• Alternative Investments

Real Estate: Necessary Inflation Protection

calendar_today March 21, 2022

It has been a difficult environment for investors to navigate. The Federal Reserve’s announcement of steady and quick rate increases for the remainder of the year confirmed their concerns of escalating and more permanent inflation.  Watching oil prices move temporarily over $100 a barrel further demonstrated their need for fast action. While prolonged inflation fears remain, the Fed’s actions were a necessary first step.

With such a focus on escalating price pressures, one of the key asset classes that investors have historically utilized as an inflation hedge has been real estate and the strategy has seen a recent shift. From 2014 to 2019, Private Real Estate deals in Office investments had dwarfed other types of real estate transactions with an average of over $144B in deals for those six years. During this same period, Residential was the second most active category but at nearly half the level of transactions, with an average of $74B in deal flow. The pandemic has obviously shifted that landscape dramatically, with Office deals lagging Residential deals in 2021. One area that has picked up traction over the past three years is Industrial, which is no surprise given the further online retail tailwinds that were exacerbated by the pandemic. See chart below.

What does that mean going forward?  The repercussions of the Office landscape are hard to predict as work from home initiatives have blended into more hybrid work environments that seem to be more commonplace. At the same time, many younger workers want the social engagement of an office environment.  As such, while Office will remain an important real estate asset, determining appropriate valuations is now much more difficult as companies reassess their office space needs.  Conversely, Residential valuations remain high as Multifamily capitalization rates have been compressed. Even as the Fed begins to raise rates, Multifamily, especially in more affordable housing, is undersupplied and we believe it should hold up better than other areas of Residential Real Estate.

In addition, the continued supply chain challenges and inflationary pressures for homebuilders only added to the corresponding affordability concerns for homeownership. As such, one area that has continued to draw interest from institutional investors is in Single Family Rentals and that segment has become a renewed area of focus.  Rental properties for both Single and Multifamily provide natural inflation hedges as escalated valuations combined with a rising lending environment could force potential buyers out of the market and into rentals.  Beyond Residential, the corresponding drivers for Industrial demand remain strong and so we believe deals in this segment will continue to increase as a percentage of all real estate deal flow.  With inflation pressuring investors, real estate offers a tangible way for investors to generate floating rate income streams.  With the Fed focused on fighting inflation, rates will be increasing.  Having a steady inflation hedge through real estate can help investors.

For more information on PPB’s alternative fund platform, please contact Frank Burke, CFA, CAIA, Chief Investment Officer, PPB Capital Partners, 484.278.4017 Ext. 108 or at fab@ppbadvisors.com.

Download: PPB – March 2022 Market Blog

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