What's the deal with inflation?
Inflation seems to be on everyone’s mind these days, and it’s no wonder why. The month of March saw the core consumer price index rise by .9%, the highest monthly increase since the 1980s. While there’s a debate raging over whether what we’re seeing should be more accurately considered “re-flation” of our economy following the impact of the COVID-19 pandemic and associated lockdowns, what remains clear is that inflation expectations have risen, at least in the short term.
Hedges Against Inflation
If you’re worried about inflation, the best thing you can do to protect yourself is seek out investments that serve as an inflationary hedge. You’ve probably heard for years that gold is a good inflation hedge. Newcomers like bitcoin and other forms of cryptocurrency have also begun vying for recognition as an inflation-resistant avenue in which to park your money.
People Will Always Need a Place to Live
Many investors prefer, however, to place their money in something more tangible, like real estate. When we’re discussing multifamily real estate, for instance, there is an intrinsic value to a place of habitation and shelter. People will always need a place to live and once they’ve found one, uprooting is difficult and costly. No matter what happens to the economy, so long as there’s people out there, demand for housing will exist.
New Generations Face Affordability Challenges
Demographic shifts make this line of thought even more compelling to a multifamily investor. Millennials boast by far the lowest recorded homeownership rate, while their younger counterparts, generation Z, are now entering the market as renters for the first time. These generations face the same affordability challenges that have caused many to abandon homeownership as a goal altogether.
Go With Something Reliable
If you fall into the camp that prefers tangible assets, or if you have a diversified portfolio of investments that include multifamily real estate, it’s encouraging to realize that multifamily is one of the most reliable inflationary hedges around. Compared to the other real estate asset classes, multifamily has the distinct advantage of shorter lease periods.
Time is of the Essence
A typical lease for an apartment is twelve months, meaning that investors can quickly react and bump rents as inflation rises. This is in contrast to retail, industrial, and office leases, which typically last several years. Unless your leases stipulate annual rent increases that track with the consumer price index, you’ll be locked into a lease you may regret signing if inflation ramps up.
In addition to the flexibility offered to multifamily investors by shorter lease periods, there’s added protection against inflation when you consider property values themselves. As inflation rises, the value of the underlying asset you’ve invested in rises as well. In simple terms, this means that unlike any dollars you’re holding in your wallet, inflation isn’t hurting the value of your property because it is rising alongside inflation.
Let's Look at the Facts
So what does the data have to say about the topic? Research by the Department of Economics at MIT took a deeper dive into the numbers to see how inflation has historically affected the real estate asset classes. By looking at how both income and value were affected by jumps in the CPI over a thirty eight year period, they were able to measure the degree to which each asset class resisted inflation. Their findings showed that multifamily is an inflationary hedge from both a value and income perspective.
Multifamily property values rose almost completely proportionally with inflation. Multifamily rental income also rises alongside inflation, though income has not tracked to the same degree as property values. Viewed as a whole, the data suggests that both multifamily value and income continue to perform well in an inflationary environment. Another interesting thing to note for retail real estate investors from their research is that retail has historically been the strongest inflationary hedge of all the asset classes. That’s something to think about as we’re moving past the pandemic, which has been devastating for retail.
If you fear inflation, you can fear no longer. The answer is to place your money in investments whose value and generated income rise alongside inflation. With multifamily real estate having intrinsic value as a place of habitation and strong demographic data suggesting it’s a great place to invest for the foreseeable future, we can sleep easy knowing that multifamily is also a formidable foe in the battle against inflation.