How Inflation Impacts Commercial Real Estate and Why You Should Care

Moneymagpie Team 20th Mar 2023 No Comments

Recently you’ve no doubt been bombarded by news about how inflation is on the rise, and why this is generally bad news for consumers.
But what about the business perspective on inflation? Surely with all of these stories regarding the record profits that are being earned in some industries suggests that companies are actually doing very well out of the current situation?
Well, it’s a little more complex than that, and looking at the influence inflation has over commercial real estate (CRE) is a good way to illustrate the main points.

• The current conundrums explored
• The solutions being implemented
• The dilemma of commercial rental costs
• What this means for consumers

The current conundrums explored

There are a few issues associated with inflation that are afflicting CRE, specifically with regards to the development of new projects, rather than the economics surrounding the buying, selling and renting of existing commercial buildings.

Material costs, for example, hit record highs last year, and have continued to climb since. There have also been significant hold-ups and shortages in the supply chain, with the knock-on impact of the pandemic meaning that the return to normality in this sector has not come as quickly as in others.

There’s also the job shortage to contend with, which means that even if projects are going ahead, they might not be able to find the right workers to fill roles, which can lead to delays and further spikes in costs.

The solutions being implemented

It’s not all doom and gloom for CRE developers, of course. All that this current crisis is doing is encouraging them to adapt and improve their processes and practices so that the ups and downs of inflation don’t leave them so exposed to delays and expenses.

Data-driven decision making, as afforded to developers by platforms like www.northspyre.com, is helping to ensure that projects come in on time and within the original budget. And if speed bumps do appear, changes can be made without this leading to a domino effect that disrupts anything further down the line.

The dilemma of commercial rental costs

So far we’ve not discussed the way that inflation is costing businesses more to rent out commercial premises, just as residential renters are having to pay more to landlords in a cost of living crisis.

This is a problem that tends to be more geographically weighted, meaning that rents for everything from retail spaces to warehousing are increasing more rapidly in some areas than in others.

Of course there is a point at which this arms race must hit a peak, and market forces are fairly volatile in this sector right now.

There’s also the fact of increased inflation going hand in hand with higher interest rates. So for businesses that want to invest in their commercial premises, and want to borrow money to do so, the cost of securing a loan will be much higher, perhaps to the point of it being unattainable, especially if they’re already feeling the squeeze from rent increases.

What this means for consumers

It’s helpful to understand more about why businesses you use from day to day might be putting their prices up right now.

‘Inflation’ is an all-encompassing word, and yet it’s one which has different degrees of influence when you dig beneath the surface. For CRE, there’s mixed news overall, and so while new developments stand a better chance of weathering the storm, established businesses are facing steeper costs, which in turn are being passed onto customers.

The bottom line is that while inflation might seem daunting, history teaches us that this too will pass, and we’ve now got the tools to deal with it more effectively than in the past.

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