Private Commercial Real Estate Equity Returns and Inflation

Abstract

The authors estimate, for total real estate and each of four property types, the extent to which various private commercial real estate returns, namely income, capital and total return, hedge against expected and unexpected inflation during the 1978-2006 period. Overall, total returns for all of the property types, except for retail, are shown to be a strong hedge against both expected and unexpected inflation. However, and interestingly, this hedging efficacy comes mostly from capital appreciation rather than income return. Thus the inflation hedging power of real estate seems to be more a product of the capital markets, rather than of the net income generating processes of real estate9s leasing and expense structures. In terms of inflation hedging capability, office is shown to be the strongest, followed by apartment and warehouse. Contrary to past studies and conventional wisdom, the retail sector is shown to have no significant hedging power against inflation. <b>TOPICS:</b>Real estate, risk management, statistical methods