01 Feb Three Tips to Stay Ahead of Inflation in Commercial Real Estate
It’s no secret that most of the world is in a cycle of high inflation. In the face of that inflation, it can be difficult to stay ahead of market swings and come out on top, no matter your industry. In commercial real estate, volatility is a major consideration.
So, how do you win? How do you stay ahead of inflation in this business? There are a lot of viable answers, but three surprisingly simple tips can help your clients focus on where they will get the most out of their efforts, and they’re universal. Read our latest blog post to learn more. Take a look.
Start With Mortgages
Inflation usually comes with higher interest rates, and that can kill commercial real estate business models. Obviously, clients will want to look for better interest rates, but what matters more than getting the best deal is predictability. It will often be worth it to take a slightly higher interest rate if your client can get a fixed mortgage to go with it.
Fixed rates are a source of predictability in an otherwise storm of inflationary chaos. And as long as you can predict your mortgage rates, your client can adjust rental rates and agreements accordingly. In some cases, it will even be worth refinancing properties just to fix the interest rate.
As for adjusting rental agreements, clients have two tools that help a ton with this. The first is the inflationary clause. Basically, they can include a provision that allows them to raise rent alongside inflation, and that can help them keep up with interest rates when they can’t get a fixed mortgage. If these clauses are not yet standard in their rental agreements, they need to be.
The second tool is operating expense shares. It’s common for commercial property owners to pay utilities and simply bill the tenants for access. Depending on how they structure the agreement, they might end up paying a larger share of those utilities (or other operational expenses). So, recommend they build some wiggle room in the contracts and raise the tenant’s share of those expenses if inflation forces your client’s hand.
Trim the Fat
Another way for clients to deal with inflation is to find ways to save money outside of interest rates and rental rates. They can do that by revisiting their administrative and management expenses and finding room to trim the fat.
This process might require them to take on more administrative and managerial duties themselves. It might mean that they need to search for new providers and bargain shop for these services. In some cases, they can invest in software that automates jobs and enables their existing managers and administrators to handle more responsibilities with fewer hours or labor.
By itself, the word is hardly a solution, but there are ways for your clients to diversify their investments while sticking to the realm of commercial real estate.
First, it helps to diversify assets into different kinds of commercial real estate. Different parts of the market may heat up or cool off in response to inflation, so having fingers in a wider range of pies can mitigate risk and stabilize returns.
As an example, they can invest in a multi-family dwelling, a business front, a storage location, and a healthcare facility. Each type of property is likely to follow different business cycles, hedging against the impacts of inflation.
They can also explore REITs and other large-scale investment opportunities. They’re still in commercial real estate, but splitting the risk with other investors.
Contact CCIG Loans
As an NMLS licensed loan originator, you can get your clients’ projects financed by working with CCIG. Combining fast closings and simple documentation, CCIG can move your clients’ commercial, industrial, retail, or residential projects forward. Talk with us about your project and needs. With over ten years of experience, we can make deals happen.