Understanding How “Sticky” Real Estate Investments Hedge Against Inflation
Real estate investors, along with the rest of the world, are experiencing an inflationary environment.
Even investors with a diversified portfolio are looking for more ways to create an inflation hedge.
You’re might feel this same decline in purchasing power at home:
- You pay more daily at the pump
- You face rising energy costs for the summer
- You see the cost of food and clothing skyrocket
You want to make sure your family is well-provided even in challenging times.
One of the best ways to hedge against inflation is real estate investing in “sticky assets.”
Let’s take a quick look at our economic environment, the definition of “sticky” real estate, and how real estate can protect you from inflation.
Rising Consumer Price Index and Interest Rates
The Covid pandemic, the Russia/Ukraine war, and supply chain shortages have the world reeling under rising inflation.
In response, the Federal Reserve has raised interest rates.
They do this hoping to curb high inflation without stunting economic growth.
But consumers see their monthly payments go up in almost every area.
So investors are looking for an investment strategy. One that’ll work as an inflation hedge, provide real estate income, and create long-term cash flow.
This is where the “sticky” asset classes of real estate come into play.
Real estate prices continue to rise. Yet not all commercial real estate provides the same long-term value and rental income you want from real estate investing.
You’ve entered real estate to:
- Avoid the fluctuations of the stock market
- Maintain your level of purchasing power
- Gain inflation protection
So let’s define the term “sticky” and how such investments can work for you.
Defining “Sticky” Assets in Real Estate
“Sticky” real estate is the idea that the revenue stream of the property is consistent over the long term.
Commercial real estate is valued by tenants and whether it’s a piece of income-producing real estate or not.
Property values in private real estate — like houses — are often evaluated based on the house’s location. The improvements the neighbors do (or don’t) affect your home value too!
However, commercial properties are valued based on revenue streams and their consistency.
For example, an office space might have a 95% tenancy rate, but that rate alone doesn’t make it a sticky asset class. You also need to look at how likely the tenants will stay in that building long-term.
Many office buildings do not fall under the umbrella of “sticky” real estate because of various factors. Like remote work and ease of movement from one building to another.
These office buildings find it difficult to raise rents because of low demand. This keeps investors from having a higher rental income.
Doctors’ offices and other medical buildings are often considered sticky because of the infrastructure.
The medical corporation usually invests millions in a specialized infrastructure. This allows them to keep the building for the long term.
These tenants will usually remain even if property prices go up because they would need even more money to invest in a new building. Such office buildings are considered “sticky.”
A “sticky” investment strategy has the potential to stay strong. Whether facing high interest rates, a steep inflation rate, and a fluctuating stock market.
How Does a Real Estate Investment Hedge Against Inflation?
Investing in sticky asset classes can hedge against inflation and bolster your portfolio. If interest rates rise again, you’ll be protected.
Multifamily units are often in great demand during a period of high inflation and high interest rates.
Families who have to downsize their lifestyle as inflation rises often move into an apartment or condominium. This property sector often sees consistent income even during an economic downturn.
Storage units can be a good hedge against inflation. People who can’t find housing due to high demand or those who are moving into multifamily units due to housing prices often turn to them.
They’ll put most of their belongings in storage while living with bare minimum belongings. Usually, they’ll elect to live in a minimally sized apartment or with another family.
These storage units often provide positive cash flow and passive income for a real estate investor.
The “sticky” asset class is often in high demand no matter the economic situation. They’re a strong source of passive income and a great hedge against inflation.
Real Estate Investment Trusts or Real Estate Syndications?
Real estate investment trusts work more like the stock market and may see fluctuations similar to stock prices.
Real estate syndications need more up-front investments but often provide a more stable source of passive income.
Alternative investments like syndications offer you access to “sticky” assets that hedge inflation. Even if you don’t have millions of dollars to buy commercial real estate on your own.
Face the Future With Confidence Through Strong Investments
You can’t control the Federal Reserve or overall consumer prices.
But you can pursue an investment portfolio that contains:
- Commercial property with solid infrastructure
- Long-term tenants
- The potential for raising rents
Even as inflation rises, your confidence will too.
You’ll know that you have sound investment advice. You’ll understand how “sticky” assets can help you reach your financial potential during shaky economic times.
Your peace of mind will allow you to focus on your family and not on your worries about inflation, recessions, or any number of problems on the horizon.
Allow investments in “sticky” assets to provide for your family and create a sense of security in an insecure world.