To Inflation and Beyond

August 09, 2022

Real estate as an asset class is not immune to the effects of inflation and rising rates, but certain sectors within real estate can help investors manage through the volatility. Typically, inflation manifests itself within commercial real estate in the form of higher prices for construction materials, labor, and land. Since the onset of the pandemic, the Producer Price Index for Construction Materials, which measures the average price change of building materials over time, has skyrocketed by over 50% as of June 30, 2022.¹ These rising development costs and value-add expenditures create a headwind for real estate valuations, diluting the value of incremental rental income. However, as inflationary pressures continue to weigh on economic growth, real estate should be well positioned as a solid, though imperfect, inflation hedge. Multifamily and hotel properties benefit from the flexibility of shorter-duration leases that allow property owners to reset rents in line with market levels. Moreover, value-add and opportunistic managers are well positioned to enter deal flow at attractive unlevered price points, extracting value from industrial and retail investments that benefit from guaranteed rent increases and tenant pass-through costs. Real estate investments are an important part of alternatives allocations at Marquette as they can help diversify a portfolio and hedge against inflation while providing attractive risk-adjusted returns.

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¹Bloomberg, Bureau of Labor Statistics, Federal Reserve Bank of St. Louis, CBRE-EA, Clarion Partners Investment Research, June 2022

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.