Inflation and its Effect on Commercial Real Estate

Inflation's effect on Commercial Real Estate for 2022

It is all about what is for sale or what is selling? Everything that is currently for sale in the Austin area is selling at historically high prices. Inventory also has historically low cap rates. This has been driven by demand and low interest rates.  Money has been available for 3% over the past 5-7 years. According to the Fed, that may be on its way out. Forecasts are it may happen by the end of 2022.


Money and Interest Rates

There seems to be a high chance of interest rates increasing. This will be a challenge when it is time to refinance a warehouse purchase. The concern is how will mortgage payments be met with higher interest rates. For now, commercial real estate is more attractive than bonds.  Corporate BBB bonds are at negative real yields” according to Steve Cornet head of US research for Black Rock. 




 2022 Inflation Growth

No doubt, there is the growth of inflation. Caused by printing money and the cost of oil and gas domestically are the major contributors. Macro signs are concerning , similar to pre-pandemic times.  It is important to watch the numbers and look at the impact.  There will be industries that fare far worse than commercial real estate.


Excess supply of Commercial Real Estate

Excess inventory is a killer for commercial real estate from an owner’s standpoint. Inflation will cause construction to be more costly. This will ease construction while reducing supply and supporting pricing. If inflation costs are not in check with increasing interest rates, there will cause a big problem.

Sectors that are Inflation Hedges?

  • Warehouse is about as hot as it has ever been
  • Warehouse cap rates are at historic lows.
  • Valuations of industrial property are getting a bit uncomfortable
  • Current cap rates for warehouses do not seem sustainable.
  • Forecasts for warehouse investments may hit its peak near term
  • Industrial is maintaining strong rental growth.
  • The next sector is multifamily
  • Strong renter base exists for multifamily ,with less homes on the market.