With all of this in mind, you imagine real estate investors could be running for the hills or, at the very least, just sit on their hands and wait to see how things turn out. Not even a little. On the contrary, a number of major global pension plans have actually increased their allocations to commercial real estate even as offices are empty and seaweed is smashing through mall parking lots.
A recent survey of large investors in the United States found that 29% planned to increase their real estate bets and only 5% wanted to reduce their exposure to the sector. US commercial real estate prices, like residential prices, are nearing the peak last reached in 2006. What’s up?
Well, for starters, the value of almost every financial asset has been pushed through the roof by super-easy monetary policy, which is why Cunliffe’s comments were so dishonest. US Federal Reserve interest rates have been close to zero for a year and are expected to remain so for two more. Meanwhile, he’s buying hundreds of billions of debt, pushing real returns into negative territory for the second time in 40 years.
In such an environment, investors eye the returns of commercial properties the same way a thirsty wanderer would gaze at a stagnant puddle in the middle of the desert. But there’s another reason they dismiss concerns about dysentery and swallow them up. Real estate has traditionally been a good hedge against what the markets fear most now: inflation.
Rents for offices, shops and housing have historically been closely linked to consumer prices. Increasingly expensive raw materials can also hold back new construction, which, all other things being equal, will benefit owners of existing buildings.
But all other things are far from equal. Logic will only work if the new normal looks a lot like the old normal. It breaks down poorly if vacancy rates remain high and landlords are unable to raise rents. Inflation will only increase the prices of what people really want. It seems increasingly unlikely that offices and commercial spaces fall into this category.