In this episode, Gary Ralston, Managing Director and Senior Advisor of SVN | Saunders Ralston Dantzler Real Estate, addresses headlining issues such as inflation and what it means for commercial real estate. Gary demonstrates different tools that investors can use to predict inflation and stay ahead of it within the market.
What is inflation? Gary described this economic phenomenon as “the gradual loss of purchasing power, reflected in a broad rise in prices for goods and services.” Over time, this erosion of purchasing power affects consumers and businesses across the economy. Using data from the U.S. Bureau of Labor Statistics, Gary points out how inflation was up to 8.3% over the last 12 months. Further research however would show that inflation has actually decreased significantly over the past few months.
How does inflation work? Gary outlines three different forms of inflation and the effects they have on the economy. The first is “demand-pull” inflation where the demand for goods and services exceeds the supply and production capacity. The second is “cost-push” inflation in which an increase in production costs causes prices to increase. Finally, there’s “built-in” inflation where income and wages rise in an attempt to maintain living costs.
How does inflation affect commercial real estate? In his analysis, Gary uses three different approaches provided by the Appraisal Institute:
- Direct Sales Comparison
- The Income Approach
- The Cost Approach
Gary focuses on the cost approach for his analysis. As prices rise, the cost of production rises, and finally the value of real estate rises. This is positive for the commercial real estate market.
When considering inflation within the real estate market, you also have to consider rent and demand. The Consumer Price Index, another tool for determining inflation, tends to serve as the basis for rent prices within the market. As the CPI rises, consumers can expect rent prices to rise as a result. This is similar when looking at population and demand. When an area experiences an increase in population, the demand for housing inevitably increases as well. This all goes to prove that investing in real estate is a great way to hedge against inflation.
“More people is more demand for real estate.” Real estate is the perfect asset to obtain in safeguarding against inflation. When population growth is exceeding the national average, real estate will actually outperform inflation in a meaningful way. Don’t forget to watch Gary’s full breakdown of inflation and what it means for the future of real estate in Episode 3 of “DataBreak with Gary Ralston”.
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U.S. Bureau of Labor Statistics (BLS):
Federal Reserve Bank of Atlanta - Taylor Rule Utility:
Federal Reserve Bank of St. Louis - Federal Debt: Total Public Debt:
Board of Governors of the Federal Reserve System - Selected Interest Rates (Daily) - H.15:
U.S. Bureau of Labor Statistics - Consumer Price Index:
U.S. Census Bureau - QuickFacts: