Think inflation only affects prices—what about the entire strategy behind commercial real estate?
Inflation affects every aspect of the economy, and commercial real estate is no exception. From property values and operating expenses to tenant demand and financing costs, inflation can reshape the way investors approach CRE. Understanding these dynamics is crucial for making informed decisions and protecting long-term returns.
Here's how inflation impacts commercial real estate investments–and what it means for investors.
Commercial real estate often serves as a hedge against inflation because a property's value tends to rise alongside prices in the broader economy. As replacement costs increase (materials, construction, labor), existing properties become more valuable.
Tip: Investors holding assets in strong markets may benefit from property appreciation during high inflation periods.
Many commercial leases include rent escalation clauses or are tied to the Consumer Price Index (CPI), allowing landlords to increase rent in line with inflation. This protects investors' income streams as costs rise.
Tip: Focus on properties with lease structures that allow for regular rent increases.
While revenue may rise, expenses do as well. Inflation drives up costs for utilities, property management, insurance, and maintenance. If not managed carefully, higher operating costs can cut into an investor's Net Operating Income (NOI).
Tip: Look for opportunities to improve energy efficiency and control variable expenses to offset rising costs.
Inflation impacts tenants differently depending on the sector. Retailers may struggle as consumer spending tightens up, while industrial and multifamily often remain resilient through these times. Investors need to track how inflation pressures affect demand across asset classes.
Tip: Diversify across property types or focus on sectors with a historically stable demand during high inflation periods.
Inflation creates both challenges and opportunities in commercial real estate. While rising values and rental income can benefit investors, higher expenses and financing costs demand careful planning. By understanding these dynamics, investors can position themselves to protect returns and leverage the advantages of CRE during cycles of high inflation.
Looking to explore commercial real estate investment strategies in today’s economy? Click here to connect with our team.
Scott Naasz
Chief Executive Officer | Broker | Owner
North Star Commercial Real Estate Advisors | eXp Commercial