The big inflation hedge that wasn’t

Pandemic concerns have stemmed inflation-fueled flows into real estate

National Issue Archive /
Sep.September 10, 2021 06:00 PM

(Getty Images)

Real estate is a good hedge against inflation. So now that rising prices are dominating the economic discussion, one would expect a surge in real estate investment. 

But in the Covid era, that has yet to materialize.

“I don’t think we’ve seen a rush into real estate yet because of fears of inflation,” said Wells Fargo economist Mark Vitner.

The stop-and-go tempo of reopenings and new restrictions is casting doubt on the recovery of hotels and leisure properties, for example. More than 16 months after the first shutdowns, it’s still not clear what long-term effects work-from-home will have on office markets. And retail is still rife with uncertainty — not just from the pandemic but also from the shift toward e-commerce.

“Right now, there’s just so many other things going on in terms of…travel, retail and so on,” said Calvin Schnure, an economist at NAREIT.

These factors probably all have a bigger impact on real estate valuations than worries about inflation.

Vitner added that publicly traded real estate investment trusts are not outperforming other sectors of the stock market in ways that would indicate investors are rushing into property because of inflation.

If inflation were having an impact on real estate investment flows, experts said they would expect to see sectors with short-term leases that can capture rising prices perform better than those where current prices are locked in for longer leases.

As a group, assets such as hotels, apartments and self-storage should perform better than net-leased retail, gaming and — to some extent — offices.

That’s not to say, though, that investors aren’t thinking about inflation.

“Inflation is the number one topic clients have asked us about in 2021,” said Steven Cornet, head of U.S. research at BlackRock Real Assets, the money manager’s real estate division.

How REITs have responded

Across eight inflationary spikes going back to the early 1970s, REITs notched average total returns of 24 percent, according to Green Street Advisors, compared to the 15 percent return delivered by the S&P 500 over that same period. Inflation over that window was 11 percent. 

But that trend wasn’t uniform. REITs lagged behind stocks in one of those eight periods and failed to outpace inflation during three of them, according to Green Street. 

For the longest inflationary period, the decade between 1973 and 1982, REITs saw annualized returns of 13 percent, besting the 8 percent increase in the Consumer Price Index. Stocks and bonds failed to keep up with inflation during that time.

The argument for real estate is that when leases reset, landlords can often pass along the increases in their operating costs by raising rents at a time when wages are also increasing.

Inflation also drives up the cost of building materials, making it more expensive for developers to build competing buildings.

So far this year, the CPI was up 5.4 percent as of mid-August, according to the Bureau of Labor Statistics. 

But it’s not just real estate that seems to be shrugging off talks about inflation. Bond markets so far haven’t shown signs that investors are significantly pricing in inflation fears.

“When you look at stocks and you look at how REITs are trading, I don’t see evidence that people are that worried about inflation,” said Green Street’s Peter Rothemund.

Rothemund and other market watchers pointed out that it’s more difficult now than in times past to read the tea leaves on how inflation concerns are impacting investors’ decisions, especially given how many other factors there are to consider around the economic recovery.

Others pointed out that inflation can only move the needle so far for real estate. The inflationary spike during the late 1980s, for example, coincided with a flood of new commercial real estate, which hurt returns in that sector. 

Even if real estate can mitigate the impact of inflation, it doesn’t do much good if an investment in a poor market is losing money.

“Inflation by itself is not going to help your returns,” said BlackRock’s Cornet. “You need a healthy market.”


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