![]() ![]() ![]() is that in periods of higher inflation, capitalization rates-effectively, the net operating income (NOI) yield investors are willing to accept-have tended to compress. The principal reason CRE has served well as an inflation hedge 1 In this analysis, an “inflation hedge” is defined as an asset with a rate of return that is higher than the current inflation rate. However, there’s a wrinkle in the data that contradicts accepted wisdom: CRE performed this way despite rents generally not keeping up with inflation. According to McKinsey’s analysis, CRE outperformed inflation, its own historical average, and other asset classes (including stocks, bonds, and gold) during most of the last seven periods of elevated inflation. The answer to the first question is yes: CRE has helped investors retain real value during periods of heightened inflation. ![]() Our goal: a definitive answer to whether CRE deserves its golden reputation and a sense of how it might perform this time around. ![]() Has it delivered better real (inflation-adjusted) returns during inflationary periods than at other times? Has it outperformed other asset classes during inflationary periods? With inflation at 40-year highs, we decided to perform a data analysis of CRE’s inflation-hedging attributes. Commercial real estate (CRE) has long enjoyed a reputation for being a good hedge against inflation, yet even industry veterans might be hard-pressed to explain exactly why. ![]()
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