The latest announcement from the Labor Department on June 12, 2021, indicating that the CPI had jumped over 5% from since May 2020¹ has further fueled the main topic of many of our meetings with wealth advisors:  the impact of inflation.  While many have argued that the price jump is a short-term and expected blip as the economy continues to recover from the depths of the global shutdown last May, the level of increase was a shock to many economists, leaving wealth advisors looking for strategies to protect their clients’ portfolios.

For taxable investors multi-family housing already offers key depreciation benefits to help shield taxable income in the early years of the investment.  At a time when most people are expecting an increase in tax rates in the United States, multi-family real estate is a key asset class to consider.  Making the strategy even more timely today, however, is its inflation protection ability.  Take an even deeper dive into multi-family investing and we notice a clear bifurcation of the market.  While Class-A properties have suffered during the pandemic due to oversupply and expensive rents, the workforce housing segment of Class-B properties has thrived.  Workforce housing is particularly attractive due to the high turnover present with the average leaser.  As these leases’ turnover, the property managers can increase rents and keep up with inflation.

A study conducted at MIT titled Has Real Estate been a good Hedge against Inflation? Will it be in the future?² showed that while property income is only a partial inflation hedge (likely limited by the amount of turnover in the units), the valuations of these properties provide complete inflation hedges. In today’s markets, we are seeing the values of workforce housing continuing to rise as there remains a significant supply/demand imbalance for workforce housing properties.  As such, even in an environment of compressed capitalization rates, workforce housing remains an excellent investment with occupancy rates near all-time highs, which also allowed property owners to grow revenue even during the thick of the pandemic last year.   Accordingly, our workforce housing manager, Peak Capital Partners saw revenues grow at 5% last year³.  If we do see a spike in inflation moving forward, we believe rent renewals will rise in parallel and investors will be protected with rising income streams.

In addition, and by their very nature, real assets have traditionally been excellent inflation hedge and as such, we are starting to look more into farmland and other commodities as wealth advisors ask for more inflation protection ideas.  Infrastructure is also a main point of emphasis as income stemming from infrastructure projects will also rise with inflation.

In the interim, we believe workforce housing should be a core component of investor portfolios.  The strategy has proven its worth both during booming economic times as an inflation hedge and as a stabilizer during times of economic stress when renters start to flee more expensive properties.  Accordingly, real estate and workforce housing are excellent strategies to consider as investors consider a spike in inflation.

Download: PPB – June 2021 Market Update

 

Important Footnotes and Disclosures

1: Source: NY Times, https://www.nytimes.com/2021/06/10/business/consumer-price-index-may-2021.html. Please contact PPB for a copy of the article if unable to access.

2 https://economics.mit.edu/files/14673

3 Peak Capital Partners

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