The Current Effects of Inflation on the US Commercial Real Estate Market

Inflation continues to significantly impact the commercial real estate (CRE) market in the United States. It’s no surprise that high inflation rates coupled with increased interest rates has put consumer spending under pressure in recent months. Rising costs in goods, services, and gas has already had far reaching consequences in the CRE space. At SIG, our Investment Advisors are aware that as prices rise, while we may face challenges, significant opportunities continue to emerge for investors, developers, and tenants. We’re paying close attention to the impact of increased insurance costs in the United States and the effects of rising inflation on the market.

Inflation’s Impact on CRE

Rising Construction Costs: One immediate effect of inflation on the CRE market is increased construction costs. With construction costs expected to rise by as much as 6% this year, prices for raw materials like steel, lumber, and concrete are soaring, raising the cost of new development projects. This can delay or halt new construction, tightening the supply of commercial properties and driving up rental rates for existing properties. For example, in the industrial sector, average net rents are projected to increase at a pace of 5% over the next three years.

Higher Operating Expenses: Inflation also affects day-to-day operating expenses, including utilities, maintenance, and labor costs. Property owners may pass these costs along to tenants through higher rents or operating expense pass-throughs, impacting tenant retention and leasing activity. Proper underwriting and market knowledge is where brokers like SIG can add value to help investors see around the corner. If you know what can happen, you can prepare for it.

Interest Rates and Financing: As inflationary pressures mount, “the Federal Reserve’s decision to maintain the target interest rate at 5.25%-5.50% reflects a cautious strategy in the face of inflation”, reports The Global Treasurer. With current interest rates potentially near their peak, investors are anxious for a rate cut. High interest rates have large impacts on new acquisitions and refinancing of existing properties, slowing down transaction volumes in the CRE market.

Opportunities Amidst Inflation

Despite these challenges, there are opportunities for savvy investors:

Adaptive Reuse Projects: With new construction costs rising, adaptive reuse of existing buildings can be a cost-effective alternative. Converting underutilized or obsolete properties into new uses can provide investment opportunities while mitigating high construction costs.

Strategic Investments: Investors can take advantage of inflation by focusing on resilient property types and locations. For instance, industrial properties, in high demand due to the growth of e-commerce, may offer more stable returns compared to other sectors. Our team of Investment Advisors are experts in assisting investors make strategic investment decisions that will maximize the performance of their portfolios.

Value Retention in Hard Assets: Commercial real estate tends to retain value better than some other investment types during inflationary periods. Investors seeking to hedge against inflation might find CRE attractive, as it provides income through rental payments over a longer term period, and has a stronger chance of potential appreciation in property value.

Rising Insurance Costs

The country is facing unique challenges regarding inflation, particularly in insurance costs. The impact of climate change has made multiple regions prone to natural disasters such as hurricanes, floods and tornadoes which is significantly impacting insurance premiums.  According to the credit rating firm, AM Best Co. Inc, commercial real estate insurance costs skyrocketed to nearly five times the national pace. Inflation exacerbates this issue in several ways:

Specifically, investors in the Southeastern USA, or those looking to invest in the region, need to be aware that rising insurance costs exacerbates the issue of inflation because of the rise in hurricanes and floods. Inflation increases costs of materials and labor, thus the cost of repairs to damaged properties rise. High risk areas carry higher insurance premiums which drive up operating costs and impact bottom line profitability.

As advisors, we understand that rising insurance costs can influence investment decisions, as higher operating expenses may affect the attractiveness of certain properties or markets. Investors might seek regions with lower insurance costs or properties with robust mitigation measures to reduce risk and control expenses. Our wide range of inventory allows our expert Investment Advisors to recommend assets that fit your risk profile and investment goals.

While rising costs and interest rates pose challenges, strategic investment, and adaptive management can help mitigate these impacts. In the disaster prone regions, the added dimension of escalating insurance costs requires careful consideration and proactive risk management.

At SIG, our Investment Advisors are well-versed in navigating the complexities of the current inflationary environment, providing insights and strategies to help our clients make informed decisions and capitalize on opportunities in the commercial real estate market. By understanding the nuanced effects of inflation and employing targeted investment strategies, SIG remains committed to delivering value and stability to our clients amidst the evolving economic landscape.


CRE & Technology: The Impact is Not What You Expected

There is no doubt that digital technology is having a very real impact on the CRE industry but this might be in ways that surprise you. This advancement is creating opportunities and value in new areas for investors and brokers.

Ways Technology is Changing CRE

The impact of technology on real estate is ever changing and in many cases, there are new property types that are created by this evolution. If you look back to the early 1980s, property types like data centers, electric vehicle charging stations, and the smart factories did not exist. We did though have a lot of Blockbuster video stores, Barnes & Nobles bookstores, and RadioShacks covering the map. Human needs change based on what is available and prevalent today and you can’t overlook the real estate component of these changes.

Another example is the rising demand for last-mile logistics and the impact this is having on the industrial sector. The last-mile delivery market is set to grow by 15% through 2027, adding $62.7 billion in value between 2023 and 2027 according to Research and Markets. This growth is taking place along transport hubs and links, and is following the migration of people to secondary and tertiary markets, and even into rural areas. We think there are some great new opportunities in unexpected markets for investors seeking that diamond in the rough property to add to their portfolios. And for sellers in secondary and tertiary markets, there is the chance to reach a new base of buyers, alert to the value to be found off the beaten track. 

A third example comes from the restaurant sector. Consider how quick-serve restaurants (QSR) have changed between 2020 and today. During the pandemic, successful QSR brands adopted third-party delivery app services to reach their customers in a low-touch way. There was also an increase in virtual kitchens – restaurants that only exist to service deliveries and takeaways, and do not cater for seated customers. As the pandemic ended, QSRs started rethinking their digital channels to avoid the high third-party costs, but to continue to offer their customers convenience. New developments included drive-thrus and online ordering kiosks on their premises. Each technological evolution impacts the property layout, and ultimately the brand’s ability to expand and grow. Savvy brands with the flexibility and agility to accommodate these changes have gone from strength to strength and grown their footprint, seeking to acquire new, similar premises from property investors.

It Starts With Data

To advise our investors on trends like these – and any trends and opportunities in CRE – we need access to data, and the ability to quickly transform that data into something meaningful for our clients. Whether you are a buyer or a seller, you need this information fast. This allows you to make the most appropriate decision at that time – whether that is to buy, sell, or hold.

Today, conversations around digital transformation involve concepts such as big data, predictive analytics, artificial intelligence (AI), and machine learning (ML). But we believe this is only part of the picture, and that today CRE companies should already be using available tools to work better, faster, and be more helpful to their clients. For us, this means collaboration, and the speedy and clear communication of accurate, well-informed insights so that our clients can make the right decisions. This is followed up with the ability to execute decisions quickly and effectively to make the most of the opportunity in days, rather than weeks or months.

The reality is that AI and ML-powered tools are already here. At SIG, we use these tools for everything from capturing call notes and action items to extracting lease data, creating proposals, summarizing legal documents and reporting on complex financials.

Today, anyone has access to the ability to analyze data without being a software engineer. All it takes is a willingness to learn, and an environment and culture conducive to innovation. Companies that have a digital-first approach certainly have an advantage here. In our case, we started SIG as a national triple net lease brokerage firm and because of that it was vital that we could reach investors across the country to find the best deal for our clients and the only way to do that was to be a digital-first company.

Introducing the Robo-Broker?

As much as we are fans of using technology to do things better and faster, we don’t see the robo-broker as the next evolution. It is unlikely that a robot will ever outperform a human broker that is powered by technology. A human’s ability to connect, build relationships and understand nuances is needed to complement and mediate the data delivered by technology to arrive at and execute on the best deal.

“We can all gain efficiency, effectiveness and accuracy by using technology,” says Ryan Passe, SIG Chief Operating Officer. “Overlaying this with people who understand what they are looking at, can harness the information, and do something with it is where value is created. People can understand the human impact, and build the deep, lasting relationships required to navigate the unexpected and work through tough issues. If you pair this with the technological innovations of the world we live in, this is a great recipe for success for our brokers, our clients and our company.” 

Contact SIG today to make your investment goals a reality.