Buying commercial real estate is a great way to fight against inflation. Unlike renting, where rates can change, owning commercial property helps protect and grow your money as prices rise, making real estate a top option for investors.
Real Inflation vs. the Consumer Price Index
Inflation basically changes the number of things a single unit of money can buy. As prices rise, the number of things you can buy with the same amount of money decreases.
When inflation goes up, it impacts the real estate market. For example, loans become more expensive if the Federal Reserve increases interest rates to slow down inflation. So, it becomes harder for people to buy properties that fit their budgets.
On the other hand, the Consumer Price Index (CPI) is a tool that tracks changes in consumer spending each month in the US. It’s a mix of prices for various goods and services people buy and a go-to metric for understanding inflation observed by policymakers, financial markets, businesses, and consumers.
Factors That Make Commercial Real Estate a Strong Hedge Against Inflation
Commercial real estate can be a great investment for those who want to safeguard their buying power from inflation. Property is a limited resource, and the demand for it is always high. As a result, the value of commercial real estate tends to increase during times of high inflation.
One advantage of owning commercial property is that it provides fixed payments that don’t fluctuate based on the economy. This contrasts with leasing a commercial property, where base rent and expenses typically increase annually. The base rent escalates at a fixed rate per year, usually between 2-4%. In addition to base rent, operating expenses such as taxes, insurance, and common area maintenance (CAM) also increase every year.
If you own the property, you have an asset with a fixed payment, so you won’t have to worry about your rent going up yearly.
Other elements cement its position as one of the most suitable investments to protect against rising prices:
- Tangible asset: Real estate is a physical asset with a value that doesn’t decrease due to inflation. The steady rise of property values ensures the preservation of your buying power.
- Limited supply: The finite nature of land can propel property values to new heights during inflation.
- Market diversity: Different kinds of real estate (e.g., residential, commercial, industrial) may exhibit varied performance during inflation, offering investors added diversification.
- Tied to economic growth: Real estate values generally coincide with economic expansion. When economies grow to combat inflation, property values tend to rise in tandem with GDP growth.
- Shield against currency depreciation: During hyperinflation or currency depreciation episodes, real estate typically sustains its value more effectively than paper assets.
- Long-term investment: Real estate often resists short-term inflationary forces.
- Demand factors: The rising global population and urbanization trends keep the demand for real estate afloat, leading to potential capital appreciation.
Navigating the Commercial Market with RE/MAX Commercial Advisors Group
In times of rising inflation, commercial real estate emerges as a proactive choice for investors looking to protect, preserve, and proliferate their assets. Investors recognize the attributes that set real estate apart: tangibility, scarcity, diversity, and its symbiosis with macroeconomic trends.
We aim to be the partner investors need to chart their course amidst inflationary headwinds confidently. By leveraging our expertise and a thorough understanding of market dynamics, we can help you ensure that your investments thrive, turning the challenge of real inflation into an opportunity for substantial growth and success.
