Apartments’ Flexibility Provide Inflation Hedge

Unlike other segments of commercial real estate, apartments offer owners flexibility. With shorter leases, often running between six and 24 months, apartment operators can be more attuned to a changing economy.

“As those leases roll-off, you’re able to readjust those rent roles based on current market conditions,” says David Vincent, Cadre’s Investment Specialist. “So you have a lot more flexibility than say industrial or office.”

These shorter-term leases provide apartment owners with the ability to adjust rents upward as the economy improves (or they can see rent deteriorate quickly if the economy decelerates). “On the revenue side, you can increase the rent rolls,” Vincent says. “As people want to renew or you bring in new tenants, you’ve got a lot more flexibility versus other types of real estate.”

In the future, Vincent sees a period of rent increases, partially driven by COVID- and materials-related supply issues. “We see very strong demand,” he says. “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 building in this country. So there’s a lot of demand, and there isn’t nearly as much supply.”

In addition to providing flexibility, these short-term leases can also potentially serve as a hedge against inflation. Investors have grown more interested in building a portfolio that can protect against inflation. “It is much more on the front burner than it has been in awhile,” Vincent says.

With shorter leases, apartments can provide that hedge. “I think you’ll find that multifamily is that sweet spot in commercial real estate, where you have more flexibility, and you have a little bit more protection [against inflation],” Vincent says.

Even if some expenses go up, rising rents can protect apartment owners. “If you are a real estate owner, you bought the small apartment, you’re paying a fixed-rate mortgage and interest rates go up, all of a sudden with inflation rising and interest rates going up, you’re protected,” Vincent says. “So your costs aren’t necessarily going up, even though some of the other expenses of managing the property might be rising. And your revenue naturally moves, hopefully to some degree.”

Vincent does see inflation as a potential issue moving forward. “With Econ 101, we’ve all been taught that if you print enough money, inflation is going to go up,” Vincent says. “I think the last print we had in April was a bit of a wake-up call to markets. The fears [of inflation] are starting to crystallize.”

With rates staying at low levels for such a long time, many people don’t know what to make of the recent spike.

“Right now, the Fed is still saying they may be transitory, but we’ll see,” Vincent says. “But I think the fears are here.”

About Real Estate Intelligent Marketing (REIM):
REI Marketing is an innovative Real Estate Marketing Company that offers distinctive real estate services to developers and multifamily investors.  We are a vibrant, dedicated team of industry professionals with international experience in marketing and multifamily investment.