With the ability to change rates every day, hotels are most resistant to inflation.
Inflation is the risk factor investors are watching the most closely this year—but each property type has unique nuances in terms of how it interacts with inflation.
That’s according to John Chang, senior vice president and director of research services at Marcus & Millichap. He says office properties have general inflation resistance because their values tend to align with replacement costs and they mark to market upon tenant turnover. Some properties may also have inflation escalators built into lease agreements. On a scale of 1 to 10, with one meaning little to no inflationary risk, Chang ranks the office sector risk at a three to a five.
Multi-tenant retail falls in the same category, he says, thanks to long-term lease agreements that could have escalators tied to sales. Single-tenant properties typically don’t have such escalators, but the risk depends on the tenant he says; Chang ranks them in the three to five range as well.
Seniors housing market-rate units can recalibrate on turnover, and government programs like Medicare or Medicaid also typically adjust to inflation. The sector has the ability to mark to market so the inflation risk rating is in the three to four range.
Medical office inflation risk is low, Chang says, in the two to four range. Meanwhile, the multifamily and self-storage sectors have tremendous inflation resistance since their rents mark to market frequently.
The most inflation resistant CRE property type—with the ability to change rates every day—is hotels, at the one to two range.
“Periods of high inflation tend to be relatively short—a few years or less,” Chang says. “This shouldn’t be a primary commercial real estate investment driver but it could nudge investor decisions a bit. Real estate is generally a long term investment with multi-year hold periods, so while you factor in inflation and other short term risk, investors need to keep their eyes on the horizon.”