It doesn’t matter where you are when you are discussing the current state of the commercial real estate market—be it at a high-powered convention, at a cocktail party, hanging out in your backyard, or sitting in a classroom. When the topic of “inflation” comes up, real estate folks start to get a tad nervous (inflation being defined as the change in the Consumer Price Index, or the “CPI”).
This is not the forum to analyze what direct effect inflation has on real estate returns from an academic standpoint nor debate whether or not “real estate as an inflation hedge” works in all markets, all the time. But just as an refresher as to what happened when the United States did experience hyper-inflation, I did a quick look back at the time period of 1980-82, when this hyperinflation period is matched against certain local real estate price indices.
It is worth noting the U.S. only experienced inflation at these levels twice before: 1916-1919 and in 1946. (That does give me some comfort, I guess.) When I start comparing how certain segments of the real estate market reacted here in Dallas when we had this short period of hyperinflation, the conversation becomes quite interesting. The following chart shows the average annual percent increases for each year.
If I was having the perfect real estate dream, I would have the hyperinflation of the early ’80s, the low interest rates of the post-2008 recession, and full employment in the 6 percent range. Talk about sweet dreams. But, in realty, the way our economy is shaping up, I just hope real estate lives up to its reputation of being a hedge against inflation.