The annual inflation rate in the U.S. has risen to a four-decade high creating challenges for investors dealing with the knock-on effects on various asset classes.(1) Inflation is likely to peak even higher than previously predicted due to the impact of the Russian-Ukrainian war, as markets are impacted and supply chains face disruption.(2) But what does this mean for investors?
● Rising prices caused by inflation negatively impact returns and reduce the buying power of assets in investment accounts.
● Inflation is most damaging to fixed-rate debt securities, like bonds, as it devalues interest rate payments as well as repayments of principal.(3)
● Growth stocks meanwhile tend to perform better during low inflation, and inflation generally can increase the equity market volatility and risk premium.(4)
● Assets that can bring in cash, or rise in value, tend to fare best during times of inflation.(5)
Historically, Commercial Real Estate as an asset class has long been considered a tool to hedge inflation with sound underwriting and reasonable leverage. According to an industry study, the correlation between commercial real estate returns and inflation is 0.38, indicating a very low correlation relative to other asset classes (a correlation of 1.00 would indicate full correlation).(6)
Further, commercial real estate performance for five-year holding periods has beaten inflation over those same periods with 84 percent probability, as shown in the table below.
Commercial real estate has been proven historically to be a strong hedge against inflation, and therefore experts are currently encouraging investors to diversify their portfolios with this asset class. On top of real estate’s performance against inflation, there are several other reasons to invest in a diversified real estate portfolio.
Increased Demand for Rentals as House Prices Continue to Rise
During all the uncertainty of the Covid-19 pandemic, one thing has remained consistent: housing prices have continued to rise. What’s more, these prices are rising much faster than the median household income leaving many people looking for more affordable alternatives. (7)
Home prices are projected to continue to rise in 2022, with Fannie Mae estimating an 8% increase, while Zillow are more bullish with a 13.6% projection. (8,9)
Benefiting from the Continued Growth of the Multifamily sector
The financial barriers to home-ownership that many people face align with the growth of the multifamily market that we have seen in the past year, a trend that we continue to monitor and act upon when it comes to selecting our investments.
Apartment rent growth and occupancy both hit record highs in 2021, with 65 of America’s largest metro areas seeing a 10% climb in rents.(10) Multifamily set a new high for property sale volume ($166.8B) and price per unit or property sold ($188K) in 2021 and asking rents grew 13.5% nationally.(11) Properties in the sector now routinely trade with 3-4% acquisition yields, while the average cap rate nationally is below 5%.(12)
The rising home prices and similarly upward-trending mortgage rates means that the demand for multifamily housing is expected to stay strong in 2022.
Rental growth is also projected in many markets. CBRE analysis shows that commercial real estate is in good shape, and 2022 has the potential to be a record-breaking year, anticipating a 7% growth in rent and continued low vacancy rates.(13,14)
The combination of high demand and rent growth supports the optimistic outlook for 2022 in the Multifamily sector.(15)
Seizing Opportunities Found in Distressed Assets
2021 saw a stabilization across most asset classes in comparison to the widespread uncertainty of the previous year at the height of the pandemic. It is projected that 2022 will see increased opportunities for distressed investment.(16)
Banks, generally, have stepped back from non-performing CRE loans, leaving more room for private equity firms, pension plans and other private institutions to enter the market.(17) This shakeup in the lending world means there are increasingly new opportunities for high potential debt-investments for the non-bank sector.(18)
With the growing need to hedge against inflation in the next few years, it may be time to diversify across the real estate market. Our latest blended portfolio Fiintoo 14 is available now and is designed specifically for investors who are seeking to diversify into a spectrum of real estate properties and submarkets. Log in to our platform to find detailed information.
1, 3, 5. Investopedia: How to Profit from Inflation
2. CNN: Inflation Russia Ukraine Explainer
4. Investopedia: Inflations Impact Stock Returns
6. Martha S. Peyton, CRE: Is Commercial Real Estate and Inflation Hedge?
7. CNBC: Home Prices are now rising faster than Incomes
8. Fortune: Housing Market 2022 Forecast
9. Zillow: Home Values Sales Forecast
10. NAAHQ: Rents Occupancy hit Record Levels
11, 12. Commercial Search: Market Confident about CRE Performance 2022
13, 14 15. CBRE U.S. Real Estate Outlook 2022: Multifamily
16. S&P Global: Distressed Investing Outlook: Players see pockets of opportunity in 2022
17. AI-CIO: Special Report Distressed Real Estate 2021
18. IREI: Distress around Distressed Funds