individual looking to invest, you may invest in a money lending business and increase your interest rates to match inflation. Giving out leveraged loans is a great way to protect your finances from being drastically affected by inflation.
Gold
Investing in gold is also suitable to protect your purchasing power from declining. The price of gold generally increases when there’s inflation. It may not tower over current prices caused by inflation, but you can be sure to maintain your spending power by investing in gold.
Short-term Bonds
Short-term bonds tend to help guard your investment against inflation. The shorter it is, the more likely it is to withstand inflation. A long-term bond, however, does not have such power. While investing in bonds and even stocks can help match inflation, the margin is not wide compared to other types of investments like commercial real estate, and the chances of bonds withstanding heavy inflation are very low.
The Benefits of Owning Commercial Real Estate in a High-inflation Environment
While inflation risk generally affects most investments, its effect on real estate usually benefits the investor. Some of the ways inflation benefits commercial real estate investors are outlined below.
Increased Rental Value
When inflation occurs, the value of the commercial real estate increases too, which places a premium on existing real properties owned by commercial real estate investors. The rental value of properties also increases, and rents may be reviewed and increased by property owners. This ensures a balanced cash inflow for investors and absolutely protects them from whatever effects their investments would have suffered due to inflation.
Borrower’s Benefits
While lenders may benefit from inflation by increasing their rates, borrowers also benefit significantly if they obtain a loan from the lender before the inflation. Most commercial real estate investors receive loans from lenders to fund commercial real estate projects. It certainly helps when a long-term loan is unaffected by inflation, and the interest rates remain the same.
Limited Supply of Real Estate Properties
Building materials and the cost of workforce increase when there is inflation; therefore, real estate investors naturally wait until the inflation passes to start new building projects. The pause in creating new projects reduces the supply of real properties, which automatically increases the value of existing properties- another plus for real estate investors.
The Future of Commercial Real Estate in the Current Economy
The economy has come a long way in recovering from the drawbacks caused by the pandemic, but experts opine that another wave of inflation may be looming. Of course, one must tidy up their finances to ensure that they maintain their purchasing power should this happen. There is almost no investment as inflation-proof as commercial real estate for now and in the foreseeable future.
There hasn’t been a better time to invest in commercial real estate than now. The demand for real properties will continue to surge and definitely lead to an increase in the value placed on real properties. Though likely that the surge in prices of goods and services will reduce in good time, it remains good news for those in commercial real estate. The fact remains that a commercial real estate investment strategy will do well regardless of whether or not there is inflation.
Conclusion
Commercial real estate is a great way to protect your investments from inflation and maintain your purchasing power. Commercial real estate can also help you build up your investment portfolio.
If you’re an individual or corporation looking to invest in commercial real estate, Finance Lobby can help. Finance Lobby is a marketplace that connects lenders to brokers and borrowers and ensures a smooth transaction process. This way, you can complete your commercial real estate project without any problems. Plus, as a broker, borrower or lender, you’ll be able to find the best fit for what you’re looking for on Finance Lobby.