Real Estate – The Hedge Against Inflation

Alex Draganiuk, Managing Director

What is inflation? As one of my old Economics professors said simply, “Inflation is too many dollars chasing too few goods.” Another way to say, an increase in purchase prices and a decrease in the value of money and purchasing power.

We can talk about the reasons for the current inflationary situation another time, but suffice it to say, there are plenty of reasons, and plenty of blame to go around. Regardless, we are where we are, so let’s talk about how real estate performs relative to inflation, and what property types perform better in a high inflation environment.

Rising inflation favors property types with a shorter than average lease terms, like multifamily, single-family rentals, self-storage, and hotels (which effectively lease up daily) because landlords can effectively recoup increased costs from increased rents in the short-term.

Alternatively, properties with longer lease terms, like office, retail, and some industrial deals will be subject to whatever terms are remaining on their leases of 5, 10, 15 or even 20 years.

Those leases could be flat or have annual rent bumps growing at 2-3%, which would have been plenty to offset any increases in operating costs until inflation began spiking since early 2021.

Those rent bumps were meant to offset potential losses from increases in operating expenses, but in a high inflationary environment, like what we are experiencing today, those base rent increases are insufficient to cover those much higher costs. So, those properties are seeing the erosion of their net operating income, and therefore their value.

Those properties with longer lease terms should also be able to command higher rents, once tenants renew or new tenants are installed at higher rates, but it will take longer for them to appreciate.

The exception to the rule of real estate being a hedge against inflation, occurs during periods of stagflation, which used to be a theoretical concept until it actually happened in the 1970s. That is where you have high inflation and very low or negative growth.

In those cases, landlords are unable to capitalize on rent growth, which is either muted or nonexistent, and they get hit with the double whammy of higher costs and greater vacancy.

We can discuss inflation and stagflation more next time.

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Mission Capital is a subsidiary of Marcus & Millichap.

Two Factors to Consider for Multifamily Development

Published on
By Jillian Mariutti

Jillian Mariutti is director of debt and equity finance at Mission Capital Advisors.

(January 29, 2019) — The real estate development process is wrought with an array of potential landmines, and developers embarking on new projects always look for deals with enough upside to compensate for the inevitable snafus along the way. However, a reasonable expectation of upside only exists in a market where the rent-to-income ratio is not out of control.
According to the Department of Housing and Urban Development, individuals and families who spend more than 30 percent of their total household income on housing are classified as “rent-burdened.” And while these metrics are of critical importance to housing advocates and local governments seeking to provide relief to a rent-burdened population, the same numbers are extremely relevant for real estate developers. In cities such as Boulder, Colorado and Tallahassee, Florida – each of which has distinct merits – the upside for multifamily developers is muted, as each market’s median gross rent surpasses 40 percent of the city’s household income. (All figures are based on’s metrics, sourced from the U.S. Census Bureau and 2010-2012 American Communities Survey Estimates).

Generally speaking, multifamily developers want to set their sights on cities where that metric is below 30 percent, providing an opportunity to grow rents.
What cities fall in this “sweet spot”? Not surprisingly, markets in some of the country’s fastest-growing regions. For example, Bellevue, Washington – just outside of Seattle – clocks in at a strong 23.9 percent. As the headquarters of Fortune 500 corporations such as T-Mobile and Expedia, Bellevue seems to be a veritable model of stability, where developers can have confidence that a professional workforce will retain its well-paying jobs.

Texas has a number of attractive markets, including the Dallas suburbs of Plano and Frisco, which clock in at 26.4 percent and 25.8 percent. Dallas, Houston and Austin measure in at respectable 29.2, 30 and 31 percent, respectively. The west Texas city of Odessa outperforms all of these markets, with a ratio of 25.2.

Of course, it should be noted that cities that “perform” poorly – i.e. cities with a high rent-to-income ratio – are not necessarily markets that are struggling economically. Like any ratio, the figure can climb to excessive levels based on either a high numerator or a low denominator; in other words, it changes based on either expensive housing or a weak economy. While both sets of markets indicate locales developers will likely want to avoid, they also represent a proverbial tale of two cities, with depressed Flint, Michigan (49.3) on one hand, and gateway markets like Miami (40.0) and Los Angeles (36.8) on the other. While the gateway markets may have booming economies, incomes have not kept up with the pace of housing costs, which has made those cities particularly rent-burdened.
There are a host of factors that go into the decision of where to build, but the ability to add value is one of the most important. While many seek out markets that boast a strong economy or favorable rental rates, one of these alone is not enough to assure success. But by conducting a rigorous analysis – including an assessment of the rent burden in the local market – developers can put themselves in position to reap maximum value from their efforts.

Jillian Mariutti is director of debt and equity finance at Mission Capital Advisors. She can be reached at The views expressed here are the author’s own and not that of ALM’s Real Estate Media.