The US recently broke its 40-year record for inflation after increasing to 8.5% for 2022. There is no doubt that these changes are unavoidable, given the war on Ukraine and its impact on fuel prices. However, it is critical to study inflation and find relevant solutions to ensure it doesn’t cripple the economy. As commercial real estate brokers, we are primarily concerned with the impact of inflation on commercial real estate.

The industry is susceptible to economic, political, and environmental changes. Hence, the rising inflation rate will significantly impact its operational dynamics and market trends. This blog post will highlight how inflation will affect CRE and what it means for investments.

Impact of Inflation on Commercial Real Estate

Inflation affects all industries across the board, and income rarely keeps up with the rising cost of expenses. Commercial real estate is also connected to the local economy intricately; therefore, changes in operational costs for the industry automatically increase prices.

Below are the primary factors that connect inflation with commercial real estate:

1. Higher Construction Costs

Inflation always increases the cost of construction industry raw materials, leading to a significant overall increase in the price of building properties. This increase results in two scenarios that inadvertently affect commercial real estate.

Firstly, the higher construction cost means investors spend more to build the same property. Hence, they adjust the rent cost, increasing it to ensure they can achieve the return on investment as planned and avoid losses. This increase is inevitable since it is a form of income and needs to cover the increased prices for products and services.

Secondly, the higher construction costs also prompt some builders to pause property construction plans. While the decision is understandable, it leads to a supply and demand gap, automatically increasing commercial real estate investment costs. This higher cost has a similar effect as the first condition and pushes landlords to increase rental rates to get their intended ROI.

2. Increase in Interest Rates

Inflation leads to an increase in interest rates, which increases the cost of borrowing. Several investors cannot afford to borrow the same amounts given the new interest rates and the rising cost of living, which drastically reduces transaction value.

The good news is that investors have started finding solutions for the higher cost of borrowing, but they are limited and require expert advisory.

3. Property Value Appreciation

The only positive impact of inflation on commercial real estate is property appreciation. Inflation and property values often increase together; hence, property owners and investors see an increase in overall wealth.

This wealth can help them get better mortgage deals. Hence, people can continue investing in the industry despite the inflation.

Wrapping Up

In short, the impact of inflation on commercial real estate causes an increase in investment costs and leads to property appreciation. Therefore, you can continue to benefit by maintaining a smart portfolio.

Please contact the CHRE team to find commercial property. We have operated in the industry for several years and will provide optimal and efficient solutions.