The US inflation has reached 8.52% in 2022, and there are chances of it increasing further. It is far from the highest inflation the country has faced, but some of the worst economic circumstances accompany it. Additionally, the effect of inflation on commercial real estate in the US has also been more drastic due to the ongoing Russia-Ukraine conflict.

Hence, the current results follow the inflation pattern but have also produced some unique exceptions. Understanding these changes from an investment perspective is critical because they can affect your total ROI. This blog will address the top effects of commercial real estate in the US and explain how the situation is different this time.

Effect of Inflation on Commercial Real Estate in the US

Inflation is natural in an economy and only becomes a problem when it is no longer manageable through micro and macroeconomic policies. Some of its effects on the CRE industry have been consistent throughout the decades, but the dynamics keep changing.

Following are some examples of how inflation has led to the same yet different results this time:

1. Negative Impact on Cash Flows

Inflation causes commercial real estate values to increase, which lowers the overall demand. This impact on the market demand and supply results in fewer annual CRE transactions, causing the industry to slow down.

The effect has been mostly the same, but other factors add to the issue. Some of the Russian oligarchs’ assets are frozen, including investments in the US commercial real estate industry.

Additionally, the rising fuel costs have affected the construction sector and, consequentially, CRE. It has pushed the prices further up, enhancing the total impact on supply and demand.

2. Lower Demand for Some Commercial Properties

It is usual for the overall demand for commercial real estate to drop during inflation, but things are a little different this time. The pandemic has contributed extensively to our current economic condition, and it interestingly led to a significant increase in e-commerce activity.

Therefore, the CRE industry split, with warehouses and multifamily units increasing in demand while it lowered for office buildings and retail properties, like malls.

3. Higher Rents but Lower Demand

The higher demand for multifamily units increased rent prices, which further escalated after the rise in interest rates. The combined increase has made several properties unaffordable, pushing people to find alternative residential solutions.

This chain reaction has reduced the demand for multifamily units, so they currently have higher rent costs but fewer customers.

4. Better Returns on Investment

Lastly, inflation has helped increase the ROI due to the appreciation of property values. Several investors have decided to sell their properties and invest the money elsewhere while they wait for prices to reduce again.

Wrapping Up

In short, the effect of inflation on commercial real estate in the US has followed typical patterns with a twist. You’ll need to be careful when making CRE investments to ensure your return remains high. CHRE has worked in the industry for several years and can help you make the best commercial real estate investment decisions.

Please contact our team, and we will respond as soon as possible.