The commercial real estate market is complex. The capital drivers that push investor “funds flow” and capital availability into the real estate market include promises of Return on Invested Capital (ROIC) and shelters from inflation. While most investors are familiar with the ROI or ROIC concept, few understand as deeply the reasons commercial real estate investors care so deeply about inflation and why that matters for funds flowing into the CRE market.
Because inflation generally causes a rise in the overall prices of goods and services, investors and consumers tend to feel a similar overall decrease in the purchasing power of their capital. Inflation is driven by a number of macroeconomic factors, but is generally driven by the increases of costs for various inputs relating to a given economy.
When it comes to commercial real estate operating costs, demand for commercial space, tenant credit demand and supply, treasury yields, debt costs, cap rates, property valuations and equity yield requirements all contribute to an inflationary environment for real estate.