Why You'll Welcome Inflation
Inflation might bring some good things to the commercial sector.
April 1, 2010
Inflation isn’t always a bad thing, especially as it relates to real estate, says Tim Riddiough, professor and chair of Real Estate and Urban Land Economics at the University of Wisconsin-Madison. In the short term, inflation in the range of 5 percent to 6 percent will have some big pluses for the commercial sector, he says.
There’s only so much real estate. Most commercial sectors aren’t overbuilt, so inflation will boost prices for a relatively scarce supply.
Leverage lets you pay back loans in less-valuable dollars. Commercial owners that have locked in financing before rates rise will be in a great spot.
Rents should increase. Inflation tends to occur as business activity picks up, which also means demand for space picks up.
Property prices will go up. Investors see real estate as an inflation hedge, so more buyers will be attracted to the asset class and push up prices.
But watch out! Over the longer term, inflation does pose risks for the real estate industry, warns Riddiough. It will push interest rates higher, making purchases more expensive. And rising prices will translate to higher building operating costs for both tenants and owners.