Commercial Mortgages: Commercial real estate will remain active in 2022, but lock in low

Dominion Realty Partners bought the land in November for $13.5 million, or $37,190 per unit.

Certainly the land for town homes is worth more than for apartments, but there is no question that the rents will have to be higher at the Dominion Realty Partners’ project in order to gain the same returns if every other factor is held constant.

In essence the higher price of the land in this example requires rents to inflate to provide the same return.

The second argument that real estate is a decent hedge against inflation pertains to commercial properties.

Many commercial properties have leases that require tenants to reimburse landlords for increases in expenses which means tenants pay for the inflationary increases more than landlords.

Of course, there are holes in each argument depending on the type of property, and we are still living through a lot of COVID uncertainty in addition to inflation.

One of the biggest holes in the two arguments is rising interest rates can eat into increases in income or flat income, so to create a strong hedge against inflation, it is important to lock in longer term rates.

One reason real estate is not a great hedge is that cap rates, while slow to move, tend to increase as interest rates increase and rising cap rates hurt real estate values.