Commercial mortgages: commercial real estate will remain active in 2022, but will keep rates low as long as they last | Economic news
Dominion Realty Partners purchased the land in November for $13.5 million, or $37,190 per unit.
Certainly the land for the townhouses is worth more than for the apartments, but there is no doubt that the rents will have to be higher at the Dominion Realty Partners project in order to achieve the same returns if all other factors are held constant .
Essentially, the higher land price in this example requires rents to inflate to provide the same return.
The second argument that real estate is a decent hedge against inflation relates to commercial properties.
Many commercial properties have leases that require tenants to reimburse landlords for expense increases, meaning tenants pay more than landlords for inflationary increases.
Of course, there are holes in every argument depending on the type of property, and we’re still experiencing a lot of COVID-related uncertainties on top of inflation.
One of the biggest holes in both arguments is that rising interest rates can reduce income increases or fixed income, so to create a strong hedge against inflation, it’s important to lock in rates at longer term.
One of the reasons real estate is not a good hedge is that cap rates, while slow to move, tend to rise as interest rates rise and bond rates rise. capitalization harms real estate values.