Rising Inflation: What is the Impact on Real Estate Investments in Your Portfolio?
As inflation continues to increase, many things from grocery store items to alternative investment portfolio values will be affected. Here’s what you should be mindful of in the months ahead.
Inflation is sort of a dirty word in the business world. High inflation can be an economic indicator of financial turmoil to come. And while inflation may have this negative connotation in economics and business more broadly, it isn’t that way for real estate investments—for the most part.
There are pros and cons to every aspect affecting your portfolio, and inflation is one of them. However, many investors—myself included—would say that inflation can be a net good for those who are already invested and well diversified in properties.
Let’s take a look at what inflation means for your investments, and the aspects you should consider during these inflationary times.
Why inflation might spur you to look at adding more real estate to your funds
Investing in real estate—or adding more real estate to pension funds—-can be beneficial if the economy is experiencing inflationary pressures. Real estate investments can be a good hedge against inflation because property values over time typically stay on a steady upward trend. Multifamily properties are especially attractive in the current market. Rent prices are increasing in most markets at a rate higher than inflation—much higher, in some places. For example, the average rent in Sacramento, California, a secondary market that has been a popular destination for people moving from the Bay Area since the start of the pandemic, is up year-over-year by nearly 10%. That’s double inflation targets.
Rental properties are fueling growth in real estate investments
The cycle goes something like this: higher prices on homes lead to a higher barrier to entry for buying a home, essentially weeding out less stable home buyers and guiding them into the home rental category. With this influx to renting, there’s more of a demand for multifamily rentals and apartment complex units. Those who are managing these properties will naturally raise their rates so as to keep up with inflation devaluing their net profit, and because they can do so as a direct result of higher overall demand.
Coupled with more Americans moving to certain outpost economies, a wise portfolio investment in the years to come could be multifamily properties in secondary markets such as Nashville, Denver, and Austin. While rentals will increase nationwide, targeting your investment strategy in clearer markets will hedge your investments.
What to be aware of in terms of negative impacts from inflation
Something to watch out for is what the government is doing in response to inflation. If prices on goods and services are going up substantially and the Federal Reserve is concerned about runaway inflation, they may raise interest rates in a bid to counteract this. This will have a dampening effect on real estate values as cap rates and loan interest rates increase.
Expenses will also rise. While generally rental rates will rise at a faster rate than expenses, in property sectors or geographies experiencing an overall market contraction, expenses may rise at a faster rate than rental income.
Typically real estate performs well in an inflationary environment and is thus an inflation hedge. But making thoughtful investments within real estate is as important now as ever.
About the Author:Ryan Swehla is Principal and Co-Founder at Graceada Partners, which specializes in value-add real estate private equity investment in California's fastest-growing region, the Central Valley. Swehla provides strategic direction and oversees capital sourcing for Graceada Partners’ portfolio. He serves on Graceada Partners’ investment committee and focuses on strategic equity and debt relationships, leading Graceada Partners’ sponsorship of three real estate funds and prior syndications. Swehla’s insights on the real estate investing climate have been cited in Institutional Real Estate Americas, The New York Times, Forbes, Commercial Property Executive, REIT Magazine, Epoch Times, and other publications. He holds CCIM and CPM designations and graduated from Columbia University with a bachelor's degree in Engineering and Management with minors in Finance and Economics. Disclaimers:Graceada Partners is a Vender member of TEXPERS. The views and opinions contained herein are those of the author and do not necessarily represent the views of Wilshire nor TEXPERS. These views are subject to change.Follow TEXPERS on Facebook, Twitter and LinkedIn for the latest news about Texas' public pension industry.