How Does Inflation Impact Commercial Real Estate Property Owners
Houston, TX, 05/18/2023 – In today’s economy, we hear the term “inflation” bandied around like a brand new pickleball in a Texas dust storm. But what does it mean, or more importantly, what impact does inflation have on a commercial property owner. Here are a few ways inflation can impact a commercial property owner, from Houston’s largest private commercial real estate owner, Ali Choudhri, CEO of Jetall Capital.
Inflation is the decrease in purchasing power of currency, which manifests as higher costs for goods and services. An annual increase in inflation that equals 2% or less is considered healthy, but greater rises can be problematic—especially when they occur without a comparable increase in wages.
Increases in inflation are frequently tracked by the Consumer Price Index (CPI) or the Producer Price Index (PPI), and since the Covid pandemic, we’ve seen the steepest change in PPI since February of 1980. For your consideration below, are a few ways inflation might have an impact on a commercial property owner:
Increased property values: Inflation can lead to an increase in property values over time. As the general price level rises, the value of real estate assets also tends to appreciate in kind. This can be beneficial for property owners as it allows them to potentially sell their properties at higher prices or use the increased value as collateral for financing.
Rental income growth: Inflation often leads to higher rental rates. As the cost-of-living rises, property owners increase rents to keep up with inflation. This can result in increased rental income and higher cash flows for property owners. However, it’s important to note that rental increases are subject to market conditions and existing lease terms.
Financing costs: Inflation impacts the cost of borrowing. If inflation rates are high, lenders will likely increase interest rates to compensate for the eroding value of money over time. This makes financing more expensive for property owners, especially if they have variable-rate loans or need to refinance existing debt. Higher financing costs impacts cash flow and potentially reduces the attractiveness of investment opportunities.
Operating expenses: Inflation usually impacts the operating expenses associated with commercial real estate properties. Costs such as property taxes, insurance premiums, maintenance and repairs, utilities, and wages may increase due to inflationary pressures. Property owners need to account for these rising expenses, when budgeting and setting rental rates, to ensure they can maintain profitability.
Tenant demand and lease negotiations: Inflation influences tenant demand for commercial spaces. In times of high inflation, businesses face increased costs of operations, and their ability to afford higher rents may be constrained. This can impact vacancy rates and potentially result in longer lease negotiations or requisite increased concessions to attract and retain tenants.
Overall, the impact of inflation on commercial real estate property owners can vary depending on the specific market conditions, lease structures, financing arrangements, and the overall economic environment. It’s important for property owners to closely monitor inflation trends, adjust their strategies accordingly, and work with professionals such as real estate agents, appraisers, and financial advisors to navigate potential challenges while seizing opportunities.
“Property ownership sustains long-term value to you and your shareholders or family. Educating yourself is the first step in becoming a legitimate real estate investor.” – Ali Choudhri, CEO at Jetall Capital.
Investing in commercial properties offers numerous opportunities for wealth creation, but it also carries substantial risks. By employing diligent research and analysis, prospective investors can mitigate these risks and identify properties with strong cash flow potential and high likelihood of long-term value appreciation.