Investors Shift Money Out Of CRE Portfolios As Inflation Reaches 40-Year High

A long-held belief that commercial real estate is a hedge against inflation is being called into question as the rate of inflation reaches historic highs.

Wary of the impact of rising rates on the value of property, some investors are pulling money out of their real estate portfolios, according to a report by The Wall Street Journal. Shares of real estate companies are underperforming the broader stock market, which could indicate wavering confidence in the investment’s reputation as inflation-proof, per the WSJ.

“Some of the pros who have been around for a while are standing back from the market,” Darrell Wheeler, a senior analyst of commercial mortgage-backed securities at Moody’s Analytics, told the paper.

The rate of inflation reached 7.48% in January, an almost 40-year high, according to the Bureau of Labor Statistics. During periods of high inflation, money tends to flow into property types with rents that adjust on a frequent basis, such as multifamily, hotel or self-storage properties, Joseph Iacono, CEO and managing partner at Crescit Capital Strategies, told Bisnow. These types of assets can be viewed as lower risk when constructing investment portfolios, he said.

“If you’re concerned about long-term inflation, you probably want to stick to assets that have adjustable rent structures that can offset inflation as it’s happening,” Iacono said.

But even properties with adjustable rents may not be immune to inflation. An increase in financing costs driven by higher rates could make it more expensive for owners to finance a building, thereby eroding its value, according to the WSJ. 

There appears to be little relief on the horizon. Rates are expected to rise as the Federal Reserve begins a new cycle of short-term rate increases, per the WSJ. The ability of building owners to stay ahead of inflation by raising rents will erode as new supply comes online and the issue of affordability isolates current and future tenants.

“If inflation is persistently high, REITs may not act as an ongoing inflation hedge,” Vikram Malhotra, an analyst for Mizuho Americas, told the WSJ.