Despite inflation woes, CRE’s long-term outlook remains strong

As investors worry about the short-term effects of rising inflationary pressuresLong-term commercial real estate decision makers would be wise to look at demographics and macro behavior patterns, according to an industry source.

“When you’re looking at investing for 20 years, you can ignore a lot of the noise that’s bothering you,” says John Chang, senior vice president and director of research services at Marcus & Millichap. He cites several relevant examples, recalling, for example, investor behavior 15 years ago, when apartment bidders aggressively drove up prices in 2006 and 2007 before the Great Financial Crisis.

Many investors may have overpaid for assets, he says, but average apartment rents have risen 75% since then and prices are now 135% higher than pre-GFC levels. And from 2000 to 2021, according to data from Marcus & Millichap, S&P Global and NCREIF, the S&P’s total return was 416%. Apartments outperformed this performance at 458% and Retail delivered a return of 461%. Industrial more than doubled the S&P with a total return of 848%. Office real estate was ahead of the S&P until the start of the pandemic, but office real estate still provided a total return of 341%.

Millennials will continue to shift the housing market as they enter their household-forming years, Chang says, comparing this generation’s coming of age to that of baby boomers from 1983 to 2003. During during this period, house prices increased by 53% on an inflation-adjusted basis. The median price of a home today is $372,000, and if the appreciation matches the increase in baby boomers, that number will jump to $570,000 in today’s dollars. in 2042.

And by then, Chang says, the average baby boomer will be 87, bolstering demand for senior housing and ushering in the transfer of an estimated $84 trillion in wealth to younger generations.

“This has big implications for commercial real estate,” Chang says. “But it won’t happen all at once. This will happen slowly over time…which is why investors need to be prepared to adapt. They cannot be passive” and should instead periodically trade assets.

Investors can also look to migration patterns: the top three markets for population growth over the next two decades will be in Austin, Orlando and Phoenix, according to Moody’s Analytics.