America is in the midst of a commercial real estate bubble that could threaten your retirement savings.
Experts say the commercial real estate market is bubbling.
The RealDeal estimates that U.S. industrial property returns grew by 45% in 2021. While returns on multifamily properties like apartments rose by 25% and storage unit returns grew by 30%. In contrast, office space returns did not grow in 2021, and retail space returns grew by 6% in 2021.
Consequently, commercial real estate sales are booming. Real Capital Analytics estimates that the value of U.S. commercial property sales grew to a record $809 billion in 2021. Morningstar analysts estimate that real estate ETFs and open-ended funds saw net flows grow from a $3 billion loss in 2020 to a nearly $18 billion gain in 2021.
Can the Commercial Real Estate Bubble Affect Your Savings?
The commercial real estate bubble’s potential effects on investments are difficult to see.
Most investors don’t own commercial real estate, stock in commercial real estate exchange-traded funds (ETFs), or mutual funds. However, commercial real estate costs affect most businesses.
All publicly-traded companies lease or own some commercial real estate. Retailers lease stores, e-commerce companies lease fulfillment centers, and many internet companies own or lease data centers.
Higher real estate costs could increase expenses and lower profits at many companies. Consequently, rising real estate prices could drive inflation, which destroys some investments’ value.
Is the Commerical Real Estate Bubble Driving Inflation?
Our nation’s inflation rate rose to 8.5% in March 2022 — the highest level recorded since 1981. The inflation rate was 4.2% back in April of 2021.
Real estate costs drive inflation because almost all businesses need some property. When commercial rents rise, businesses raise prices to cover them.
According to Business Insider, warehouse rents rose by 40% from 2021 to 2022.
Inflation could drive the commercial real estate bubble because many investors use real estate as a hedge. Some investors buy rental housing because it is easy to raise rents with inflation in some markets.
Other investors will buy hotels; or homes they can use as short-term rentals (Airbnb), as inflation hedges. For instance, hotels and Airbnb hosts can raise rents on a daily, or weekly, basis to keep pace with inflation.
Money often flows out of stocks and bonds and into real estate in times of high inflation. Some investors will dump stocks to buy real estate because property can be more stable.
How the Commercial Real Estate Bubble Threatens Your Savings
The biggest threat a commercial real estate bubble poses to your savings is inflation. If real estate costs keep going up, so will inflation.
Inflation can destroy the value of cash investments such as savings accounts and certificates of deposit. Bankrate estimates that the average interest rate for U.S. savings accounts is currently 0.06%. That means the average U.S. saving account lost 8.44%, with the 8.5% annual inflation rate in March 2022.
If the commercial real estate bubble continues, the inflation rate could rise, leading to more losses. Savers will need to find alternatives to cash investments if the commercial real estate bubble continues.
Ordinary investors will face a nasty dilemma if inflation continues. As inflation rises, it makes many popular investments, such as real estate and some stocks, too expensive to buy.
Can Gold Protect Your Savings?
Fortunately, there are some inflation hedges available. One popular alternative to cash investments is gold.
Throughout times of economic crisis, gold has proven time and time again that it can retain its value.
Precious metals could be a helpful defense against the commercial real estate bubble.
Let us provide you with a free, no-obligation, one-on-one consultation. Our account executives will answer all of your questions and help figure out which option is best for you!