Three Ways Commercial Real Estate Protects Against Inflation

Inflation is defined as a reduction in a currency's buying power. In other terms, it may also imply that the average price of a group of products and services in an economy rises with time.

Because the same amount of money buys fewer products or services, investments that are supposed to help with wealth accumulation fail to achieve their primary goal. It's all the more crucial to have inflation-protected assets in this situation. Commercial real estate (CRE) as an asset class is relatively immune to market ups and downs, but can it protect an investor from the destructive blows of inflation?

Commercial Real Estate Protecting Against Inflation

CRE can safeguard investors against inflation in three different ways. Let's take a closer look at each one.

Increasing rental income during inflation

Inflation adds to price increases. That is an undeniable fact. Rents for commercial buildings are also growing in price. Positive property prices are aided by rising rental rates combined with relatively steady running expenditures.

Now, this may lead to an increase in net operating income, which would lead to a rise in property prices. If the investor holds CRE, their investment will not be affected as long as this value is above the rate of inflation.

The Lease factor

Commercial lease agreements are arranged in such a way that rents are increased at regular intervals throughout the lease period. A condition in a lease agreement, for example, may ask for an annual rent rise of 2% to 3%.

The clause for various assets will change depending on the property and the market's demand and supply. The relative return will remain positive as long as these regular increases surpass inflation.

Property scarcity

It is self-evident that space will continue to shrink. As more houses, flats, and buildings are constructed to enhance the availability of real estate, space becomes scarce. Companies will continue to expand and new businesses will launch, increasing the demand for commercial real estate.

High demand and restricted supply in crowded real estate markets and commercial areas lead to real estate prices rise, which is beneficial to investors. As a result, if price rises outpace inflation, the relative return is mainly positive.

High inflation should be on every smart investor's radar since it may significantly undervalue any investment and eat into future cash flow. As a result, investments should provide better returns than the current or predicted rate of inflation.