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Is CRE REALLY A Great Inflation Investment?

Just about everyone reading this article is familiar with the adage that commercial and residential real estate are ideal hedges against inflation. The reasons are fairly straightforward: Real properties can provide increasing income, appreciating value and overall debt depreciation. Furthermore, real estate is generally not correlated with regular market movement, offering balance to investor portfolios.

A recent research brief issued by Marcus & Millichap generally supported the axiom, pointing out that CRE tends to hold values more efficiently than other alternative investments. The brief pointed a spotlight at multifamily assets, suggesting that the product retains value in the face of higher inflation. A standard apartment lease is 12 months, and when it expires, “rents can be realigned with market forces,” Marcus & Millichap analysts noted.

Another real estate sector offering short leases? Self-storage. Marcus & Millichap research indicated that self-storage units are rented monthly and “after contending with years of oversupply, the pandemic instigated a swell of renter demand that dropped vacancy to a more than 20-year low last year.” That trend is likely to continue, especially as baby boomers downsize and millennials start needing storage for their own things.

Another brief, this one from CenterSquare Investment Management, said that U.S. REITs are in a good position to outperform equities during inflationary and higher interest rate periods. CenterSquare analysts compared REITs and the broader market (represented by the S&P 500). Relying on data from 1991 to 2022, the analysts said that REIT total returns, on average, slightly exceeded total returns from the S&P 500. Furthermore, since inflation started really taking off in January 2022, CenterSquare reported that REITs outperformed the broader equity market by 625 basis points.

And similar to their Marcus & Millichap counterparts, CenterSquare analysts said that “sectors with pricing power, strong demand and shorter lease terms” were likely to do well during the current inflation scenario. The analysts went on to say that other alternative real estate sectors, such as data centers, cell towers and life sciences labs should also “benefit from secular tailwinds.” Additionally, “we believe the entire real estate asset class will benefit from this period of economic volatility and continue to outperform the broader equity market,” the brief concluded.

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About Amy Wolff Sorter

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  • ◦Sale/Acquisition
  • ◦Economy
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