As a general rule, real estate investments — such as rental properties or stock-based investments such as real estate investment trusts (REITs) — tend to hold up well in inflationary environments. Real estate values and rental income tend to keep up with inflation over time, and investment vehicles that invest in real estate tend to outperform the market during periods of inflation.
In 2021, inflation reached its highest level in 40 years, and real estate funds as a group outperformed Standard & Poor’s 500 by about 13 percentage points. In the modern era, REITs tend to underperform the market when inflation is 2.5% or less, but easily outperform when inflation is 7% or higher, as is the case now.
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3 Types of Real Estate Investments That Could Thrive with High Inflation in 2022
In general, real estate tends to hold up well against inflation, as we just mentioned. But it is important to realize that there are many different sub-sectors of real estate, and not all of them have the same resistance to inflation. Real estate investments that tend to perform best in inflationary environments have the following characteristics:
Short lease term: Some types of commercial real estate use long-term leases that contain small annual rent increments, while others are shorter in duration and reset to market rates more frequently. Those in the latter category tend to perform better during periods of inflation.
Pricing strength: Inflation-resistant investments usually have the ability to pass price increases on to their clients. As an example, real estate investment trusts are Basic The type of property (people need places to live), which gives landlords the ability to increase rent along with the market. On the other hand, mall REITs may be less flexible, as rapid increases in rents may make some tenants think twice about keeping their stores open.
Flexible order: Shorter lease periods don’t help if you can’t find enough tenants to fill your properties. Therefore, it is smart to think about properties that will remain in demand even if prices rise. Think industrial real estate – the boom in e-commerce has created such a need for logistics real estate that industrial REITs simply cannot build real estate fast enough.
Just to name a few, here are three of my top real estate investing categories for high inflation:
- Residential rents: This can mean either owning actual investment properties or purchasing residential REITs such as Avalon Bay Communities (AVB -0.53%) or MA (MAA 1.81%). Residential property and rental values tend to keep pace with inflation over time, and the underlying nature of properties tends to make them recession-resistant.
- industrial property: I mentioned this a little earlier. Although industrial tenants tend to sign long-term leases, demand for this type of property is simply off the charts at the moment, giving operators excellent pricing power when leasing, renewing or releasing. Prologies (PLD 3.19%) It is the industry leader, although there are many other good options.
- Hotel real estate investment funds: Hotels have the shortest “rent” periods of any type of commercial property, as they have the ability to change their room rates on a daily basis. With a combination of soaring travel demand as COVID-19 restrictions fade and the ability to raise prices with inflation, hotel REITs love REMAN HOSPITALITY PROPERTIES (RHP 1.91%) or Host hotels and resorts (HST 0.85%) Winners can be.
Long term purchase
As a final thought, it is important to treat all of these as long-term investments. Real estate tends to perform well over time, no matter what inflation does. The companies mentioned here are well positioned to thrive in the current inflationary environment, but the short-term trend of their stock prices is anyone’s guess. Buy with the long term in mind.