With inflation dominating the news at the end of 2021, people with capital to invest need to protect their wealth from erosion. Savings accounts and bonds with rates of return below inflation result in losses. Although diversification and liquidity remain important considerations, finding investments that grow alongside inflation has become critical in the current inflationary environment. This situation increases the appeal of multifamily commercial real estate. The ability of landlords to routinely raise rents on top of a tight multifamily housing supply nationwide maintains returns for investors. [1]
Current Inflation Rate For the past 20 years, the U.S. inflation rate was consistently in the 2% to 3% range, except for a downward blip during the 2008 financial crisis. Since April 2021, inflation has ballooned. As of October 2021, the nation recorded an inflation rate of 6.2%. [2] For investors, the inflation alarm bell has officially gone off. The opinions of politicians and government officials about rising prices being transitory have not proven convincing. For example, the investment management firm Cadre has chosen to view inflation as a new normal for the time being. The firm's managing director and head of investments said that this perspective has resulted in a greater emphasis on multifamily real estate due to its positive relationship with inflation. [3] How Multifamily Real Estate Combats Inflation Multifamily real estate typically operates with one-year leases. Tenants renewing their leases or new tenants moving in create annual opportunities to raise rents. Lease agreements can even include automatic rent hikes each year. This reality allows property investors to increase their net operating income in relation to inflation. Higher NOI also improves the value of the property at the same time. A tight supply of multifamily housing units across most markets also contributes to a landlord's power to maintain occupancy even with annual rent increases. The supply of rental homes and apartments does not meet demand. This means that even if current tenants cannot withstand a rent increase, people who can pay are waiting in line for those rental units. Real estate markets where housing shortages are particularly acute offer the most benefit to investors. [4] Housing supply has been persistently low for multiple reasons. The chief economist with the National Association of Home Builders attributes the shortage to a lack of labor, land, and lumber as well as expensive loans for builders and zoning laws that prevent building rental units. Although reforms may emerge that alleviate these problems, especially in regards to zoning, changes will be slow and take time to have a meaningful impact on housing supply and rental rates. [5] Research Shows Strength of Multifamily Assets During Inflation Researchers from the commercial real estate services provider Berkadia studied the sensitivity of returns in relation to inflation. Since the 2008 financial crisis, privately held commercial real estate has had a positive rate of return even after factoring in inflation. Within the commercial real estate category, apartments enjoyed the best performance whether inflation was moderate or above 5%. [6] Diversification With Real Assets As investors consider their options amid inflation, real assets in the form of stocks, commodities, and real estate offer a realistic way to prevent inflation from eating away at capital. Stocks and commodities generally keep up with inflation but are prone to volatility. Real estate also responds positively to inflation with multifamily real estate having the greatest advantage. [7] References: [1] [4] https://www.forbes.com/sites/forbesbusinesscouncil/2021/10/15/three-ways-that-commercial-real-estate-protects-against-inflation/?sh=e2408ee55ffb [2] https://tradingeconomics.com/united-states/inflation-cpi [3] [6] https://www.wealthmanagement.com/investment-strategies/inflation-fears-are-driving-more-investors-towards-commercial-real-estate [5] https://www.npr.org/2021/11/06/1052876271/democrats-are-seeking-largest-ever-investment-in-affordable-housing [7] https://www.usbank.com/financialiq/invest-your-money/investment-strategies/effects-of-inflation-on-investments.html
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Ruben DominguezPrincipal and founder of Totem Capital Group Archives
April 2022
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