Industry insights, market outlook reports and commercial real estate
news, and trends from the Coldwell Banker Commercial brand.
Inflation has been on everyone’s minds lately as increased prices are affecting the entire economy and driving up costs for food, consumer goods, labor, housing, and commercial real estate. To help curtail inflation, the Federal Reserve Bank has been raising the target interest rate with three increases since March of this year for a total increase of two full percentage points. By increasing interest rates, the fed works to cool demand for products and services (by dissuading borrowing) which helps prices come back down to a more normalized growth rate. That means payments normally made with borrowed funds, such as real estate, become even more expensive. In fact, the 2% increase in interest rates equates to about 40% higher payments for borrowers of commercial real estate who typically borrow funds with a 20-year amortization rate. I was recently listening to the Commercial Investment Real Estate Podcast produced by the CCIM Institute and Martha Peyton, PhD., who is the global head of real estate research at Aegon Asset Management. Peyton shared some interesting observations on inflation and its effect on commercial real estate. Through analyzing historical data, she noticed that when inflation hits, people look to purchase CRE as an inflation hedge. While this is a fact supported by past transactions, she delved deeper to find out why. One of the main reasons that CRE is a sound investment during inflationary periods is that commercial leases have escalation clauses giving the landlord the ability to pass along common area maintenance (CAM) costs to the tenant, so as costs increase, net income remains strong. Short-term leases, such as apartment leases which are often one-year, are especially good because rents and terms can be adjusted easily. This is exactly what Redfin reported as happening, with asking prices for rental housing increasing an average of 17% this year nationally.
Cryptocurrency is a hot topic amongst investors, entrepreneurs, and essentially anyone involved in technology, business, and/or finance. The use of cryptocurrency is expected to spread into the real estate sector in the coming years. The rise of this digital payment isn’t surprising, given the number of companies that now accept it for goods and services. In fact, legendary entrepreneur Mark Cuban made headlines when he announced that dogecoin, a popular form of cryptocurrency, can be used to pay for tickets and merchandise online for supporters of the Dallas Mavericks, the NBA team that he owns.
The prevailing thought about the Federal Reserve stimulating the economy with injections of newly printed money, to rebound from the COVID-19 pandemic, is that inflation will be temporary. The Fed has assured us that as production gets back to normal, prices will come down to stabilized levels and this will keep our economic engine humming as it did before the pandemic. But what if higher labor costs and rising housing expenses are the new normal and don’t come back down?
Real estate crowdfunding is currently one of the most popular ways to raise capital for real estate investments. In April of 2012, crowdfunding burst on to the scene with the inception of the “Jumpstart Our Business Act” also known as JOBS. This act was signed into law under former President Barack Obama.