The Federal Reserve issued its final monetary policy decision “to keep the target range for the federal funds rate at 0 to ¼ percent” the economy has better weathered the consequences of the coronavirus especially with respect to employment and supply chain.  The Fed will be prepared to adjust the stance of monetary policy as appropriate.

As for the impact of this decision, the relationship between commercial real estate performance and inflation is dynamic. Historically, rent and value have risen as inflation has pushed up prices and wages. Rents and costs should rise or rise with inflation, as the value of commercial real estate is primarily based on net income. In many cases, costs rise faster than income.  Inflation may cause the Federal Reserve Bank (the “Fed”) to decide to raise short-term interest rates. This indirectly affects long-term interest rates when government bond yields rise. Increased cost of capital usually leads to higher capitalization rates, leveling out the increased income.

Nevertheless, commercial real estate is widely believed to be an asset class used to offset the effects of long-term inflation because of the higher new rents, continued escalation of existing rental income, and continued property scarcity increasing values. This is one of the benefits of investing in commercial real estate. Most scholars and financial services advisors agree that private commercial real estate can (at least in part) be a hedge against rising inflation.