5 Key Things All Commercial Real Estate Professionals Should Understand About Inflation 

No niche in the real estate market has remained unaffected after the events of the past two years - not even the commercial real estate field. And, if you are a broker, developer, or agent in the industry, you know that macroeconomic changes, including rising inflation and today’s energy crisis, can have cataclysmic and unexpected effects on the market.

So, how will the industry be affected by the spiking inflation? What should CRE professionals keep in mind to navigate this fast-changing environment?

In this quick-start guide, you’ll find what you need to know to prepare for the upcoming changes. Let’s dive in!

Rent Will Increase To Match the Rising Inflation

When looking at the future of commercial real estate, it is impossible not to wonder how property prices will change over the next few years.

But while a lot is yet to be understood about these fluctuations, something is for sure: in the 5-year period between 2017 and 2022, rent prices in the US have grown by 5.77% each year, and they have spiked by a whopping 14.07% from 2021 to 2022.

As inflation rises and the cost of living increases, it is important for CRE developers and managers to understand how to calculate returns that are adjusted to today’s rent prices and take into account potential future spikes.

Rising Interest Rates Might Cause a Shift Towards Leasing

Just in 2022, the Federal Reserve increased interest rates seven times, causing auto loan rates and mortgage rates to reach an 11- and 10-year high, respectively. Increasing the interest rates is an efficient strategy used by central banks and bodies such as the Federal Reserve to fight inflation by encouraging people to borrow less and save more.

However, the residential and commercial real estate markets are among the hardest-hit industries by these changes. Indeed, the large majority of real estate buyers will resort to mortgages and loans to secure the funding necessary to close a deal. 

For real estate agents, developers, and property managers, it is important to understand that securing a loan might be more challenging, thus driving a shift towards leasing and renting.

Efficiency Savings Can Help Counter the Effect of Inflation

Inflation is inherently linked to an increase in the cost of living and materials, which might cause CRE professionals to face much higher costs when attempting to complete a real estate project.

Nonetheless, for commercial property developers, brokers, and sellers, it is possible to gain a hedge against inflation by leveraging ad hoc software solutions. Indeed, CRE software allows project managers and development companies to maximize their operational efficiency, reduce waste, and optimize their labor. In turn, these benefits lead to lower development and management costs, which provide cost-saving advantages to buyers and lessees.

Buyers Might Be Looking for More Versatile Spaces

A spike in inflation is often correlated to lower purchasing power and a higher cost of living. In turn, this can cause buyers and lessees to be more careful of how their resources and budgets are spent.

This trend, coupled with the rise of remote working and virtual offices might cause a drop in demand or drive a shift in the type of commercial spaces buyers will look for. For developers, it is important to account for potential changes in the market and invest in commercial real estate venues and facilities that are versatile and easily adapted to changes in the industry.

Different Types of Commercial Real Estate Properties Are Emerging

The commercial real estate market has been drastically changed by the pandemic-induced crisis and ensuing economic transformation. And, today, buyers, investors, and business owners are no longer looking with the same interest at large office spaces or shopping centers.

However, as the industry bounces back from these changes, CRE professionals should notice that there are some emerging niches with significant growth potential, including healthcare venues, warehouses and storage facilities, multi-family rentals, co-working spaces, and life sciences properties.

This post was contributed by a guest author. Mainvest does not guarantee the accuracy of information in this post and does not provide legal, tax, or accounting advice.

posted January 10, 2023
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