July 2021 Edition - Let’s Talk About Inflation and Multifamily Investing

Right or wrong, our federal government has injected $5.5 trillion in stimulus money into the economy over the last year.  Additionally, the current administration is on a spending spree that seems to have no limits.  Our national debt and deficit have grown to record levels and are on track to continue to increase.  This has caused our economy to enter into an inflationary period.  We see it every day when we go the gas station to fuel our cars, to the grocery to buy food for our families and in many other ways in our daily lives.

Inflation, by definition is a general increase in prices and a fall in the purchasing value of money (Oxford Languages).  Economists categorize inflation as being the result of one of two main causes: “Demand-pull” or “Cost-push”.  Both are responsible for a general rise in prices in an economy.  “Cost-push” inflation occurs when there is a supply shortage with enough demand to allow the producer to raise prices.  A current example of this is the price of lumber and labor in our construction industry.  “Demand-pull” inflation is the most common cause of rising prices.  It occurs when consumer demand for goods and services increase so much that it outstrips supply. There are several circumstances that create demand-pull inflation.  Such as, when people get better jobs and become more confident, they spend more.  Another circumstance, the one we are facing now, is “discretionary fiscal policy” where the government either spends more than they have or prints more cash, thus devaluing the currency.

Individually, none of us are pro-inflation.  But, as multifamily owners and investors, inflation may have a positive effect on our investments.  Inflation concerns will drive capital into property investments.  Conflicting opinions on how much to worry about inflation make it all the more challenging to decide how to best invest our money.  No one has a crystal ball to know how bad inflation will be over the next five to ten years, but when thinking about how to invest, it’s safe to assume that in a best-case scenario we will see modest inflation and in a worst-case scenario we will see significant inflation.  Given this reality, the question becomes: Where’s the best place to put your money when moderate to significant inflation is on the horizon?

Unlike other segments of commercial real estate, apartments offer owners flexibility.  With shorter leases than those in office, industrial and retail, apartment owners can be more attuned to a changing economy.  “As leases roll-off, you’re able to readjust those rents rolls based on current market conditions” (David Vincent, Cadre’s Investment Specialist).  Vincent sees a period of rent increases, partially driven by COVID and materials related supply issues.  “We see very strong demand.“  “I think part of that is tied to the story of the lack of housing.  Historically, over the past 10 years, we’ve really been underbuilding relative to what we used to be in this country.  So, there’s a lot of demand, and there isn’t nearly as much supply.” (David Vincent, Cadre’s Investment Specialist).

The lack of affordable homes is keeping would-be-first-time-home-buyers out of the housing market and in apartments.  Sales of existing single-family homes saw a record year-over-year increase of 23.6% in May, according to data from the National Association Realtors, while inventory is down about 20.6.% from one year ago.  The unsold inventory of single-family homes is only 2.5 months.

“Even before the pandemic, there was a lack of housing supply.  There still is, and it doesn’t look like it will be resolved any time soon,” said Doug Ressler, manager of business intelligence at Yardi.  “What you have is a generation of millennials who would be looking at buying homes but can’t because of lack of supply.”  At this time, “nobody has a resolution yet to the housing availability problem,” he said.  The solution for now and the foreseeable future is apartment living.

While most economists and analysts expect rising inflation to be a temporary phenomenon, concerns continue to mount from businesses and consumers alike.  With that in mind, the National Apartment Association (NAA) is launching an inflation tracker to keep its members informed and help them cut through noisy data – a result of uncharted territory created by the pandemic.  This information can be reviewed on the NAA website.  If you do not have access to this website, please let me know and I will assist you with the information.

“Just-In-Case You Missed It” is a monthly letter prepared for multifamily owners and prospective owners.  It is a compilation of multiple articles from multiple sources or a reprint of an article from a specific source (source credit given).  Its purpose is to present both facts and opinions that may influence our multifamily business in the Southeastern U.S. If you have any questions and/or would like to discuss any of the comments above, my conclusions or your multifamily business, please contact me at your convenience.  I can be a valuable resource to you without adding expense to your budget.  I look forward to speaking with you and having an opportunity to meet with you.  I am always at your disposal to assist you with your multifamily business.  If you would like to review previous editions of my monthly “Just-In-Case You Missed It” letter they are posted on my website, www.rickbakermultifamily.com. 

Respectfully

Rick

G.F. Rick Baker, CCIM 

Multifamily Specialist/Investment Advisor 

www.RickBakerMultifamily.com 

2504 Tinderbox Ln.

Greensboro, NC 27455

Cell: 336.549.6083 

Email: rickbakermultifamily@gmail.com

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