A “gotcha moment” clearly has something in common with a “Eureka moment” in terms of the flash of insight or understanding. We have been telling investors for over a year now that inflation is coming and they had best prepare for it.
Unfortunately, our message has been dismissed as over cautious, as alarmist or downright kooky. This dismissive attitude is easily understood in light of the average investor and financial professional’s profile. Many are young, having had no personal experience with inflation. As mentioned in a previous blog, we have not experienced inflation of 5% or more over a 12 month period of time since 1991.
Furthermore, both Fed Chief Jerome Powell and Treasury Secretary Janet Yellen have made a point of reassuring both markets and investors the inflationary spike occurring now is transitory and not something to worry about.
Their phlegmatic response is understandable in light of the fact they are largely responsible for it. Fed Chairman Powell spent much of the last year running door to door on Capitol Hill urging lawmakers that now was not the time to economize where borrowing and spending was concerned. The economy was teetering in the balance so they must all go big or go home.
In so doing he catered to the natural instincts of the political class to spend rather than save and for a short time was the most popular man in our nation’s capitol.
Unfortunately, all this comes at a cost and the cost is inflation, concomitant debasement of the currency, eradication of middle class savings, impoverishment of the working class which will ultimately result in increased dependency upon the state and the privileged elite that run it.
With these “transitory” signs of inflation now threatening the stability of capital markets and the value of investors portfolios, we hope the latter are finally having their own “Gotcha moment.” Kind of hard not to when for the first time in a generation the topic of inflation is front page WSJ news. Guess you should have listened to us.
In an environment like this, we believe it is nearly impossible to overestimate the importance of operating assets in an income property portfolio. We have elaborated on this at some length in the past. Operating assets are different from single tenant net lease assets from the standpoint they are priced largely on rental income stream vs. lease duration.
However, in an inflationary environment the most important and compelling difference from an investment standpoint is their short lease intervals. Assuming full occupancy, rents may be increased more frequently than that of most highly structured single tenant net lease assets.
In this way, they may serve the landlord by being in a better position to strive to keep up with inflation. If your rental income stream has the potential to be increased frequently, it may blunt the reduction in purchasing power inflation inevitably bring in its wake.
Furthermore, this is real property. And real property as realized in the DST format must be fully stabilized and cash flowing. As such, it is developed property comprised of many of the physical commodities that are a primary source of input costs for the inflation index. If inflation continues to drive these costs higher, the value of existing construction may very well follow.
This is obviously a complex and delicate balancing act. However, if the current inflationary spike proves more lasting and difficult to tame than Powell and Yellen think, you may be thankful of any mitigation to that risk offered by your equity and cash flow potential.
Given the very real threat of inflation and capital markets volatility this may bring in its wake, real estate may continue to offer a hard-asset shield against continuing currency debasement. This may prove especially true in no income tax stares like Florida and Texas.