Workplace revolution means real estate won’t protect investors from inflation

With all of this in mind, one could imagine real estate investors running into the mountains, or at least sitting on their hands and waiting to see how things turn out. Not a bit of it. On the contrary, a number of large global pension funds have even increased their commercial real estate allocations despite the fact that offices are empty and shopping malls are jumbled with parking lots.

A recent survey of large investors in the US found that 29 percent planned to increase their real estate bets and only 5 percent wanted to reduce their exposure to the sector. Commercial real estate prices in the US, as well as residential real estate, are close to their highs last reached in 2006. What’s the point?

Well, first of all, the value of almost all financial assets has been driven up by ultra-loose monetary policy, which is why Cunliffe’s comments were so insincere. The Fed’s interest rates have been close to zero for a year and are expected to stay there for two more years. Meanwhile, it is buying hundreds of billions of billions of debts and driving real returns into negative territory for the second time in 40 years.

In such an environment, investors look to commercial property returns like a thirsty hiker staring at a puddle of standing water in the middle of the desert. But there’s another reason they put aside concerns about dysentery and gulp it down. Real estate has traditionally been a good hedge against what the markets fear most right now: inflation.

Rents for office, retail and residential properties are historically closely linked to consumer prices. Increasingly expensive raw materials can also slow down new construction, which, all things being equal, benefits the owners of existing buildings.

But all other things are far from being the same. The reasoning only works if the new normal looks very similar to the old normal. It collapses sharply when vacancies remain high and landlords cannot raise rents. Inflation only leads to higher prices for the things people actually want. It is becoming increasingly unlikely that office and retail space will fall into this category.