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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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  • Charles H. Wurtzebach & Glenn R. Mueller & Donna Machi, 1991. "The Impact of Inflation and Vacancy on Real Estate Returns," Journal of Real Estate Research, American Real Estate Society, vol. 6(2), pages 153-168.
  • Handle: RePEc:jre:issued:v:6:n:2:1991:p:153-168
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    1. W. B. Brueggeman & A. H. Chen & T. G. Thibodeau, 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, September.
    2. repec:bla:econom:v:42:y:1975:i:166:p:123-38 is not listed on IDEAS
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    Cited by:

    1. Dirk P.M. De Wit, 1996. "Real Estate Portfolio Management Practices of Pension Funds and Insurance Companies in the Netherlands: A Survey," Journal of Real Estate Research, American Real Estate Society, vol. 11(2), pages 131-148.
    2. E. Chuke NWUDE, 2013. "A Critical Analysis of Inflation-Hedging Capacity of Packaging Stocks in Nigeria," Asian Journal of Empirical Research, Asian Economic and Social Society, vol. 3(11), pages 1435-1459, November.
    3. 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.
    4. Oestmann Marco & Bennöhr Lars, 2015. "Determinants of house price dynamics. What can we learn from search engine data?," Review of Economics, De Gruyter, vol. 66(1), pages 99-127, April.
    5. Michael Bond & Michael Seiler, 1998. "Real Estate Returns and Inflation: An Added Variable Approach," Journal of Real Estate Research, Taylor & Francis Journals, vol. 15(3), pages 327-338, January.
    6. Martin Hoesli & Colin Lizieri & Bryan MacGregor, 2008. "The Inflation Hedging Characteristics of US and UK Investments: A Multi-Factor Error Correction Approach," The Journal of Real Estate Finance and Economics, Springer, vol. 36(2), pages 183-206, February.
    7. E. Chuke NWUDE, 2013. "The Impact of Inflation on Stock Market Investment Performance: Evidence from Airlines Automobiles Road Transport and Maritime Sectors Stocks of the Nigerian Stock Exchange," Asian Journal of Empirical Research, Asian Economic and Social Society, vol. 3(10), pages 1257-1276, October.
    8. Sebastian Schnejdar & Michael Heinrich & René-Ojas Woltering & Steffen Sebastian, 2020. "The Discount to NAV of Distressed Open-End Real Estate Funds," The Journal of Real Estate Finance and Economics, Springer, vol. 61(1), pages 80-114, June.
    9. 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.
    10. N. B. Udoekanem & J. I. Ighalo, 2016. "An assessment of the relationship between office rent and vacancy rate in Abuja, Nigeria," Asian Journal of Empirical Research, Asian Economic and Social Society, vol. 6(3), pages 77-83, March.
    11. 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.
    12. Raymond Y. C. Tse & James R. Webb, 1999. "Dynamic Equilibrium of the Housing Market," Urban Studies, Urban Studies Journal Limited, vol. 36(13), pages 2361-2373, December.
    13. E. Chuke NWUDE, 2013. "Inflation-Hedging Properties of Petroleum Marketing Stocks in Nigeria," Asian Journal of Empirical Research, Asian Economic and Social Society, vol. 3(12), pages 1488-1512, December.
    14. 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.
    15. Dirk P.M. De Wit, 1993. "Smoothing Bias in In-House Appraisal-Based Returns of Open-End Real Estate Funds," Journal of Real Estate Research, American Real Estate Society, vol. 8(2), pages 157-170.
    16. Martin Hoesli & Colin Lizieri & Bryan MacGregor, 2006. "The Inflation Hedging Characteristics of US and UK Investments:Â A Multi-Factor Error Correction Approach," Real Estate & Planning Working Papers rep-wp2006-01, Henley Business School, University of Reading.
    17. Sebastian Schnejdar & Michael Heinrich & René-Ojas Woltering & Steffen Sebastian, 2017. "The Discount to NAV of distressed German open-ended real estate funds," ERES eres2017_160, European Real Estate Society (ERES).
    18. Muhammad Jufri Marzuki & Graeme Newell, 2020. "A global investment opportunity in non-listed infrastructure for institutional investors," Journal of Property Investment & Finance, Emerald Group Publishing Limited, vol. 39(3), pages 239-255, May.
    19. 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, May.
    20. Wei-han Liu & Zhefang Zhou, 2009. "Inflation-hedging Behavior of a Securitized Real Estate Market," International Real Estate Review, Global Social Science Institute, vol. 12(3), pages 221-251.
    21. Henry Koon Nam Lee, 2021. "The Inflation Hedging Effectiveness of Residential Property-Evidence from Three Emerging Asian Markets," International Real Estate Review, Global Social Science Institute, vol. 24(2), pages 221-251.

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    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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