How Commercial Real Estate Can Be A Hedge Against Inflation
- 03 mins 28 secs
"When we talk about commercial real estate and principally talking about institutional grade real estate, a lot of retail investors have not had access. Within the commercial real estate universe, we typically are talking about the major four food groups: industrial warehouses, multifamily, retail and office." Onay Payne, Portfolio Manager, Clarion Partners.
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Franklin Templeton
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we do see the risk of moderate inflation going forward. The good thing is that with commercial real estate we have an opportunity to hedge against rising inflationary environment. So number one, if we are in a rising inflationary environment, were typically in a period of growth, right? So We are rebounding. I think most expectations have growth in the us pegged at somewhere around 6%. In a rising growth environment, landlord typically have a little bit of leverage because there is significant demand and accordingly we can adjust our rental rates um to meet the the demand that we're seeing. So um we can do that with the new leases and then on an ongoing basis, we can typically do fix annual or periodic rent increases um to either inflation or another rate. So you might say, uh you know, relations typically could be around 2 to 3% we would try to get 2 to 3% rent increases pegged into the lease. So what we would do typically say, and I heard one of our analysts say this rising rents usually beat rising rates. So in many respects, um, you can continue to have the strong level of income durable income that I mentioned, which will increase over time as you continue to see growth in the environment. Um and we have an opportunity to continue to perform well on an income basis. Certainly, we have to be the cognizant of the fact that as um inflation increases, um, the the discount rate or the rate of return in which investors um, uh, demand in order to invest in real estate also increases. So that has the potential to impact asset values longer term. One of the things that we're seeing as an arbiter on that increase on the back end is the fact that we've seen such large increases in commodity prices, specifically steel, for example, and would, and the fact that those construction prices are increasing so much makes it makes developers need to pause and think before they put more demand, more inventory into the system, which also serves as a way to check the balance between supply and supply and demand of real estate. So even in an inflationary environment, we have some other checks in addition to the fact that we often are able to increase friends and net operating income, uh, in a growth environment.
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