Inflation severely impacts Las Vegas, not only at gas pumps, supermarkets or home costs but also on commercial building costs.
The Federal Reserve terms the current US economic situation as transitory inflation caused by the pandemic; however, it seems that the high inflation will stay for an extended time.
The commercial property cost increases are proportional to the inflation rate around the country.
Let’s understand the effect of inflation on a commercial building in Las Vegas and how to cope with it.
- What is inflation?
- Commercial real estate in Las Vegas
- Relation between inflation and commercial buildings
- Demand and supply
- Property owners benefiting from inflation
- Lower inflation risk
- Commercial mortgage loan trends
As inflation goes up, the Federal Reserve increases interest rates to combat it. With the increase in the interest rates, lower commercial property value is the result. Keep reading to learn how higher inflation severely affects commercial real estate in Las Vegas.
What is Inflation?
Before proceeding further, let’s briefly overview inflation and its repercussions. In layman's language, the reduction in currency’s purchasing value is termed inflation.
Hence, consumers need to pay higher costs for regular groceries, gas, construction material, and property.
Inflation measures the rate at which the average prices of food and essential items go higher with time. That’s why people often use inflation to assess the performance of any country’s economy.
Sadly, debt levels become worse during inflation, making it difficult for the new property owners to construct commercial buildings due to higher labor and material cost.
But on the other hand, existing property owners can enjoy significant benefits thanks to higher market values.
Commercial Real Estate in Las Vegas
Unlike residential properties, commercial buildings refer to hotels, restaurants, shops, and casinos built for commercial purposes.
One of the primary reasons investors are interested in commercial real estate is to reap tax benefits such as depreciation, control over tangible assets, more customers, and as a result, higher capital markets.
Relation Between Inflation and Commercial Buildings
Commercial real estate and inflation have a rather interesting and dynamic relationship.
Generally, inflation leads to higher prices due to higher construction costs and employee salaries. Similarly, rent and the value of the existing commercial building tend to increase.
Since the overall value of the commercial building is based on net income, expenses and rent inflate.
It means if you, an investor, have taken a loan on some commercial property with a fixed low-interest rate, the value of the commercial property climbs when inflation is high, which is a plus.
However, smart investors hedge against inflation and don’t invest in buying new commercial properties since land and labor costs skyrocket during inflation.
Demand and Supply
Supply and demand is a general phenomenon known to everyone and is quite prevalent in construction. For instance, the low availability of construction materials and skilled labor results in elevated prices, which the investor has to pay to build any shopping complex or other commercial enterprise in Las Vegas.
Las Vegas, the world’s greatest tourist attraction, is home to countless commercial buildings, restaurants, and hotels. However, as more commercial buildings open up, existing property owners lose the market share.
Property Owners Benefiting From Inflation
It’s the new investors who are negatively impacted by inflation. However, some property owners in Las Vegas take advantage of inflation, such as renting the property to hospitality firms on a short-term contract basis.
Similarly, mortgage cost drastically increases for the occupants, which gives additional benefits to the property owners.
Higher inflation is good news for existing property owners, who can maintain their market share since no new commercial buildings are constructed.
Similarly, the current value of commercial real estate increases due to the rise in federal interest rates.
Not only that, but the federal reserve elevates the interest rate to minimize the disruption caused by the difference in supply and demand.
Hence, the existing value of real estate further increases due to the scarcity of construction and building materials.
Smart investors benefit from inflation because the increase in material costs is passed down to the occupant.
Lower Inflation Risk
The good news is that commercial real estate in Las Vegas faces relatively lesser risk with time due to the low growth rate. However, there is generally a negative impact on the industry and consumer confidence, which can impact commercial real estate.
Here, the role of real-estate businesses comes into play to understand and evaluate the potential of inflation to prevent chaos. This way, investors, property owners, landlords, renters, and construction companies can act accordingly.
Economists, as well as real estate investors, understand that the impact of the global pandemic will last longer than originally thought.
Therefore, the objective is to leverage the current real estate situation by lowering the rates to create opportunities to borrow.
Commercial Mortgage Loan Trends
Three factors affect the commercial mortgage market:
- Effect of inflation
- Higher interest rates
- Rebound from Covid-19
The objective is to create a balance between new and existing property owners for ongoing construction projects. However, at the end of the day, construction companies also have to bear losses due to the lesser number of projects.
Don’t Worry About Inflation, and Let the Experts Do the Construction For You
Inflation affects not just the economy of Las Vegas but also commercial real estate. Do you have commercial land but are worried about the construction material and labor costs?
The good news is that Thomason Construction offers reliable construction services amidst inflation in Las Vegas.
It’s the fourth generation of the native family running the construction business; hence, they understand the regional dynamics better than anyone.
A team of experts has years of knowledge and experience in delivering high-quality construction projects within budget.
You can offer the following services:
- Timely project delivery
- Professional and helpful staff
- Attention to details
- Reliable services
Operating in Las Vegas since the 1940s, the company has a diverse, in-depth knowledge of construction projects. In addition, they understand the construction and labor cost; hence, they offer the best deal favourable to both parties.
What are you waiting for? You can schedule a commercial estimate by submitting an online ENQUIRY FORM. We guarantee you won’t be disappointed by their knowledge and expertise.