How could inflation affect multifamily real estate?

For any investor looking to maximize their returns, whether these be investments in the real estate market or in stocks, they will almost certainly be keeping a very close watch on key economic indicators in so far as they relate to the US economy.

This is especially so over the last 5-6 months when investors’ attention has shifted away from the daily updates on the pandemic and other headline news, to note that inflation has again become a hot topic as the Federal Reserve grapples with the economic fallout of the pandemic.

What is inflation and what are the primary causes?

Inflation can be described as the ongoing decline of purchasing power of a given currency (in this case the US Dollar) over a period of time. In other words, the Dollar you hold buys less, as the prices of goods and services become higher.

The root causes? Relatively cheap borrowing costs, increased consumer demand, and when prices rise due to increases in the costs of production or raw materials and wages.

But inflation can be a “double edged sword”. On one hand the US government via the Fed wants to stimulate the US economy after the ravages of the pandemic. On the other hand, “cheap money” and government stimulated demand for goods and services means that prices and, hence, inflation will rise.

Inflation has been controlled in the past

Over the last 10 years or so, inflation has averaged under 2% a year in the US. Yet, over the 12 months, inflation has been rising much faster than previously. Indeed, the latest data shows that, almost across the board, consumer prices have risen around 5% from a year earlier. Just weeks ago, the government said its Consumer Price Index rose a surprising 6.2% from 12 months — the biggest 12-month jump since 1990.

This should not be unduly surprising given the low interest rate environment which currently exists and the huge amount of liquidity in the US economy due to measures instigated by the government to stimulate business activity. 

As a result, there are ongoing fears amongst policy makers that the US economy could be overheating. With the overall view that inflation harms an economy from both a business and personal perspective, the government is keen to keep it under control.

For months, a number of economists had maintained the spike in consumer prices would prove temporary or “transitory,” according to Federal Reserve Chair Jerome Powell.

But, for some, inflation isn’t all bad news… just look at the real estate market

However, notwithstanding the above, inflation can actually be considered as a positive for the real estate market and for multi-family investors.

To summarize the key reasons for this:

• Real estate prices tend to rise in inflationary times, and more so in a low interest rate environment. Accordingly, real estate as an asset class is generally viewed as a good asset to hold in inflationary times.

• It’s simple economics that if basic supply and demand for real estate is in equilibrium, property prices will remain steady. However, the addition of ample, even excess liquidity, and the availability of relatively low-cost funding will encourage more people to seek higher loans or plan to move and upgrade their property. Demand for real estate grows—with the resultant price increases.

• As capital values are rising, rents in multi-family homes also tend to rise when inflation is high. The main reason is that, as the rate of inflation increases, the government and banks will raise interest rates to help rein in inflation. The most obvious effect is that home loan or borrowing rates will rise.

For those first time buyers or those whose income is limited, it becomes more difficult to get a mortgage loan as buyers have reduced purchasing power as the cost of borrowing increases. As a result, demand for rental property continues to rise as prospective buyers have to postpone any plans they may have to acquire a property. Rentals of multi-family homes increase accordingly.

For the shrewd investor, not only are they getting the benefit of rising rents and, accordingly, better yields or returns on investment with multi-family but there are other benefits of this asset class 

With their generally shorter leases, multi-family landlords can quickly adjust their rental rates as inflation and demand rises, something which is difficult to do with a retail or office asset which invariably have longer leases and less market flexible rents.

In any event, property investors can benefit in inflationary times as real estate has intrinsic value; people need a place to reside, irrespective of the state of the economy or the rate of inflation.

Breneman Capital

Breneman Capital (formerly Rise Invest) is a data-driven multifamily investment firm pushing the real estate industry into the future with a modern approach to direct real estate investments.

We focus on providing our investors with the best risk-adjusted investment opportunities in carefully selected markets across the U.S., researched and underwritten with extreme detail from our headquarters in Chicago.

Hedge against inflation today with Breneman Capital.

To begin receiving high-quality investment opportunities from us, sign up today: