While there are many ways to hedge against inflation, one of the most popular is investing in commercial real estate. Inflation is a significant factor that affects property prices, including rents. As a result, it can be beneficial to invest in commercial properties. Inflation does not affect all sectors of the economy equally, but it generally works well for those already experiencing price increases.
Increasing Assets Value
The primary way that commercial real estate protects against inflation is by increasing the value of its assets. Inflation is a factor that can harm some investors. For example, bonds and shares can fluctuate dramatically overnight due to macroeconomic factors. However, property values generally increase as the cost of production increases. Hence, commercial real estate is a safe bet for investors, especially those with limited funds. Inflation can be fought by investing in existing real estate assets.
As a result of the escalating costs of labor and materials, the value of commercial real estate rises. The value increase results from an increased net operating income, which can also be used as a hedge against inflation. Furthermore, most commercial real estate leases call for annual rent increases, which serves as an additional inflation hedge.
Another way commercial real estate protects against inflation is through its fixed-term lease structure. This structure allows landlords to renegotiate rental rates with tenants if necessary and evict tenants who disagree with the increases. Multifamily real estate provides the most protection against inflation because of its short lease terms. Most of these contracts include annual rent increases, which allow the landlords to raise rents in times of high inflation quickly.
Historically, commercial real estate protects against inflation by increasing its value. By generating more income, landlords can raise rents faster than inflation. Likewise, rents can increase as long as the property owner increases its net operating income. When the asset price rises, the landlord can adjust the rent to match the inflation. Inflation is not the only factor to consider when purchasing commercial real estate.
As long as the price of real estate remains stable, it protects against inflation. Whether it is a residential or commercial property, the property’s value can outpace the inflation rate. This means that the longer the rent is paid, the higher the rent. This means that a commercial property can be a good investment if financed. It also offers protection against inflation from escalation.