When the Federal Reserve increases interest rates to curb rising inflation—as they have done in the past few months—a number of different property asset sectors are uniquely impacted. We’re not in the economic forecasting business, but we believe that investors in certain real estate assets – especially multifamily – can set themselves up for higher rental income during the current unpredictable economic environment.
Multifamily Properties Are A Good Inflation Hedge
While increased interest rates decrease the value of bonds and growth stocks, real estate assets are, historically speaking, usually more resilient to swings in interest rates. More specifically, revenue-producing real property and multifamily properties can increase net profitability during inflationary periods.
Real estate has always been viewed as an inflation-resistant asset class. A 1979 study conducted by the Wharton School of the University of Pennsylvania indicated that the average dividend income from REITs outperformed inflation during 306 of the 404 months of observation. And an analysis of 43 years of datareviewed by NCREIF Property Index showed that the returns associated with private real estate assets were significant during years when inflation increased. For example, in 2021 when inflation rates outpaced the national GDP growth by over 0.5%, the NCREIF Property Index indicated a promising annual returns rate of 12.1%.
Investment properties will continue to be an effective hedge against inflation. Higher mortgage rates essentially mean that would-be homebuyers are forced to rent. These higher rates, coupled with continued low inventory (housing development is still struggling with the after-effects of the pandemic and construction remains constrained because of high costs and tough local Bay Area permitting requirements), mean property owners have the power to charge a premium on rents and can expect a steady stream of well-qualified tenants willing to pay optimal price points for the right property. Data compiled by CoreLogic indicates that the nationwide average rent spiked over 10% in 2021 and is expected to increase for the foreseeable future.
Investors Will Have Opportunities In The Near Future
We recommend that investors continue to closely follow the Federal Reserve’s inflation strategy. The Fed is expected to increase benchmark rates another 75 bps this week (Nov 2nd) which should further slow down the overall RE market. Again we’re not in the forecasting business, but the interest rate futures contracts trading on the CBOT seem to imply that the Fed intends to stop rate hikes in mid-2023. Note that investors in these futures have usually underestimated the degree to which the Fed tightened. Nonetheless, the Fed doesn’t want to trigger a deep recessing by further increasing short term rates too rapidly.
As we all know, RE values – especially SFR home values – in the Bay Area have already dropped since the end of the summer. According to mortgage-date provider Black Knight, Inc., home prices in San Jose fell 13% in August from the 2022 peak, followed by San Francisco with an 11% drop.
While this economic backdrop is challenging, we expect savvy investors will have opportunities this winter to acquire assets at attractive prices.
A Financial Partner Committed to Your Success
Put simply, despite a volatile global market, privately owned, well-managed real estate assets have, and will continue to, produce consistent returns on investment. Having a trusted lending partner with a track record of facilitating profitable investment ventures of all shapes and sizes is a must for savvy real estate investors looking to diversify their portfolios and build generational wealth. Since 1943, Security Financial Services have provided mortgage brokers, developers and investors acquisition, rehab and refinance loans secured by property throughout the Bay Area and Northern California. Our team of professionals has the requisite experience and insight to develop viable and innovative funding solutions for your next investment project—contact us today to get started!