Inflation: How can real estate be a hedge?

In this video, our own investment analyst Amna Nawaz discusses the impact inflation can have on commercial real estate (CRE) as well as how historically, CRE investments can help mitigate the effects of inflation.

Video Transcript:

"Investors will often come to us to ask about inflation and commercial real estate. It can provide a hedge against inflation. So, let me explain how that works. My name is Amna, and I'm an Investment Analyst at Crowd Street.

Crowd Street, it's an online commercial real estate platform, and we make it easier for investors to invest in private commercial real estate, and it helps them diversify their current portfolio.

Simply put, inflation is the decrease in the purchasing power of money. When inflation goes up, the cost to purchase products and services also goes up. And so, the value of your money goes down. Some level of inflation is actually considered good for the economy, generally 2% or less annually. And that is because it boosts productivity by keeping a good balance of supply and demand.

When inflation increases on an above-average level, it tends to increase costs, and commercial real estate is no exception, because the cost of labor and construction goes up. It restricts development pipeline. Because now, they're more expensive to bill, and new projects can slow down. And in that scenario, inflation can also impact operational costs, and that's just the cost to run the property.

So, think of things like maintenance, utilities, and insurance. The investor returns are what suffer the most. This is because, as the purchasing power of money goes down, so does the value of any cash distributions you'll receive. If you invested in a coffee shop, and you were getting $50 per month, and it's fixed $50 every month. And now, inflation is going up, it impacts the value of any cash returned. Commercial real estate can be a good hedge against inflation. So, a hedge is just a type of investment that protects the value of an investor's returns.

Think about it this way. When property owners bump up the rents, it can increase the property's income, which increases the investor's cash returns. The shorter the lease term, the more flexibility a property owner has, which is essentially the inflation hedge. We like to keep our investors informed about latest market trends. Visit our website at Crowd Street.com. "