It has been many years since investors have had to position their portfolios to hedge against inflationary risks. While it’s a subject perennially discussed by the financial community, the fact is that the United States has been very effective at keeping inflation within the targeted 2% range since the 1980s. Since then, inflation has been kept within a narrow band, and with it, interest rates have steadily marched lower over the years, supporting asset prices.
The benign inflationary environment has tempted central banks to be extremely liberal with their monetary tools. The global financial crisis began the trend of aggressive monetary intervention into the economy, as there was seemingly no consequence to the supply of endless, economy-boosting liquidity injections into the system to flatter GDP growth rates.
However, the onset of the COVID-19 epidemic appears to have altered that dynamic, as unprecedented levels of stimulus has been deployed both from the monetary and fiscal sides of the house. While the effects of these initiatives was a dramatic stabilization of asset prices during the peaks of the pandemic, as economies reopen, consumers and businesses are flushed with levels of liquidity never been seen. The amount of enhanced spending on the horizon is increasingly being priced in by the markets, resulting in meaningful increases in commodity prices.
This leads to the obvious question: “How can investors position their portfolios to protect and benefit from the risk of inflation?”
Eli Weiner, The BoaVida Group
I have been investing in mobile home parks for more than 20 years, seen several economic cycles and have experienced the fortunate outcome of never losing my or other investors’ money. I’ve always used the buy and hold strategy, and I’m often asked, “How does your investment and cashflow keep up with inflation? Aren’t you concerned that by never selling and holding an asset for perpetuity you won’t keep up with market rates?”
The answer is that tenants in mobile home parks have month-to-month leases which can follow virtually any pace of inflation immediately and for perpetuity. In comparison, other commercial real estate asset classes, such as retail, have much longer terms for their tenants and, in some cases, can have no rent increases during their term.
Another concern is keeping up with market rent, what value renters get for it, and what the real rate drivers are. Since average space rent for mobile home parks in the US is around $300 per month, this is well under half the average apartment rental rate – around $1,200 per month. With its affordability, the mobile home park space has a lot of room to grow even in a state of high inflation.
Mobile home parks also provide one of the most affordable forms of single-family housing available. With the average new manufactured home price starting from $75,000 and the average site-built home price approaching $350,000, there is really no competition. Today’s manufactured home features compete with entry level site-built homes, leaving high demand for such housing.
With trillions of newly printed dollars in the system, this is one sign that we’re going to start seeing an imminent devaluation of the dollar, thus inflation. If you were in a fixed income investment that did not have the ability to grow with inflation, at a rate of 3-5% for just three years, that’s over a 10% loss on your investment.
David Papson, CDT Capital Management
Looking at the numbers, U.S. money supply, as measured by the very standard metric of “M2,” has increased by roughly 34% between 2019 and 2020, on the back of government fiscal stimulus and monetary easing initiatives in response to the COVID-19 epidemic. To put this in perspective, this implies that nearly a quarter of all money in circulation in our 200-year-old republic is one year old or less. This gives us pause, and investors are right to be concerned about the implications on their hard-earned savings.
When it comes to navigating any economic environment, including inflation, watching the trend of insider money, or the purchase activities of the executives who run Fortune 500 companies, can be particularly instructive. Insiders have a unique perspective, as they possess an asymmetric informational advantage over normal shareholders. In order for an insider to get sufficiently excited to put their own capital at risk, typically a meaningful or significant event to the business is on the horizon, and insider buying can signal that there is value yet to be discovered by the market.
Sometimes these events are obvious, and sometimes they are unforeseen. The case of inflation likely falls in the former bucket. Examining insider activity, one can observe that in September of last year, insiders of companies where inflation would benefit started buying shares in meaningful quantities, particularly in the basic materials, financial institution, and consumer staples sectors.
The case for basic materials businesses is quite clear, as inflationary forces strongly influence the price of the commodities produced by these companies. For example, Cleveland Cliffs, a steel producer located in the Midwest, is experiencing strong favorable impacts from inflation, as the price of steel is up over 100% from averages. However, because the company has costs that are largely fixed, any increase in price goes straight to the bottom line. This is an example how investors can position themselves to benefit from inflationary pressures.
Consumer staples is another sector to pay attention, though investors should be weary that inflation can have positive or negative impacts on companies in this sector. The alcohol industry is one sub-sector that will likely benefit, as consumer demand is relatively unaffected by price, so commodity inflation can likely be passed through readily. Further, the industry benefits from economies reopening and customers returning to consumption away from home, while also having defensive characteristics should COVID-19 resurge and lockdowns reoccur.
Josh Fischer, Birgo Capital
During periods of inflation, investors are faced with a problem: Although the value of their holdings continues to increase over time, the value may not increase fast enough to outpace inflation. Inflation isn’t homogenous, and some industries and asset classes can adjust pricing faster than others. And of course, if an investor is sitting on large piles of cash, purchasing power is eroding by the minute.
What’s the solution? Call us biased, but we think that multifamily real estate is about as good as it gets for an investor looking for a hedge against inflation.
In the real estate space, returns are a function of two numbers: income, and expenses. Inflation can affect both sides of the equation, but multifamily real estate empowers investors to adjust their strategy to beat it.
How? As prices rise, so do wages, and eventually, rents. And while all types of investment real estate can protect investors from inflation, we think multifamily offers the greatest level of protection.
Unlike office, residential, and industrial real estate – which typically have leases locked in for five, ten, fifteen, or even twenty years – residential leases are much shorter in duration, almost always somewhere in the six-to-twenty-four-month range, with one year being the standard. This shorter duration allows multifamily real estate investors to adjust prices at lightning speed relative to other asset types.
Increasing rents allows multifamily investors to scale their incoming cash flows in keeping with inflation. And because tenants’ tolerance for rent increases is tied to income, this strategy allows investors to weather inflationary environments – as income rises, rents can rise with it.
Meanwhile, on the expense side of the P&L, things inflate at a comparatively measured pace. Property taxes, insurance, utilities, and so forth will certainly start to trend upward in an inflationary environment, but far less quickly than income and rents. Similarly, the mortgage payment on your apartment building is locked in for a much longer term, further boosting near-term levered returns.
As such, inflation can actually be a boon for multifamily real estate investors in the short term, because it affords them the opportunity to capture value in an expansionary economy without materially increased expenses — widening profit margins and enhancing returns.
Elias Weiner is the founder of The BoaVida Group, a real estate investment company which owns and operates over 140 manufactured home communities and RV parks with more than 15,600 spaces. He is one of the top 10 largest owner and operators of manufactured home communities in the country, and the largest owner his age.Eli’s companies operate in 26 states throughout the country. On a daily basis, Eli is actively involved in company marketing, management of property development, targeting new acquisitions, due diligence, home sales and general management decisions.
What makes Eli unique and sets him apart from his competition is his ground-up, bootstrapping beginnings in the business. He began in 2000 as a mobile home salesperson selling brand-new homes into empty spaces in mobile home parks while attending UC Davis. One year later at the age of 22 he co-founded Woodcrest Homes, a manufactured home dealership that specialized in in-park sales. For 17 years, Eli has run a successful manufactured home dealership, sold more than 1,000 homes and has a reputation throughout California as one of the few mobile home park buyers that can fill vacant spaces just about anywhere.
Eli is involved in several local charities including Fellowship of Christian Athletes, Keaton’s Child Cancer Alliance, and Compassion Planet.
In his spare time, Eli enjoys some ping pong, surfing, driving his red Chevelle convertible, and spending time with family. Eli is proud of the one professional headshot he has ever taken (not pictured).
Josh is principal at Birgo Capital and is primarily responsible for all aspects of acquisitions including prospecting, deal screening, underwriting, negotiations, due diligence, and closing. He has successfully sourced and closed on approximately $200 million of investment real estate. Josh also oversees capital raises for funds, Birgo’s commercial real estate portfolio, and all fund marketing campaigns.
Birgo Capital is a private equity real estate investment firm based in Pittsburgh, Pennsylvania. The firm currently has over $200 million in assets under management, including 2,000+ residential units and 325,000 square feet of service-oriented retail space and diversified office buildings.
David Papson co-founded CDT Capital Management in 2017. As the company’s Chief Investment Officer, Mr. Papson is responsible for the management of CDT’s investment portfolio and the execution of the fund’s hedging strategy. Prior to founding CDT, Mr. Papson held multiple leadership roles with increasing responsibility within Fiserv, Inc.’s credit risk team. Mr. Papson graduated from New York University with Magna Cum Laude honors and holds a B.A. in Economics.