Why Commercial Real Estate Is a Safe Hedge Against Inflation and the Biggest Asset Class Winners for Investors Right Now

By Mike DeGiorgio

Rising inflation and interest rates are driving investor capital into commercial real estate across the U.S. As we face a critical turning point for the economy, commercial real estate continues to serve as a safe hedge against inflation. Looking ahead, asset classes like industrial, retail, office, and multifamily are set to yield the highest potential returns for investors.

Historically, real estate has often served as a buffer against inflation because it provides reliable long-term returns compared to stocks and other more volatile investment options. Right now, despite rising interest rates and a downturn in the stock market, our data shows prices per square foot are rising across asset classes. Even as cap rates decline and economic uncertainty negatively impacts investments in other sectors, rising rents mean commercial real estate is well positioned for continued growth throughout 2022.

Inflation uncertainty highlights real estate’s recession-resistant, longer-term positive returns, as supply chain shortages delay construction, limiting supply, increasing operating income and driving up property values. Whether buying, selling, or owning, commercial real estate’s profitability further demonstrates the sector’s resistance to inflation.

For leaders looking to invest in U.S. commercial real estate in the months ahead, here are the biggest asset class winners.

1. Industrial real estate continues to be one of the most in-demand property types in the U.S., based on Q1 2022 data and its performance throughout the pandemic. The increasing need for e-commerce facilities and consumer demand for fast-acting delivery has been driving significant investor interest in distribution centers. At the same time, supply chain shortages have instigated a growing need for U.S.-based manufacturing plants. These facilities are popping up more and more in secondary and tertiary markets, following homeowners and renters migrating away from more populated metros. Investors will want to keep a close eye on this space.
2. Retail transaction activity so far this year suggests a far cry from the unsettling performance of this asset class during the pandemic. Retail property for sale is poised to shine, with rising property valuations, higher occupancy levels, and surging cap rates across different retail sectors. The current retail market endured the pandemic’s closures and started the year as a newly re-proven sector. The challenges of Covid-19 accelerated worn-out and struggling retail concepts and bolstered confidence in assets that survived the worst of it. Among these, restaurants and shopping centers have made surprising comebacks with noticeable pricing gains. At the same time, grocery stores and gas stations are attracting consistently high levels of investor attention.
3. Office assets are seeing the greatest increase in transaction speed. This is on the backdrop of a strong U.S. labor market with unemployment at an all-time low—as demand for workers is still outpacing supply—and a workforce that demands increased flexibility. Most metropolitan areas across the U.S. have opened office spaces for business to return, encouraging lease signing at a gradual rate. Flexible coworking spaces are a particularly hot-ticket item that allow businesses to attract talent and recognize the necessity of in-office collaboration, while balancing the needs of employees who have relocated or prefer to work from home. While vacancies are still slow-moving in many metros, investors and sellers are confident that the office is here to stay.
4. Multifamily properties made substantial gains in April with a double-digit rise in asking prices, showing the highest month-over-month growth. It is a core investment sector that can demand higher values thanks to its steady returns. Its track record so far this year is already showing impressive levels of growth and indicating continued investor interest in the asset class even as formerly impacted property types return to their prime. According to the National Multifamily Housing Council’s monthly rent tracker, rent collections reached stable activity by the end of 2021–so much so that the NMHC discontinued its tracking measures. This institutional level of confidence aligns with our data at the top of 2022. We are seeing improved valuations and seller activity in this asset class as owners have decided now is the opportune time to achieve positive multifamily ROI.

Overall, the outlook for the commercial real estate market in the U.S. remains strong. As inflation drivers including the price of construction materials along with wages continue to rise, the Fed is poised to continue aggressively raising rates. That means that the time to invest in inflation-resistant property is now.

About the Author:

Mike DeGiorgio is the CEO and founder of Crexi, the commercial real estate industry’s fastest-growing data and technology platform.