Inflation fears are driving investors to commercial real estate. Indeed, over the past year, we have seen inflation ramp up to 6%, which is 9 times the highest of the decade. We have not seen this sort of pace since the early 1980s. Experts cannot agree on whether this is “transitory” or not because both market and Fed policy may be hard to predict.
Although supply chain and oil woes might be overcome, real estate makes over one the index. US Multi-family is charging 14% higher rent than a year ago (Yardi Matrix). Further, it can take up to 6 months for housing costs to show up in the CPI. This makes crystal balls even foggier.
Overall, CRE may remain a good hedge against inflation. Material cost makes replacement cost high. Structured leases somewhat offset rising prices. On the other hand, if supply outstrips demand, high vacancies disallow rent increases. Likewise, different asset classes may fare differently than others. Labor costs and remote work may continue to influence certain segments.
Therefore, to play it safe, look for
Leases that allow for regular rent increases,
Review tenant quality,
Ensure a structured rollover,
Know your submarket, and
Aim for Cap rates to keep pace
For more detailed prediction, check out Brad Kraus’ article “You Can Handle the Truth“, James Capital Advisors. Or, if you want help evaluating a particular real estate transaction in Texas, feel free to call Bill Oates 512.527.9600 Ext 205