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The Impact of Inflation and Vacancy on Real Estate Returns

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    Abstract

    The impact of inflation on the value of assets is considered one of the primary financial concerns of long-term investors. While actual and expected inflation have slowed considerably since the early 1980s, concern over future increases is still a consideration for long-term investors.Ibbotson and Fall, Ibbotson and Siegel, Brueggeman, et al., Fogler, hartzell, et al., and Rubens, et al., conclude that real estate compensates the investor for inflation risk. When real estate is added to a mixed-asset portfolio, the inflation risk of the expanded portfolio is substantially below that of the original portfolio (ex-real estate).The purpose of this study is to examine the relationship between the performance of commercial real estate and inflation. Unlike previous studies, this study examines real estate performance during both high and low inflation periods. The results show that real estate does provide an inflation hedge. Second, real estate returns are broken down by two major property type categories (office and industrial) to determine if any property type differences exist. A major difference is found between the inflation hedging effectiveness of office and industrial properties. Third, the differences are further analyzed in relation to vacancy rates in the two property types. A structural imbalance in the office market is evidenced by high vacancy rates. Therefore, the relative impact of vacancy rates upon office and industrial property performance is examined and found to be a significant factor in explaining returns, thus affecting inflation hedging characteristics.

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    File URL: http://aux.zicklin.baruch.cuny.edu/jrer/papers/pdf/past/vol06n02/v06p153.pdf
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    Bibliographic Info

    Article provided by American Real Estate Society in its journal Journal of Real Estate Research.

    Volume (Year): 6 (1991)
    Issue (Month): 2 ()
    Pages: 153-168

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    Handle: RePEc:jre:issued:v:6:n:2:1991:p:153-168

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    Postal: American Real Estate Society Clemson University School of Business & Behavioral Science Department of Finance 401 Sirrine Hall Clemson, SC 29634-1323
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    Web page: http://www.aresnet.org/

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    Postal: Diane Quarles American Real Estate Society Manager of Member Services Clemson University Box 341323 Clemson, SC 29634-1323
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    Web: http://aux.zicklin.baruch.cuny.edu/jrer/about/get.htm

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    1. W. B. Brueggeman & A. H. Chen & T. G. Thihodeau, 1984. "Real Estate Investment Funds: Performance and Portfolio Considerations," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 12(3), pages 333-354.
    2. Carlson, John A & Parkin, J Michael, 1975. "Inflation Expectations," Economica, London School of Economics and Political Science, vol. 42(166), pages 123-38, May.
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    Cited by:
    1. Martin Hoesli & Colin Lizieri & Bryan MacGregor, 2006. "The Inflation Hedging Characteristics of US and UK Investments: A Multi-Factor Error Correction Approach," Real Estate & Planning Working Papers rep-wp2006-01, Henley Business School, Reading University.
    2. Roland Füss & Felix Schindler, 2011. "Diversifikationsvorteile verbriefter Immobilienanlagen in einem Mixed‐Asset‐Portfolio," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 12(2), pages 170-191, 05.
    3. Saira Tufail & Sadia Batool, 2013. "An Analysis of the Relationship between Inflation and Gold Prices: Evidence from Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 18(2), pages 1-35, July-Dec.
    4. Glenn R. Mueller, 1993. "Refining Economic Diversification Strategies for Real Estate Portfolios," Journal of Real Estate Research, American Real Estate Society, vol. 8(1), pages 55-68.
    5. Waldo L. Born & Stephen A. Pyhrr, 1994. "Real Estate Valuation: The Effect of Market and Property Cycles," Journal of Real Estate Research, American Real Estate Society, vol. 9(4), pages 455-486.
    6. Gwangheon Hong & Bong Lee, 2013. "Does Inflation Illusion Explain the Relation between REITs and Inflation?," The Journal of Real Estate Finance and Economics, Springer, vol. 47(1), pages 123-151, July.

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