The Azucena Take: Inflations Impact on Investment Real Estate
News of inflation continuing to climb has worried investors and the Federal Reserve. Fears of even higher interest rate hikes and a possible recession have jumped among investors. This will make many start to rethink their investment strategies going forward.
Those in the investment real estate market are now going to examine how their assets will hold up against inflation. Thus it helps to understand how investment real estate holds up during times of high inflation and how one can prepare for it.
Current State of Inflation
First, let's get the obvious out of the way (since too many idiots promote misinformation). This is a global issue brought on by the pandemic and is ongoing due to a number of factors. No one factor is single handly responsible for the inflation crisis.
The consumer price index (CPI) is currently at 9.1%. While high at first glance, the biggest driving force has been the cost of energy. When you look at core CPI (which takes out food and energy), it looks promising at 5.9%.
Investment Real Estate and Inflation
Even though investors should be concerned, many have planned for rising inflation and interest rate hikes. While not a full-proof plan, these are some of the emerging trends in the investment real estate market:
Capital Moving to Less Volatile Assets: Investors will most likely play it safe and move their capital into investment real estate. When comparing the return on investments based on asset class from 2001 to 2021, the S&P 500 back had a return of 416% while multifamily and retail properties had a return of 458% and 461%.
Upward Pressure on Interest Rates: Credit lenders and life insurance companies will be expected to bake in the new interest rate hikes in their quoted rates. Banks and Credit Unions are expected to be more lenient with their rates when it comes to working with long-term clients.
Inflation Resistant Properties: Investors concerned about a recession will most likely move capital into inflation resistant properties. Hotels, multifamily, and self-storage properties have always performed better during times of recession. DO NOT mistake this for "recession proof" as all investments come with some risk.
Properties with Rental Upside: Investors will also look to properties that offer a greater return. This is more true with suburban offices and industrial properties. That is because they will either have rent escalators in the lease or the lease is set to expire soon.
Capital Migration: Secondary and tertiary markets are expected to see a boom in investments. These markets offer potential without the hefty price tag seen in major and gateway markets.
What it Means for Investors?
The big takeaway for investors is that inflation will impact the investment real estate market in regards to what sells. There is a lot of capital on the market but investors will want to play it safe. To better understand how you could navigate the current market, speak to an expert who understands the investment real estate market.
The Azucena Take provides an inside look into the investment real estate market using the research done and data collected by Marcus & Millichap