Inflation. It’s a common word among consumers, though it’s not always fully understood. The initial assumption most people make about inflation is that they’ll be paying more to acquire the same goods and services than they did in the recent past.
Let’s start with the basics.
What is inflation?
Inflation happens when prices rise and your dollar doesn’t go as far. This typically happens when the demand for goods and services is high, but the supply is low, as it is today. The pandemic and the world’s sudden reliance on ecommerce caused massive problems in the supply chain, creating a backlog of demand. If this demand persists, prices will rise.
How is inflation calculated?
There are three barometers used to measure the inflation rate.
- The Consumer Price Index, which calculates the annual raises for companies, as well as the cost of living for Social Security payments
- The Personal Consumption Expenditures Price Index, which tracks how much consumers are paying for goods and services
- The Producer Price Index, which follows changes in the price of goods and services that companies receive
It’s important to note that inflation is not appreciation. Appreciation rate (in real estate) is the increase of a property’s value which does not happen in the result of inflation. A property’s value increases based on demand. Calculating inflation is simple but the reality is that no one ever knows what the future will bring. However, being informed and prepared is key to thrive in this economy and in the real estate market.
What Does Inflation Mean for Real Estate Investors?
There has been a lot of talk about our monetary system in the United States these days. Inflation is not necessarily a bad thing for commercial real estate investors. Though it may impact the price of goods and services needed to renovate or maintain a property, it can also allow investors to charge higher rents. Naturally, the best way to take advantage of inflation is to secure a new tenant at an updated, escalated rental rate.
Don’t fret if you’re not in this position. Though California passed a rent control law in 2019, it still allows the state’s landlords to increase rents by 5%, plus inflation – making inflation a good thing – each year through 2030.
If you’re in the market, you should also know that interest rates and inflation tend to have an inverse relationship. As the inflation rate rises, interest rates tend to fall. This can make now – or any inflationary period – a great time to consider multifamily lending and commercial real estate loan options!
Those who own single-family and commercial properties often experience a boon during an inflationary cycle. Not only can they increase rents, but buying or refinancing a property at a low interest rate lets them hedge against inflation since their lending terms are already locked in.
Want in on this inflationary period? It’s not too late! FBF is constantly monitoring many barometers related to inflation, interest rates, the economy, the housing market, and, of course, multifamily lending and commercial real estate loans.
We’re happy to share our data with you, and even happier to devise a real estate inflation hedge plan that puts you in control of your financial future, regardless of outside forces.
Give us a call today to get started.