Using Real Estate to Beat Inflation Could Backfire

Using Real Estate to Beat Inflation Could Backfire

Real estate has historically been one of the preferred assets for investors (and any buyer) seeking to insulate their capital from inflation. However, warned the Wall Street Journal in a recent article, this could backfire if you buy the wrong types of properties in 2021.

“While single-family homes usually perform well during inflationary periods, values of offices, retail buildings, and other commercial properties can tumble in value if owners are not in a position to increase rent,” wrote WSJ reporter Konrad Putzier. He went on to note that the U.S. Labor Department had reported an annual increase in April 2021 consumer prices of 4.2 percent, which is the highest this metric has gone since 2008. “The prospect of inflation has become an obsession in financial markets,” he concluded.

In the past, investing in real estate to avoid inflation has made good sense. As far back as the 1970s, economists were conducting research studies that indicated home prices rise relative to the size of the economy even when stock prices fall. The result of this is that homeowners and property owners become richer when inflation happens while stock investors tend to lose money.

The difference, this time around, is that not all real estate will provide that traditional “hedge” that most people expect from it. Although office, retail, and apartment rents can be expected to rise with inflation – thus pushing up property income and the value of the property – in today’s post-pandemic market it appears likely that only multifamily will retain that advantage. With the advent of remote-work options and many consumers’ ongoing concerns about on-site retail shopping, office and retail space may be left out this time around.

If landlords on commercial buildings cannot raise their rents, they will suffer along with the rest of the country when inflation arrives. Not only bound by conventional, long-term leases that might prevent raising rents, today landlords may face a declining interest from potential tenants in renting their facilities at all. In fact, retail and office spaces currently are posting high vacancy rates because there is not much demand for this type of property.

“If there is a lot of vacancy, at the margins landlords lose their bargaining power,” explained David Hartzell, professor of real estate and finance at the University of North Carolina. Fortunately for single-family real estate investors, there is not a lot of vacancy in this sector. As most investors already know, demand for single-family residential properties is white-hot. This is why Strategic is focused on accessing as many deals in our markets as possible so we can build our own portfolio and continue to serve the needs of our clients and investors.