How to Invest During High Inflation?

The multifamily sector weathered the worst of the pandemic with astonishing resilience, and the expected Covid discount turned into a pricing surge.

Although the multifamily sector has been resilient during the worst of the pandemic, there are challenges and headwinds in the market. Intending to build a strong future for this industry, it is important to acknowledge these obstacles.

Impact Of Rising Interest Rates On The Multifamily Sector

Sales volume for multifamily properties is declining with the recent rate hikes from the Federal Reserve, as higher borrowing costs have disrupted purchases. Some potential buyers of apartment properties had factored higher debt costs into their assumptions when they first purchased an apartment, causing them to want to cut the amount they were willing to pay relative to the income from the property. It is too early to tell how much sellers will be willing to renegotiate.

Consumer demand for multifamily housing remains strong, often exacerbated by pandemic-driven migration and demographic shifts. An ongoing shortage of units can be attributed to developers' inability to keep up with supply, as well as supply chain disruptions caused by inclement weather or other factors.

Next, while prices may be stabilizing, they are not falling. The market has had a tremendous run, and there is some course correction going on. Economic jitters are adding to the uncertainty, and we have not seen any downward pricing adjustment yet; instead, there has been a slight uptick in the openness to negotiate terms and ultimately sell at a fair price. When all things are considered, both buyer and seller need to be open and honest about the current and near-term asset and capital markets environments, which have seen some serious changes over the last year, particularly in the last few months.

Given these factors, it’s hard to make a bear case for multifamily in the next 5-10 years. Even if rents don't continue their double-digit year-over-year increases and revert to a typical 2%-5% increase (and perhaps more in some markets), multifamily will still offer steady value appreciation as an inflation hedge. Multifamily properties will continue to provide solid returns on investment, perhaps not the 30%-50% return they have provided since the pandemic.

Multifamily real estate is an asset class that can hedge against inflation in a few different ways:

• It can provide a relatively stable cash flow over time.
• It can act as an inflation hedge because it increases in value over time.
• The property’s value is based on its income stream, which increases as rents increase due to rising rents and inflation.

Where And How To Invest During This Economic Downturn?

Dr. Mueller's Real Estate Market Cycle Monitor has been tracking each primary commercial real estate sector since 1990. He presents his nationally acclaimed "Real Estate Market Cycles" report. His analysis helps investors identify where various markets are in the four phases of the real estate cycle and ultimately decide where and when to invest in this economic downturn.

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