What Rising Inflation Means for Multifamily Portfolios

Inflation is inevitable, and multifamily real estate investments are a historically successful and profitable asset that adjusts for annual price increases. Underwriting models factor inflation into their stabilized assumptions when forecasting rent increases year over year. However, when inflation spikes beyond standard projections, multifamily owners and investors need to reassess risk and make adjustments to their investment strategies by extending holding periods. But, when rent is capped out by inflation, owners assume more risk caused by inability to raise rents any higher.

Now, however, advances in technology have provided communities with the opportunity to garner further financial security and profit by rethinking the way the properties are operating. 

Table of contents

• Curbing Inflation With Multifamily Investments
• How Accelerated Inflation Affects the Multifamily Industry
• The New Response to Accelerating Inflation

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Curbing Inflation With Multifamily Investments

Historically, multifamily investments have been very successful in periods of rising inflation. Their ability to curb the effects felt by rising prices make them a valuable asset. 

Although rising interest rates might seem to threaten the value of real estate, the truth is rising rates indicate a growing economy and often multifamily properties witness more demand for space as spending on goods and services increases. Economic growth fuels employment and higher wages, which in turn drives demand for housing. This allows owners to raise rents. 

The increase in revenue from rents help multifamily investments outpace the increase in prices to offset higher operating costs and expenses. In turn, higher rental rates could increase asset valuation in addition to the natural appreciation of multifamily values, both of which help fend off diluted currency value from inflation. Finally, debt secured by real estate is often in the form of long-term, fixed-rate loans, which keep debt payments stable in periods of rising inflation. The combination of fixed debt payments, rent growth, and increased property valuation have proven that multifamily assets are resilient investments when considering inflation. 

How Accelerated Inflation Affects the Multifamily Industry

Inflation is inevitable. The Federal Reserve attempts to stabilize the inflation rate at 2% annually and financial projections factor this in when underwriting year over year rent increases. So, the natural existence of inflation does not have any new or severe implications for multifamily investments. Rather, the challenges with inflation arise when it accelerates beyond underwriting projections and expenses suddenly outpace income.

When inflation rates rapidly or unexpectedly accelerate, multifamily investors and owners are forced to reassess risk and make adjustments to investment strategy. 

Economic Conditions and Inflation in 2022

The U.S. Consumer Price Index recently released that the annual inflation rate spiked to 7.9% in February of 2022. This is well above the attempted annual average of 2%. Month over month, inflation rose 0.8%. In March 2021, the annual inflation rate was 2.6%. In a period of just one year, inflation grew 203.8%. 

The 40-year high marks the fastest increase since February 1982, when inflation hit 7.6%. 

How it Happened

• The onset of the pandemic triggered an increased demand for goods which caused significant supply chain delays 
• Supply chain issues exacerbated the price of materials, mainly steel and lumbar
• High replacement costs put upward pressure on rents at newly developed communities 
• Increased demand for acquisitions to circumvent the supply chain issues inherent to new construction and repositioning projects increased competition over multifamily properties for sale on the market
• Current acquisitions are extending hold periods due to fierce competition, risk aversion, financial return projections and cash flow potential from strong renter demand and increased rental income

The New Response to Accelerating Inflation

Underwriting models factor inflation into their stabilized assumptions when forecasting rent increases year over year. However, when inflation spikes beyond standard projections, multifamily owners and investors need to reassess risk and make adjustments to their investment strategies by extending holding periods. But, when rent is capped out by inflation, owners assume more risk caused by inability to raise rents any higher. Now, however, advances in technology have provided communities with the opportunity to garner further financial security and profit by rethinking the way the properties are operating.

Rethinking Property Operations to Capitalize on Extended Hold Periods

The positive outlook for the multifamily sector, driven by a shortage of housing and promises of strong renter demand and rent revenue for the foreseeable future, are reasons enough to hang onto multifamily assets. But owners and investors can do even more to capitalize on extended hold periods by cutting costs to drive NOI growth to further cash flow for the additional amount of hold time. 

Managing a multifamily asset or portfolio is a hands-on process. It requires staffing, collecting data, aggregating actionable reports and on-site troubleshooting, just to name a few. Rethinking property operations to streamline tedious tasks and enable remote community management keeps owners competitive and improves investor returns despite rising costs during extended holds.

Owners are adopting new operating strategies, including:

• Remote security management to streamline operations
• Eliminating keys and key management
• The simplification of resident management
• Implementing self-guided property tours to expedite leasing

Download our white paper for more details about the innovative ways multifamily owners are rethinking property operations to offset costs of accelerating inflation.