Investing feedback, guidance. Thoughts on the effect of inflation. Other rambling.
  

I don't work in CRE. I'm considering CRE investment and I was hoping to get some feedback from smarter, more experienced people.

For context:  My real estate investment style is conservative. I target positive cash flow residential properties and limited upside, as opposed to negative/BE with more of a land play aspect.

I've been surveying the CRE market for nearly a year. My ideal property is $1-5m, which I've come to believe is a sweet spot. It prices out casual investors, but isn't big enough to attract PE or a shop with any decent amount of G&amp;A.  

Credit worth NNN would be ideal (for everyone, right?) but the cap/borrowing rate spread is too tight for my liking.  Nicer shopping centers seem to be trading in the 7.5-8 range (NN typically, sometimes gross) where I'm looking.  This would be palatable, except I get hung up on the borrowing details.  Most commercial loans I've found at 15% down, 20 year amorts with a 5 year balloon at prime plus 50-100 basis pts.  This would require refinance every five years.  From the numbers I've run, a &gt;2% increase rate rise over the 5 years would smoke an investment, assuming no increase in rents or devalue of the property.

So where's my question?  In a market with increasing interest rates, or for an investor that believes that the market will move 2%, does it make sense to purchase CRE at terms similar to the ones below?  Will we hit a wave of defaults in 3 years as the folks who refi'd in 2020 hit their 5 year window.  Any thoughts or opinions?

Also, what happens to valuations in a inflationary environment?  The underlying asset would seem to appreciate (inflation) but cap rates would be expanding (borrowing costs in/crease).  Is there data/case studies to show what wins out?  Does anyone tie lease renewal rates for factors like CPI or prime as a hedge for both parties?
[{"id": "huomefp", "text": "I think CRE in normal times is a great hedge to inflation, but not now. Work in the multi sector and it\u2019s unreal seeing people buy a POS 3% cap ( was a 6% cap 36 months ago) by modeling a workforce demographic that can\u2019t afford in-place rents somehow affording 20% growth over a 3 year hold.", "replies": [{"id": "hur847a", "text": "People model a 20% growth over three years!? Don\u2019t get me wrong, I\u2019ve seen what\u2019s happen in the housing market. But history isn\u2019t always a good predictor of the market. Seems like that assumption could be a disaster. \nI suppose that there haven\u2019t been a lot of other investment alternatives (equities are frothy, debt has been crushed), and funds have to be placed.", "replies": [], "depth": 2}], "depth": 1}]