As the U.S. government has poured trillions of dollars of stimulus funding into the economy, some politicians and economists have raised the specter of inflation, warning of spiking consumer prices if the country’s money supply continues to expand at unprecedented rates.
But some economists are unconcerned about the ballooning of the money supply, arguing that rising inflation will likely affect prices not of consumer goods, but of assets, including stocks, bonds, precious metals and commercial real estate.
While it may discourage new investors in CRE, this kind of asset inflation would likely be a boost for large institutional owners of existing real estate assets. And with housing still in short supply nationwide and cheap capital still widely available, multifamily ownership may prove to be investors’ strongest play in a market that is starved for yield.
On the latest Walker & Dunlop Walker Webcast, former Wharton professor Peter Linneman said that the nature of inflation today is fundamentally different from the inflation of the 1970s and 1980s, which caused spikes in the prices of things like gas and groceries.
“Back then, banks were set up to give money to mom-and-pop America,” Linneman told Walker & Dunlop CEO Willy Walker. “Today, those stimulus funds are going to JPMorgan, to Goldman Sachs, and they’re putting that money into massive assets, $100M here, $200M there. That money isn’t going to be chasing bread and cigarettes, it’s going to be chasing assets.”
Former Wharton professor Peter Linneman on the Walker & Dunlop Walker WebcastLinneman predicted that the new money in the economy will drive up pricing on commercial real estate over the course of the next seven years. The result, as with any form of inflation, will be a benefit for those who already own assets and a detriment to those who are looking to buy new ones.
Unlike with inflation of consumer goods prices, the U.S. government’s fiscal authorities are unlikely to take any steps to curb inflation in these sorts of assets, Linneman said.
“Intellectually, they’re aware of what this kind of inflation does to the economy,” Linneman said. “But historically, they’re hesitant to direct monetary policy around asset price inflation.”
Other macroeconomic forces are likely to boost certain sectors of commercial real estate while hampering others. Linneman was especially optimistic about the future of multifamily, noting that it is one of the few sectors of CRE where owners and developers can currently borrow cheap capital. Unlike sectors like office, many banks, government authorities and other capital sources remain very willing to lend for new housing, since the country has run a housing deficit for going on two decades, Linneman said.
One other thing the multifamily market has going for it is the liquidity of its renter base. Because office buildings may only hold a handful of tenants — and an entire warehouse may be rented out by one company — office and industrial assets tend to be “lumpy,” in Linneman’s words, posing a higher risk to their owners in times of economic uncertainty. While many industrial owners are likely doing very well at the moment, a single company going out of business could mean serious pain for their landlord, Linneman said.
Walker & Dunlop CEO Willy WalkerMeanwhile, even conservative estimates on the future of multifamily growth suggest that it is a strong investment. A property’s net operating income could fall 10% in 2021, then 8% again in 2022, but assuming a 2.5% growth rate over the next eight years, a multifamily investor could still see a 9.5% internal rate of return, Linneman’s calculations showed.
“If you have a long hold horizon, I just think you're in a golden age for multifamily,” Linneman said. “The spread is so outlandishly attractive. A lot of money's going to be flowing to the sector that I just think we’re going to look back and say, ‘This is the third golden era of longer-term-hold multifamily.'”
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