How to Invest in Real Estate During Inflation


The money supply rocketed 41% from January 2020 to January 2022. COVID-19 related stimulus and a decade of low interest rates pumped trillions of dollars into the economy. That’s a lot of dollars chasing after the same amount of resources.

When the amount of money goes up and the amount of resources and products doesn’t, demand for everything increases and you get price inflation. More people rush out to buy houses with low-rate loans. More businesses take on debt to invest in new projects. Add in supply chain problems and you get an 8.5% increase in the Consumer Price Index (CPI) over the last twelve months.

Inflation can eat away at your returns. . If you buy a stock and it goes up 10% but the value of your money has fallen 8.5%, your real gain is only 1.5%. That doesn’t mean you should sit on the sidelines, however, buying stocks and holding them for the long-term is your best bet to beat inflation and keep your purchasing power up.

Traditionally, investors flock to real assets during times of inflation. Consumers will forego some of their purchases during inflation because budget constraints, but inflation is, by definition, an increase in the price of assets like real estate. Let’s go over how three real estate investment trusts (REITs) — W.P. Carey (WPC 2.60%), Extra Space Storage (EXR 2.43%), and Store Capital (STOR 3.48%) — can shield your portfolio from inflation.

A person loading up a storage unit.

Image source: Getty Images.

W.P. Carey

W.P. Carey is a diversified REIT that focuses on single-tenant commercial leases. The REIT owns 1,336 properties in the U.S. and Europe. Current occupancy rate is 98.5%.

Unlike most REITs, which specialize in one property type, W.P. Carey owns industrial, warehouse, office, retail, and self-storage properties. It also advises the management of close to $2 billion of real estate assets. If one, or even a few, of the company’s revenue streams hits a rough patch, the other ones will likely pick up the slack and keep growth and the dividend going.

Currently, the dividend is 5.5%, and you can expect that dividend to keep growing ; it has increased for 24 straight years. How will W.P. keep the growth coming through inflation? The REIT has a two-part inflation shield.

The first is triple net leases. Most of its leases are triple net, which means the tenant is responsible for all maintenance, taxes, and insurance costs.

The second part is rents. Fifty-eight percent of its leases have annual rent escalations linked to CPI and another 37% have fixed increases baked into the contract. While its costs remain the same, rents go up and the increased profit flows right out the door into your pockets with the high dividend.

Store Capital

Store (Single Tenant Operational Real Estate) Capital is a diversified REIT with 2,866 current properties and 99.5% occupancy. Like W.P. Carey, it focuses on single-tenant triple net leases. When maintenance and repair costs go up, the tenant pays them.

Store’s niche is sale-leaseback transactions. It purchases buildings from businesses and then leases them back to the business that owned them. Current relationships accounted for 80% of its recent acquisitions. That doesn’t mean its customer base isn’t diversified; however, its largest customer makes up just 3% of its revenue and top ten customers make up 18%.

Businesses sell their properties to Store to use the proceeds to fund future growth, and Store has the expertise to finance the purchases and get the proceeds to the businesses quickly. In the first quarter of 2022 alone, it purchased 111 new properties, with an average transaction size of $13.1 million.

Store has the same two-pronged inflation shield: fixed costs and CPI-linked lease escalators. Store’s management believes that its addressable market amounts to $3.9 trillion. Obviously, it won’t reach that size, but revenue has grown 73% over the last five years and has plenty more room to run.

Extra Space

Extra Space is a self-storage roll-up company. Over the past ten years, it has purchased enough self-storage facilities around the country for its stock to rise over 500%. The total return (as of 03/31/2022), which includes dividends, over the past ten years is over 1,200%. Its roll-up has made it one of the most successful REITs on the stock market.

The roll-up strategy was made popular by Wayne Huizenga and Blockbuster in the early 1990s. The company specializes in a certain niche — so, video rental stores for Blockbuster and self-storage for Extra Space – and buys up mom-and-pop shops and smaller competitors to grow across the country. The company’s economies of scale make each location more profitable for it than it was for the mom and pops, so most acquisitions are accretive immediately.

It currently wholly owns 985 facilities, manages 828 third-party facilities, and owns another 283 in joint ventures. Over those three categories, it has 1.5 million units in 41 states. No store contributes more than 1% of total revenue and no geographical market contributes over 12%.

Extra Space’s advantage when it comes to inflation is lease pricing. REITs that own commercial office buildings or warehouses usually commit to long-term leases of 10 or even 20 years. If they don’t have large built-in escalators, like W.P. Carey, they miss out on price increases when inflation is rampant. Extra Space’s storage leases are often month to month so it can raise rents far more flexibly.

Additionally, Extra Space has more technical capability to figure out what costs the market will bear in the facilities that it purchases. If it buys a facility for five times earnings and can then raises prices because of inflation, it will keep consistently producing inflation flattening returns for investors.

Adding REITs to your portfolio may insulate it from inflation

In a world with central banks, inflation of some level is a certainty. When it’s down closer to 2% or 3%, it doesn’t hurt your portfolio much, but inflation levels nearing 9%, or even more, take a bite out of your purchasing power. These REITs may be a good start to insulate your portfolio, but you should also evaluate your other investments to determine how they’ll handle high inflation levels.

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