COMMERCIAL REAL ESTATE’S HEDGING CAPABILITIES

For decades, commercial real estate has been widely regarded as a useful inflation hedge, a real asset whose income streams and replacement costs should, in principle, rise with the general price level. The intuition is straightforward: higher construction and labor costs ultimately influence replacement values, while market rents reset over time. Unlike fixed income instruments, whose cash flows are largely fixed and are therefore more vulnerable to inflation’s erosion of purchasing power, commercial properties possess the ability, albeit with lags and frictions, to reprice. Yet, as with many long-held investment beliefs, this relationship merits periodic reassessment, particularly in a cycle defined by shifting monetary policy, evolving market structures, and meaningful dispersion across sectors.

In this paper, we take a data-driven look at the inflationhedging characteristics of commercial real estate by examining the long-term relationships among real estate and fixed-income performance, and inflation. Our analysis begins with the macro lens: how have property returns correlated with inflation across cycles, and how does that compare with the challenges faced by fixed income.