Should You Invest in Multi Tenant Real Estate During Inflation?
As inflation grows, the need to make intelligent investment decisions has never been more significant.
Inflation hit a 9.2% peak in June 2022 due to mounting pressure from the Russian invasion of Ukraine, Covid-19, supply chain issues, and aggressive interest rate hikes from the Fed in an effort to ease the economic tensions.
However, this doesn't mean there aren't opportunities to make money or prepare for potentially worsening conditions. Investing in options like multi tenant real estate during harsh economic conditions can prove a hedge against this otherwise precarious climate.
In this blog, we'll look at inflation, how it impacts property investing, and why multi-tenant commercial real estate can prove to be a more successful investment option in an inflationary environment.
What Does Inflation Mean?
Inflation is an economic principle in which the purchasing power of money decreases over time.
This means every time you pay for your groceries at the checkout, go for a haircut, or fill up the tank with gas, you'll notice that it is more expensive than before. Experts measure inflation by comparing the prices of goods and services against a period in the past.
Inflation is caused by several factors, including:
Demand-pull: An increase in demand without sufficient supply.
Cost-pull: Increases in the cost of manufacturing, meaning companies must put up their prices.
Devaluation: A currency loses its value respective to other foreign currencies.
Fiscal policy: The government prints too much money leading to a decrease in purchasing power. Extreme examples include the hyperinflation of the Weimar Republic or Zimbabwe in the early 2000s.
Unprecedented events: Black swan events such as the Covid-19 pandemic can also contribute to inflation. In this case, supply chain issues and lockdowns added to the inflationary push.
Some (or all) of these factors can contribute to what we label as "inflation" during tough economic times.
How Are Inflation and Property Related?
There is a direct correlation between the property market and inflation. Generally, building a new property in a high-inflation environment becomes more expensive due to higher labor, production costs, and building costs.
Mortgages also become more expensive as it costs more to borrow from the bank, meaning interest rate concerns can be off-putting for first-home buyers.
At the same time, rent and rental-related products and multi-tenant real estate can be a port in the storm in times of higher inflation due to lease agreements and increased demand for rental arrangements.
How Should You Invest During High Inflation?
So, the question is should you add real estate to your portfolio?
High inflation can limit investment options and muddy the waters. So while many flock to the stock market focusing on established companies with strong pricing power, it's important to remember that there are other games in town.
The first and most obvious step is to avoid panic investing, take all investment advice with a grain of salt and undertake a robust fundamental analysis of all opportunities.
A solid investment strategy should include inflationary-resistant commercial real estate options with impressive performance across all economic environments. Therefore, real estate investments such as commercial multi tenant real estate are ideal as tangible assets (physical spaces).
When examining CRE (commercial real estate) investment opportunities, assess the overall market, including supply and demand, debt, market projections, and even the syndicators or private equity managers.
Focus on value-oriented investment opportunities like multi-tenant commercial real estate.
Investing In Multi-Tenant Commercial Real Estate During Inflation
Commercial real estate has historically proven to be a haven against inflation. This is due to the underlying advantages of higher cash flow, appreciation of property values, and volatility management across a medium to longer-term investment period.
Commercial multi tenant properties (vs. single tenant properties) are a smart choice during inflation due to the inbuilt protection of lease terms. Generally, owners renting spaces in a multi-tenant real estate agreement, such as a strip mall or office building, are subject to longer-term commitments, including (often) annual fixed increases on the lease amount.
Due to this stability, commercial real estate is not as prone to significant market swings as stocks and also benefits from appreciation over time, adding an offset to inflation.
There's also less competition as fewer commercial spaces, such as shopping centers, aren't being built due to cost pressures. Any investor can get a slice of the CRE pie through group investment and private equity opportunities through Kenwood Property Management.
Medium inflation poses minimal risk to commercial real estate opportunities. Therefore, our investment strategy focuses solely on value investments with a higher dividend yield (7-8% annualized). In addition, all assets are property, and location-specific, meaning investors can research and choose an investment opportunity that best suits their investment appetite.
Multi Tenant Real Estate Is a Smart Investment Option During High Inflation
Inflation can put a lot of downward pressure on investors, but this doesn't mean there aren't opportunities out there. Returns are still possible with the right strategy and investment plan.
Adding multi tenant real estate to your investment portfolio with the Kenwood Management team creates a unique opportunity for investors to diversify and hedge against the growing inflationary threat. Reach out to the team today to discover how you can get started in a traditionally robust investment opportunity!