Commercial Real Estate Inflation: How Rising Costs Are Impacting Property Prices
The impact of inflation can be felt across practically every industry, including commercial real estate (CRE). High inflation rates force property owners to increase their prices in return, leading to inflated interest rates, raised property prices, and rent increases. Fortunately, investing in CRE can benefit owners during times of inflation by preventing profit loss and securing their assets.
Read on to learn more about commercial real estate inflation and its impact on property prices, including the following:
- How inflation impacts real estate tenants and owners
- How does inflation affect commercial real estate?
- Why you should invest in commercial real estate during periods of inflation
- Key takeaways
- How Hokanson Companies can help you navigate rising costs
How Inflation Impacts Real Estate Tenants and Owners
While many have negative connotations regarding inflation as a whole, it is a natural economic progression, translating to an increase in the prices of goods and services over an extended period while the value of a currency falls. Typically, a healthy inflation rate increases from one to three percentage points annually, which can stimulate spending and help boost the economy. However, drastic inflation spikes can occur during economic hardship, mitigating purchasing power for consumers and businesses.
Regarding the commercial real estate industry, operating expenses and the cost of rent that tenants are expected to pay increase as inflation soars. Over time, the rise in occupancy costs can take a toll on tenants and potentially impact profit and loss statements, unless they’ve locked into long-term lease agreements with the help of a tenant representation service.
How Does Inflation Affect Commercial Real Estate?
Many aspects of the commercial real estate industry are impacted by high inflation rates, namely, property prices. Some of the most notable impacts of commercial real estate inflation include the following:
Increased Property Values
Rising property values can directly result from inflation, leading to significant capital gains for real estate owners and investors. While rising property prices are mainly a positive benefit, they may eventually reach a point where the cost purchase an asset is too high to entice prospective buyers, should you ever want to sell.
Rising Commercial Construction and Operational Costs
Inflation doesn’t just raise rent and property value; it also increases commercial construction and operating expenses. The price of materials and other services your property relies on have increased, including labor, insurance, maintenance, and utilities. It’s important to consider higher operating and building costs during commercial construction projects to avoid exceeding your budget.
Navigating a commercial construction project during inflation can be challenging, but working with a contractor specializing in real estate can make the process easier. Partner with an experienced commercial construction contractor like Hokanson Companies that can simplify your project and guide you through inflated prices.
Higher Rent Payments
As property values increase, so do the rent payments distributed to tenants. Increased rent can benefit property owners as they obtain a more significant ROI, allowing them to stay afloat during rising prices. However, it can also prove detrimental, as being locked into long-term lease agreements that specifically state annual rent percentage increases between 1% and 3% may not be enough to keep up with high inflation rates, which can result in a slight loss of revenue.
Commercial Real Estate Shortages
When commercial real estate inflation is high, properties are acquired faster than created. This is partly due to the number of investors interested in acquiring commercial properties to hedge against inflation but also because of rising operating expenses and slow supply chains. The laws of supply and demand also dictate that commercial property prices are likely to increase as availabilities dwindle.
Commercial real estate assets appreciate at a steady rate over time. However, during periods of high inflation rates, when the price of everything skyrockets, properties can appreciate at an accelerated rate. This can lead to a high capital appreciation for your commercial real estate.
Why You Should Invest in Commercial Real Estate
During Inflation Periods
Owning or investing in commercial real estate during periods of inflation can be beneficial when timed correctly. The real estate industry, while not immune to the effects of inflation, is unique because it is generally considered a safe investment against rising costs. As inflation raises the prices of goods and services across every industry, the value of commercial properties rises with them. The intrinsic value of commercial real estate allows landlords who own or lease property to increase the rent price.
Savvy investors anticipate and plan for rising prices using commercial real estate to hedge against inflation. Inflation hedging offsets the projected drops in the value of a currency and protects decreased purchasing power, as well as secures the value of commercial investments.
While investing wisely in commercial real estate can be used to hedge against inflation, timing is critical. The return on investment (ROI) is most significant when a property is purchased before inflation rates peak. Waiting to invest in a commercial property when prices are at their highest may benefit the current owner, but it can result in profit loss for you if the conditions aren’t right and you only intend on maintaining a property short-term. That being said, the value of a commercial property is only likely to increase regardless of inflation rates.
The Key Takeaway
In conclusion, commercial real estate inflation is unavoidable. As the prices of goods and services continue to increase, so do the cost and maintenance of commercial properties. However, real estate investors can use commercial properties to hedge against inflation since property values increase alongside the expense of other goods.
While there are pros and cons to commercial real estate inflation, CRE is a safe and profitable investment decision that allows owners to secure their assets against rising prices. Even so, navigating the complex landscape of commercial real estate can lead to profit loss if the right actions aren’t taken. To ensure that your CRE investments pay off, it’s best to partner with a professional real estate expert like Hokanson.
Navigate Commercial Real Estate Inflation With Hokanson Companies
If you need an accurate commercial real estate outlook for 2023 and beyond, consider Hokanson Companies.
At Hokanson, we provide user-friendly tools, resources, and practical strategies to help clients navigate the corporate real estate landscape. As seasoned professionals in the commercial real estate industry for over eighty years, we have the knowledge and skills to provide fully integrated real estate solutions that exceed our clients’ expectations. We aim to build personal relationships with our clients by combining custom real estate strategies, seasoned property management, and industry-leading expertise to deliver undeniable results.
With commercial real estate inflation scaring many prospective buyers into submission, businesses need effective real estate solutions now more than ever. But with Hokanson by your side, making a smart financial decision with a commercial property isn’t just possible—it’s guaranteed.
Do you need a professional to guide you through rising inflation and real estate prices? Contact us today to get started.