Is Commercial Real Estate an Inflation Hedge?

Download a PDF of this entire article

Winter 2011/2012, Vol. 36, No. 3 features

Abstract: Inflation is among the worst of nightmares depriving investors of peaceful sleep. It erodes the value of corporate earnings and roils stock investors; inflation favors borrowers as debt repayments are made in lower value dollars, and it pummels consumers— especially those on fixed incomes—by depressing the purchasing power of their incomes. With the trough of the last recession now almost three years past and with the recovery characterized by a peculiar set of circumstances, inflation nightmares appear to be on the rise. In an effort to quiet their uneasiness, investors are re-examining the capacity of various asset types to offer inflation protection, should inflation become problematic. Conventional wisdom and some solid historical research show that commercial real estate does indeed offer inflation protection, albeit imperfect. This article examines both inflation potential for the U.S. economy over the next few years and the capacity of commercial real estate to provide inflation protection.