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| The Impact of Inflation and Vacancy on
Real Estate Returns Author: Charles H. Wurtzebach, Glenn R. Mueller, and Donna Machi Start Page: 153 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. |
