Inflation Could Be Real Estate Owners' Friend

As inflation hits the U.S. economy at a faster rate than in decades, there might be an upside for commercial real estate, or at least for investors already holding real property. 

Higher input prices for construction could, in theory, limit supply growth in every real estate sector, even as demand grows, which would help support the recovery in rents and asset prices, JLL posits in a new research note.

In May, the consumer price index grew at an annualized rate of 5%, up from 4.2% in April, according to the Bureau of Labor Statistics. That marks the fastest rate since 2008. So-called core inflation, which excludes the volatile food and energy sectors, came in at an annualized 3.8% in April, up from 3% in March.

Inflation is being driven by a massive post-pandemic rebound in the economy. The Fannie Mae Economic and Strategic Research Group revised its growth expectations for the U.S. economy for full-year 2021 upward 10 basis points to 7.1% due to stronger-than-expected consumer spending so far this year.

The question is whether this inflationary bout will last after the initial rush of pent-up, post-pandemic spending ebbs. JLL predicts that inflation will have some persistence this time, unlike in 2008, when the Great Recession put a lid on it.

"First, some of the more jolting supply issues will take longer to resolve," the company's research report says. "Second, demand should remain elevated for some time (even though recent spending rates are unsustainable). And third, inflation expectations have recently increased, albeit slightly."

Federal Reserve Chairman Jerome Powell insists that inflationary pressures on the economy will be transient, though the central bank nevertheless forecasts that inflation will climb to 3.4% this year and has rolled out the possibility of interest rate hikes.

As inflation seems to grow, investors are turning to real estate equities. So far during Q2 2021, real estate stocks have gained 13%, considerably higher than the 6.3% gain of the S&P 500, The Wall Street Journal reports.

“The real question is does inflation become a bigger worry or a smaller worry,” UBS Global Wealth Management Head of U.S. Real Estate Jonathan Woloshin told the WSJ. “If inflation continues to be a worry, I think people will look to real estate as an inflation hedge.”