In general, real estate investments – such as rental properties or equity investments like real estate investment trusts (REITs) – tend to hold up well in inflationary environments. Real estate values and rental income tend to follow inflation over time, and investment vehicles that invest in real estate tend to outperform the market during periods of inflation.
In 2021, inflation hit a 40-year high and REITs as a group outperformed S&P500 by nearly 13 percentage points. And in the modern era, REITs tend to underperform the market when inflation is 2.5% or lower, but easily outperform when inflation is 7% or higher, as it is. currently.
3 types of real estate investments that can 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 have the same resistance to inflation. Real estate investments that tend to perform better in inflationary environments have the following characteristics:
Short lease term: Some types of commercial properties use long-term leases that have small built-in annual rent increases, while others are shorter in duration and reset more frequently at market rates. Those in the latter category tend to perform better during periods of inflation.
Price power: Inflation-resistant investments generally have the ability to pass on price increases to their clients. For example, apartment REITs are a essential property type (people need housing), which gives landlords the ability to raise the rent based on the market. On the other hand, mall REITs may be less flexible, as rapid rent increases could make some tenants think twice about keeping their stores open.
Resilient demand: Shorter lease terms don’t help if you can’t find enough tenants to fill your properties. It is therefore wise to consider properties that will remain in demand even if prices increase. Think industrial real estate – the rise of e-commerce has created such a need for logistics real estate that industrial REITs simply cannot build properties fast enough.
To name just a few examples, here are three of my top real estate investment categories for high inflation:
- Residential rentals: This can mean either owning real investment properties or buying residential REITs like AvalonBay Communities (AVB -0.53%) or MAA (MAA 1.81%). Residential property values and rents tend to follow inflation over time, and the essential nature of properties tends to make them rather recession-proof.
- Industrial properties: I mentioned this one a little earlier. Although industrial tenants tend to sign long-term leases, the demand for this type of property is simply out of the ordinary right now, giving operators excellent pricing power when leasing, renewing or of liberation. Prologis (PLD 3.19%) is the industry leader, although there are several other good choices.
- Hotel REITs: Hotels have the shortest “lease” lengths of any commercial property type because they have the ability to change their room rates daily. With a combination of strong travel demand as COVID-19 restrictions end and the ability to raise prices with inflation, hotel REITs like Ryman Hospitality Properties (HRP 1.91%) or Host Hotels and Resorts (HST 0.85%) could be winners.
Buy for the long term
Finally, it is important to approach all of these as long-term investments. Real estate tends to do well over time, regardless of how inflation moves. The companies mentioned here are well positioned to thrive in the current inflationary environment, but the near-term direction of their stock prices is uncertain. Buy with the long term in mind.