McDowell on Addressing Inflation: Rising Interest Rates and Their Impact on Real Estate Investments

Every now and then, interest rates would skyrocket, and such an increase would have varying effects on diverse asset classes. In such cases, rising rates would consume the principal of bonds and influence the value of stocks, interest payments on debt, and other financial assets. Despite such adverse impacts, however, other areas tend to perform exceptionally well in a rising rate environment. These include real estate investments wherein income-generating real property and multifamily have historically demonstrated a greater potency to grow net income during expansionary periods compared to securities and alternative assets.

According to the Bureau of Labor Statistics, the U.S. inflation rate increased 6.8% over the previous year and is held to be the largest year-over-year rise since 1982. In addition, information from the S&P CoreLogic Case-Shiller Indices indicates that house prices in the United States are continuing their upward trajectory, up 19.8% year over year.

The looming inflation is something that the public should be wary about since it disrupts the economy's pricing systems and forces individuals and entities to manufacture less-than-optimal decisions regarding spending, saving, and investment. At the end of the day, ineffective decisions can reduce earnings, slow economic progression, and lower living standards. These far-reaching distortions support the idea that inflation is kept low to stabilize the economy and encourage the productive utilization of resources.

In times of inflation, owning real estate has proven to be one of the best courses of action that anyone can take. True enough, owners will get to benefit from the appreciation as property values keep pace with inflation. On top of that, there have also been more price increases since there are fewer real estate development projects due to rising labor, material, machinery and alternate costs, and property supply slumps. As housing development slows and demand for existing properties rises, occupancy rates typically shoot up. In such environments, landlords raise rents, generating higher revenues.

Inflation in the U.S. hit multi-decade highs in 2021 primarily because of robust economic growth, manpower shortages and hampered supply chains. Last December 2021, CBRE research made a statement regarding the economic state. "Despite doubt from the omicron variant and other risks, a growing economy will fuel demand for space and increase real estate investment over all property types," it said. The firm also explained that interest rates would not rise sufficiently to harm real estate markets, with the 10-year Treasury yield forecast to hit 2.3% by the end of 2022.

Although 2021 was a rough year for the industry, this year is expected to be a positive one for the real estate landscape. In a volatile global market, privately owned and high-quality real estate with lasting income streams can constitute a prime allotment choice. With comparatively high yields, low volatility, and respective portfolio diversification benefits, real estate has systematically been favored by advisors and investors because of its ability to brave inflationary pressures while preserving and building value.

Taking heed of the current economic situation, Colin McDowell has addressed himself to the challenge of equipping individuals with the necessary tools and technical know-how to help them conquer their respective endeavors. Widely acknowledged for his unrivaled expertise and unmatched skills, Colin has led and consulted for Fortune 500 Financial Banks and Companies for over 17 years. He has also served on the board of two real estate development firms and continues to serve the mortgage and real estate space.