By CJ Follini, Managing Principal of NOYACK Logistics Income REIT (NLI), a fast-growing alternative investment management company displaying the latest innovations of Web3 - blockchain tools and tokenization - to securitize their investment offerings.
During times of high inflation -- whether or not there's high or low economic growth -- REITs have outperformed other major investment classes.
If you are invested in the stock market, we don’t have to be the ones to tell you what happens to your portfolio when the CPI is rising at 7%+. With rising rates and low consumer confidence, the stock market doesn’t look to be improving. So where should you turn to hedge inflation and protect your principal? Whether the Fed’s rate moves can slow inflation effectively or not, real assets and rents tend to “inflate with inflation.” As a result, real estate investment trusts (REITs) are an asset class that can offer protection against inflation.
How much protection could a REIT offer to investors in times of high inflation? Potentially, a lot.
During times of high inflation — whether or not there’s high or low economic growth — REITs have outperformed other major investment classes, including government bonds, stocks, and investment-grade bonds.
The Relationship Between REITs and Inflation
To find out just how REITs performed compared to other investment choices, we looked at some of our past peak inflation periods. What did we find out?
For the past 20 years, REITs outperformed a range of other asset classes when inflation peaked – whether economic growth was considered low or high.
Historical Analysis of REITs and Interest Rates
Another reason to invest in a commercial REIT: tax advantages
The rate of return on your investments is an important consideration, but so are tax implications.
Real estate investment trusts offer tax advantages that start with their requirements to be a REIT. A REIT must distribute at least 90 percent of its taxable income to its shareholders, but 100% of these distributions are not taxable at the same rate as ordinary rental property income, i.e., if you chose to invest in real estate directly.
A privately-held commercial REIT like NOYACK’s NLI (NOYACK Logistics Income REIT) directly invests in commercial real estate and may provide tax benefits. Of course, your financial situation is unique and in evaluating any tax implications of investing in a commercial REIT, you should consult with your financial advisor.
Private REITs can produce higher returns whether or not it’s a time of high inflation
Inflation is continuing to rise. That’s an important consideration, but commercial REITS can perform better than other investment vehicles whether inflation rates are high or low. Part of the reason for their strong performance is the nature of commercial real estate. Commercial leases are generally long-term that allow for annual increases.
REITs are an effective hedge against inflation because rent is typically more predictable than other essential living expenses. Long-term leases generally have built-in protection from inflation, and short-term leases are normally based on the current market. Furthermore, REITs maintain a portfolio of leases, some of which they renegotiate each year, allowing them to change the price even on long-term leases. REIT portfolios also appreciate in addition to price increases on leases since REITs own the properties in their portfolios.
According to Nareit, REITs have historically delivered good market returns and had a good fundamental operating performance during times of moderate inflation. Nareit’s analysis of REIT performance as compared to the S&P 500 between the 1970s and now shows that REIT returns outperformed the stock market in 56% of 12-month periods with high inflation, and over 80% of the 12-month periods that had high inflation that was continuing to go up.
The way that leases work in any real estate sector contributes to the ability of REITs to offer reasonable protection during inflation. Long-term leases have inflationary protection built in. Short-term leases also respond to inflation and can increase with the consumer price index. When it comes to specialized REITs that invest in industrial logistics or other industrial REIT investment vehicles, leases are also long-term and have built-in inflationary protection.
Take a look at REIT performance compared to 10-year treasury yields. An in-depth S&P study confirmed that REITS have strongly outperformed Treasury yields since the 1970s with two exceptions during the late 1980s and mid-1990s. During the late 1990s moving into 2001, REITS performed similarly to the stock market, but still provided a 27.4% better return than 10-year Treasury bonds.
In two periods during this time, mortgage REITs outperformed Treasury yields and the stock market. Between 1976 and 1981, 10-year Treasury yields started out returning 6.9%, growing to 15.3% returns. The stock market returned 46% during the five-year period. How did REITs do during that time? A whopping 137.4% return.
Great REIT Returns During Late 70s/Early 1980s
According to the Chicago Tribune, using data from Freddie Mac, in 1976, a 30-year fixed-rate mortgage averaged 8.7% interest, rising to 11.2% in 1979. By 1981, mortgage interest rates went up to 16.63%: an all-time high. The wild, disruptive economy of the late 70s/early 80s is the environment in past decades where REITs showed some of their strongest performance and returns to investors.
Another High Point: 2003-2006
REITs outperformed Treasury yields and the stock market between 2003 and 2006 as well, according to S&P’s analysis. Treasuries offered 3.3% return in June 2003, and three years later, they were offering a 5.1% return. The stock market performed well during this period, with more than a 37% return. So, how did REITs do? They performed 108% better than 10-year Treasury notes and 70% better than the stock market.
Mortgage interest rates back when the top TV show was the original CSI were similar to those we’ve seen recently. In 2003, the average 30-year mortgage interest rate was 5.83%, and in 2006, it was 5.87%.
Other Higher-Interest Rate Cycles and REITs
REITs outperformed 10-year Treasury notes during four of the prior six interest rate growth cycles and outpaced the stock market during three of these periods. As you can see from our analysis, blanket statements like “When interest rates rise, REITs underperform” don’t represent the complete picture or even the majority of the picture.
Real estate management teams can achieve investment returns that outpace inflation through strategic selection of properties, excellent management, and well-structured lease and finance terms. Establishing long-term relationships with commercial developers contributes to long-term value for properties. Experience and the ability to interpret demographic and economic data also help to boost profitability that can outpace inflation.
Invest in a REIT that Outpaces Inflation
The studies we’ve covered encompass all REITs, including residential real estate, mortgage-backed securities, and commercial real estate. You can find REITs that invest in clean energy infrastructure and REITs that combine direct property ownership, mortgages, and real estate securities.
When it comes to investment portfolios, volatility is a concern. No one wants to see wild shifts in investment earnings or dividends. While every investment could potentially experience volatility, the way REITs are structured and the types of properties they invest in help to provide more stability in terms of dividend income and long-term earnings. REITs that are linked to equity or mortgages, or hybrid REITs that combine both, are able to weather economic volatility and tend to provide more stable returns and growth. Within the REIT sector, there are some options that provide better assurance of a strong yield rate, especially logistics and warehouse REITs in the US that invest in industrial assets. Here are some of the reasons to consider investing in not just any REIT, but a U.S. Logistics REIT.
Logistics and Industrial REITs Can Offer Steady Cash Flow
Industrial and logistic REITs are able to offer steady cash flow for several reasons. They invest in an essential part of the economy that includes light manufacturing facilities that make food and essential products. They also can invest in cold storage facilities, warehouses, and product fulfillment centers.
Income from logistics properties comes from long-term leases, which can extend to 25 years. Industrial leases also usually have triple-net leasing structures. Tenants are not only long-term, they also pay for building insurance, maintenance, and real estate taxes. The result is reliable, steady cash flow to the REIT as well as to investors.
All posts are the opinion of the contributing author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CAIA Association or the author’s employer.
About the Author:
CJ Follini is the Managing Principal of NOYACK Logistics Income REIT (NLI), a fast-growing alternative investment management company displaying the latest innovations of Web3 - blockchain tools and tokenization - to securitize their investment offerings. Noyack's offerings include a high Sharpe ratio and a high yield-driven REIT. Noyack’s commitment to innovation, and focus on the future way people invest, led Noyack to be the first REIT to accept Cryptocurrency as a method of funding an investment.
Further, CJ Follini has more than 38 years of investment experience in commercial real estate and venture capital. His real estate career began in his teens when he took leadership over the management and disposition of his family’s eight-figure industrial portfolio and successfully yielded in excess of a 20% IRR.
Since 1990, CJ has been a leading investment expert on alternative real estate assets including healthcare, cold storage logistics, structured parking, media infrastructure, and Qualified Opportunity Zone development. CJ is on the Board of Advisors for the Economic Innovation Group, the bipartisan council responsible for proposing the legislation that created Qualified Opportunity Zones.
A few of CJ’s real estate career highlights include:
- Development of a 400-acre site with Rockefeller Group Properties for the expansion of their renowned International Trade Center in Mount Olive, New Jersey.
- The creation and disposition of a $300MM healthcare real estate portfolio yielding over 23.2% IRR for its family office investors.
- Creation and development of the award-winning media infrastructure known as the Gun For Hire ("GFH") Production Centers. He conceived, designed, and built GFH’s 700,000+ square feet of digital media centers in New York, Miami, Vancouver, Toronto, Austin, and Los Angeles.
- His New York center earned him the 1998 Crain’s Magazine Small Business Award
- The Brownfield redevelopment of 13 waterfront acres in the NYC borough of Queens, the largest privately owned waterfront parcel in NYC. This project achieved 3X returns for its investors in four years.
CJ speaks at international conferences on the topics of alternative asset investing. He holds a B.A. from Tufts University, a General Course Degree from London School of Economics, and a degree from Harvard Business School.