From a jump in consumer goods prices to a decrease in currency value, rising U.S. inflation is driving concerns across the economy. However, we believe that inflation could hold some upsides for real estate investors despite reaching a 30-year high and possibly continuing longer than expected.
The causes of inflation are widespread—the rise in prices of goods and services over time—include Covid-19-related disruptions and pent-up demand due to lockdowns, plus job shortages that have driven up wages and salaries. With the possibility of many of these lingering for months to come, investors seeking a hedge against inflation may want to consider adding real estate, specifically multifamily housing, to broaden their portfolios.
Why?
In short, we believe that real estate can act as a diversifier in your portfolio, adding value in a different way than stocks and bonds. In addition, inflation tends to drive up rents, bringing increased income to investors in multifamily units. [1]
Multifamily units can provide an income stream
According to Forbes, real estate investors earning income from rental properties, especially multifamily properties with short-term leases, can benefit from inflation because “higher home prices often equal higher rent,” according to Forbes. “If you’re able to adjust your rent up while keeping your mortgage the same, this can create the opportunity for increased money in your pocket.” [2]
Unlike stocks and bonds, multifamily asset investing is relatively unaffected by the volatility of the stock market. For example, the S&P 500 alternated between significant gains and big losses for at least four sessions earlier this fall. Because real estate is generally uncorrelated to stock market movements, volatility doesn’t directly impact its value the way it does with stock prices.
Real estate “doesn’t experience daily price fluctuations often driven by investor sentiment given its illiquid properties. In addition to protecting investors from volatility, real estate can also act as a hedge against inflation,” according to Arborcrowd. [3]
Markets and investors will be watching what the Fed does or doesn’t do around inflation in the coming months. For investors, using multifamily assets could provide an inflation hedge and revenue stream while also benefitting from increasing property values, both valuable diversification in portfolio strategies. [4]
Rents are hitting record highs
Meanwhile, rents are up over 13.6% in the 50 largest U.S. metro areas across the US including Florida, California, Arizona, Texas, and more according to Realtor.com. Rents reached a record high median price of $1,654 in September meaning renters are paying $198 more than last year and an extra $222 compared with two years ago before the pandemic began. [5]
In New Jersey, demand for multifamily housing by Baby Boomers and millennials, along with a mutual desire for community, access to New York City, and an overall wish for more space during the pandemic, continues to push redevelopment and luxury apartment projects. NJmonthly.com features 12 towns meeting various housing needs in a hot market, including Bayonne, Hackensack, and more. [6]
In a previous blog, we illustrated the widespread appeal of multifamily housing, focusing on Hobe Sound, Florida, with its natural beauty, outdoor activities, and amenities for everyone from young professionals to seniors. Developers also see consistent demand for multifamily housing units in other areas of Southern Florida, including West Palm Beach, and detail how the pandemic recovery is driving the competition. [7]
If you’re considering adding real estate to your portfolio, check with your financial advisor about the strategic moves that may best fit your long and short-term goals. For Circle Squared Alternative Investments’ approach to investment management, be sure to reach out to our team of professionals for insights and “alternative” solutions.
The information contained herein is provided for educational purposes only, represents only a summary of topics discussed, and does not constitute personalized investment advice or recommendations. The views expressed herein are the opinions of the authors which may not come to pass and are subject to change without notice. Certain information contained herein is derived from third parties, and no guarantee is made as to the accuracy or completeness of such information, which has not been independently verified. Past performance is not indicative of future results. All investing involves risk, including the risk of loss of principal. Investors should be aware of additional risks associated with alternative investments due to factors such as economic downturns,, political developments, regulatory requirements, increased volatility, illiquidity, higher management fees, lack of performance history, currency fluctuation, and differences in auditing and other financial standards and that these risks can be accentuated in alternative investments. Alternative investments may be suitable only for those investors who understand and are willing to assume the economic, legal, and other risks involved. In addition, investing in real estate involves risks including, among others, those relating to illiquidity, economic downturns, market conditions, political developments, financing risks, property development risks, construction risks, property management risks, and tenancy risks.
The foregoing is not a complete list of the risks involved with alternative investments and real estate investments. You should consult your financial advisor to determine if such investments are appropriate for you given your financial and personal circumstances.
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SOURCES
[1] (Arborcrowd.com, 2021)
[2] (Forbes.com 2021)
[3] (Arborcrowd.com 2021)
[4] (JLL 2021)
[5] (Realtor.com 2021
[6] (njmonthly.com 2021)
[7] (wptv.com 2021)