Inflation is a major buzzword today. It seems like everyone is talking about it and their concern for the economy. Today, Americans are encountering the highest inflation rates in over 40 years. Prices on everyday purchases have skyrocketed and don’t seem to be slowing down any time soon. One way to counter the rising rates is by using commercial real estate as an inflation hedge. If you are unfamiliar with real estate investing, this may seem strange, but this strategy could help offset potential losses.
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What is Inflation?
Inflation is the rise in prices, meaning a consumer cannot purchase the same product(s) for the same price. The rate of inflation is often measured by the consumer price index. This calculates the average change over time in the prices consumers pay for products and services. Inflation has greatly impacted numerous industries, but the real estate market has been permanently altered due to this economic stress. The real estate industry has experienced rising prices throughout the years, with every decade being more expensive than the previous. Due to inflation and other economic factors, home prices have grown a dramatic 326.1 % since the 1950s.
Real Estate vs. Inflation
Inflation is a time-sensitive situation and long-term investments are exceptionally important during these times. Commercial real estate is among the few investments that remain protected from the uneasy market and starts on the path of recovery much sooner. These quicker recovery times are a significant factor why investors make a beeline for commercial real estate assets.
A way to fight inflation is through an inflation hedge. This investment protects the decreased purchasing power of a currency that follows from the loss of its value due to rising costs. This process involves investing in an asset that is predicted to maintain or increase its value over a designated period. On the other hand, the hedge could involve taking a higher position in assets, this may decrease in value less rapidly than the currency’s value.
Hedging can help protect the investment’s value. Certain investments might seem to provide a decent return, but with inflation, they can be sold at a loss. Assets that are considered to be part of an inflation hedge can be self-fulfilling; which keeps their values high even though the intrinsic value may be lower.
Real Estate Investment Options
Fractional Ownership
This option allows diversification of the portfolio, and the individual can choose without limitation the assets they would like to invest in.
Unimproved Property
Unimproved property is land with nothing on it including buildings, paths, and crops. Investing in unimproved property is a unique opportunity for investors to diversify their portfolios and tends to be cheaper than purchasing developed land or other types of property.
Commercial Real Estate (CRE)
This option allows the individual to own or co-own commercial property. This is a great option if you have knowledge of the market you are investing in and can handle the formalities involved in the ownership process. Individuals can also choose to purchase wholesale commercial properties. This is a great way to enter begin investing in commercial real estate with little capital or experience, to get started check out these tips.
Real Estate Investment Trusts (REITs)
REITs are companies that work with the purchase, management, or financing of real estate. They allow diversification and remove the unnecessary stress of excessive formalities present when purchasing real estate. Similar to a mutual fund, an individual can choose the REITs, but not the assets it is invested in.
Investors can use a REIT to generate income without having direct ownership responsibilities. | Photo: Reits Market
How Can Commercial Real Estate Protect Investors?
Commercial real estate as an inflation hedge has proven time and time again to be a successful strategy. It’s an asset class that generates predictable returns among other benefits, here are three:
Increasing Rental Income
Property rental prices can be attributed to rising inflation. This can cause an increase in net operating income, which will appreciate the property’s value further. If the property’s value is more than the inflation rate, the investment will not be hampered if they are holding commercial real estate.
The Lease Factor
Lease agreements for commercial real estate are structured in a way that increases the rent at regular intervals throughout the leasing period. Based on the property and demand of the market, the clause for different assets will be different. If these regular increases outpace the rate, the relative return will stay positive.
Property Scarcity
Space will always keep decreasing. Houses, apartments, and other buildings are created to increase the market’s supply. However, this increase in supply causes scarcity of space. In dense real estate markets, high demand and limited supply contribute to the appreciation of prices for real estate, which is positive for investors.
Ready to Fight Inflation? Invest in Property Today!
Using commercial real estate as an inflation hedge is a great strategy to preserve your finances and prevent current and future losses. There are a few money-making options you can pursue, but it is always best to examine all your options and choose the best fit for you, including choosing the right partners. Millennial Title provides commercial real estate title services across the United States. With in-house attorneys and a team of knowledgeable real estate professionals, we have the experience and expertise to manage your next commercial real estate transaction. To learn more about our commercial title insurance and escrow services or to schedule your closing, contact us today.
