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Why Commercial Real Estate Remains a Solid Investment Despite the Risk of Inflation

January 13, 2021

graph depicting inflation

Inflation brings about uncertainty, but CRE could be a stable investment to protect against its outcomes.

There’s a non-trivial chance that we’re heading toward a lengthy period of high inflation because of the Federal Reserve slashing interest rates and government debt reaching unprecedented levels. The result would be money being worth less, lowering the value of stocks and other long-term investments. 

While this trend seems like bad news for all investments, tangible goods, or hard assets, tend to increase in or maintain value to counteract the forces of inflation. Therefore, these vehicles are worth considering when interest rates fall precipitously, debt expands, and inflation may rise.

Key takeaways

  • We are possibly approaching a period of high inflation
  • Hard assets can hold their value relative to other investments
  • Commercial real estate is worth considering as a hedge against potential inflation

What inflation does to investments

Periods of high inflation cause issues in many segments of the economy, albeit in different ways. 

For investors, they can erode the value of stocks and reduce corporate earnings. The average consumer will also have less purchasing power. At the same time, inflation favors those who borrow before its onset because the borrower will make repayments in lower-value dollars. 

Investors should have a firm grasp on how to prepare for periods of high inflation to ensure they protect their money and capitalize on this shift in the value of a dollar.

Investment strategies during an inflationary period

Investing in hard assets like gold and oil is one commonly recommended strategy during a period of high inflation. The reason is that these assets have tangible utility and theoretically stable value.

For example, if the US dollar tanks, it’s argued that gold will retain more value because it’s a useful commodity. The same goes for oil, as some analysts believe the overall demand for petroleum products isn’t going anywhere, no matter what happens elsewhere in the economy. Putting money into these assets is considered protectionary against other economic downturns. Even if stocks and bonds stop producing, hard assets will still hold onto their value.

Commercial real estate is also on this list of hard assets—and it’s specifically worth considering for various reasons.

Commercial real estate as an investment option

One element that makes commercial real estate a desirable hard asset is its income-generating potential. 

Unlike an asset like gold that the investor will have to sell to turn a profit, real estate can generate monthly income to further protect against inflation. Additionally, the amount tenants are willing to pay can increase exponentially during an inflationary period, reducing the risk associated with the property’s resale value.

Assessing risk is a crucial factor when making any investment. And a hard asset that generates monthly income has particular value because it significantly reduces this risk. Rather than holding onto the investment and weathering losses during an economic downturn, owners can continue collecting rent and profit.

Another reason to consider commercial real estate investments during an inflationary period is the lower interest rates. Taking advantage of these rates reduces the real risk of purchasing the property. That said, cheap money does not always mean easy money. For example, while interest rates moved to historic lows after COVID hit, lenders also started closely scrutinizing borrowers to ensure they would recoup their investment.

Another consideration is that commercial properties require time and energy to achieve an ROI. How much time and energy depends on the property, its location, and the tenants it attracts. Finding a long-term, low-maintenance tenant takes effort, but achieving this makes a property incredibly rewarding in any economy.

Making smart CRE investments

We’re still sorting out the long-term effects of the COVID-19 pandemic, and portions of the economic recovery will take years. However, interest rates are extremely low, making it a good time to borrow if an investor has a well-researched opportunity backed by requisite credit-worthiness and resources. We also know that government debt is at an all-time high, which could drive an inflationary period. 

Commercial real estate investments in specific business sectors may become an increasingly valuable option if inflation soars, by providing immediate returns through rental income while holding value long term. And given that CRE can be an excellent investment in almost any economic conditions, diversifying a portfolio into income-generating real estate as a hedge against inflation may provide additional benefits.  

For more information on current CRE trends and the ever-changing market, call Morris Southeast Group at 954.474.1776. Ken Morris is also available directly at 954.240.4400 or by email at kenmorris@morrissegroup.com

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