1. Rental income rises with inflation. We have already established that rising inflation causes increasing prices. This includes commercial property rental rates. When property rental rates rise, it is a positive for property values as long as operating expenses are held relatively constant. The resulting increases in Net Operating Income drive property values higher. As long as value increases outpace inflation, an investor's purchasing power will not be eroded when holding CRE.

2. Commercial real estate leases call for regular increases in rent. To hedge against inflationary pressure, it is common for CRE leases to contain a clause that calls for rent increases at regular intervals throughout the lease term. For example, a lease could call for rents to increase at a rate of 2% annually. The impact of these increases causes rising income, which leads to rising values. As long as the rate of an increase outpaces inflation, the relative return is positive.

3. Property scarcity often causes price increases to outpace inflation. The pricing of CRE assets is driven, at least in part, by their scarcity. This is particularly true in dense real estate markets where there is a limited supply of space. High demand and limited supply is the right recipe for rising price levels, which is a positive for real estate investors. As long as price increases outpace the rate of inflation, returns will be positive on a relative basis.

These reasons highlight the importance of holding CRE as part of a broadly diversified investment portfolio of risk assets. Higher real estate returns can offset volatility and/or lower returns for equities and bonds during periods of higher inflation.