Is Now Still A Good Time to Invest?

THE EFFECT OF INFLATION ON COMMERCIAL REAL ESTATE IN TEXAS 

 The year 2022 was an economic roller coaster for many Americans. But it's not all doom and gloom, and some bright spots might continue into 2023.

Inflation continues to peak as a result of several different variables. For starters, the COVID-19 pandemic impacted every area of the economy, resulting in stubborn supply chain bottlenecks, energy shortages, geopolitical events, and rising commodity costs. In the U.S. prices and wages continue to fluctuate along with the supply and demand. To mitigate the current headwinds impacting on market returns, investors are looking at the potential benefits of shorter duration assets, cyclical growth sectors, and inflation-resistant investments.

The Relationship between Inflation and Interest Rates

Some commercial real estate investors might consider purchasing property in Texas sooner rather than later. Rising interest rates may make commercial real estate deals more expensive as the year advances. Every rate increase makes borrowing money more expensive.  

One thing we have learned as a real estate group for several years now, is that when the consumers leave the market, the investors enter. 

Every eb and flow in the market creates a unique opportunity for investors. If you take advantage of this time in the market, the return could exceed your expectations.

What Does Increasing Inflation and Interest Rates Mean?

Soaring inflation and interest rates might seem threatening for the real estate market in Texas in 2023. However, it is worth noting that real estate offers a higher ROI than other types of investments. This economic reality should give Texas commercial real estate investors an advantage as inflation and interest rates rise. However, in terms of interest rates, the time to act is now for real estate transactions. This is because interest rate hikes promise to add tens of thousands of dollars to the purchase price.

This has led some commercial real estate owners and investors to believe that now is the time to invest even more in Real Estate. Why? The explanation is simple, while interest’s rate are on a rise, the principal of the properties are going down, meaning that even if the cost of the property rises due to high interest, this is still beneficial to investors as interests can always be adjusted when refinancing the property a few years after acquiring the property. Real Estate investors can also benefit from rising rental income from inflation.

 Property owners who may profit from inflation include: 

• Those who typically rent their properties for a shorter period of time, such as multifamily, hospitality, and self-storage, may benefit from more frequent rental resets if inflation continues.  

• Those who have existing properties and who are taking advantage of current market circumstances (i.e., rising construction and labor costs and completion delays caused by supply chain disruptions).

 MAJOR TAKEAWAYS

Now is not the time to stay on the sidelines when it comes to real estate deals.

For those who are just starting out, now is the best time to invest. Texas continues to be a hot market for real estate which guarantees that there will be a drive up in prices. Closing on your commercial investment properties will require a sense of urgency to lock in prices and rate.

Keep in mind…

• Texas' standing as a hot market for real estate promises to drive up prices, adding to the urgency to close deals.

• While rising inflation concerns consumers, real estate investors might benefit from rising property values.

• Since interest rates are likely to keep hiking, investors should move quickly to take advantage of real estate opportunities.

The problems caused by the Covid-19 pandemic, such as the sudden spike in inflation, are cause for concern. However, Wise investors should not stop from putting their equity to work on generating returns and looking for properties with positive cash flow to grow their Real Estate Portfolio. 

Even if property development is expensive, there is no doubt that investing in real estate can be an effective inflation hedge. Don't be intimidated by inflation! As long as you have the right Commercial Broker working for your interests and as long as you are confident with your numbers and know your target property market, you'll be on the right track.