What Are “Sticky” Real Estate Investments & How Do They Hedge Against Inflation

by | Nov 8, 2022 | Investing Process, Passive Investing, Real Estate Investing 101 | 0 comments

Real estate investors, along with the rest of the world, are experiencing an inflationary environment. Even investors with a diversified portfolio are looking for more ways to create an inflation hedge.

You’re feeling this same decline in purchasing power at home as you pay more daily at the pump, face rising energy costs, and see the cost of food and clothing shoot upward for your entire family. You want to make sure your family is well-provided for even in challenging times.

One of the best ways to hedge against inflation is real estate investing in “sticky assets.”

Let’s take a quick look at our economic environment, the definition of “sticky” real estate, and how specific types of real estate can hedge against inflation.

Rising Consumer Price Index and Interest Rates

As I write this, the combination of the COVID pandemic, the lingering supply chain shortages it caused across the globe, and the war between Russia and Ukraine have the world reeling under rising inflation.

The Federal Reserve has been raising interest rates this year with the hope of curbing high inflation.

As consumers see their monthly payments go up in almost every area, investors are looking for an investment strategy that will work as an inflation hedge, provide income, and create long-term cash flow if inflation hits even harder.

This is where the “sticky” asset classes of real estate come into play. Although real estate prices have risen dramatically in recent years, not all commercial real estate provides the same long-term value and rental income that you want from real estate investing.

Because you entered real estate to avoid the fluctuations of the stock market, maintain your level of purchasing power, and gain inflation protection, let’s define the term “sticky” and how such investments can work for you.

Defining “Sticky” Real Estate Assets

“Sticky” real estate is the idea that a property’s revenue stream is consistent over the long term. Commercial real estate is valued by its tenants and the degree to which it produces income.

The values of private real estate, like houses, are often evaluated based on their location. The improvements the neighbors make (or don’t make) affect your home value, too!

However, commercial properties are valued based on their revenue streams and the consistency of those revenue streams.

For example, while an office space might have a 95% occupancy rate, that rate alone doesn’t make it a sticky asset class. You also need to look at how likely the tenants are to stay in that building over the long term.

Many office buildings do not fall under the umbrella of “sticky” real estate because of various factors such as remote work and ease of moving from one building to another. These office buildings find it difficult to raise rents because the demand is generally low. This keeps investors from having a higher rental income.

However, doctors’ offices and other medical buildings are often considered sticky because of the amount of money that goes into building a medical building’s infrastructure. The medical corporation, rather than the landlord, is usually investing millions in a specialized infrastructure that will keep them in the building for the long term.

These tenants will usually remain even if property prices go up because they would need even more money to invest in a new building. Such office buildings are considered “sticky.”

An investment strategy that focuses on “sticky” real estate investments has the potential to stay strong in the face of high interest rates, a steep inflation rate, and a fluctuating stock market.

So how does a real estate investment hedge against inflation?

Real estate investing in sticky asset classes can hedge against inflation and bolster your portfolio against a future that may see interest rates rise further.

Multifamily units are often in great demand during a period of high inflation and high interest rates. If families have to downsize their lifestyle as inflation rises, they often move into an apartment or condominium. This property sector often sees consistent income even during an economic downturn.

Storage units can be a good hedge against inflation. People who can’t find housing due to high demand or those who move into multifamily units due to housing prices often turn to storage units. They’ll put the majority of their belongings in storage while they live a more minimal lifestyle. Storage units, in this case, can provide positive cash flow and passive income for real estate investors.

Because real estate rental properties that fall under the “sticky” asset class are often in high demand no matter the economic situation, they are usually a strong source of passive income and a great hedge against inflation.

Related article: Why Investing in Real Estate is a Great Hedge Against Inflation

 

Real Estate Investment Trusts or Real Estate Syndications?

Real estate investment trusts (REITs) work more like the stock market and may see fluctuations similar to stock prices. Real estate syndications, on the other hand, usually require more up-front investments, but often provide a more stable source of passive income. Alternative investments like real estate syndications can offer you access to “sticky” assets that can hedge against inflation, even if you don’t have millions of dollars to buy commercial real estate on your own.

Face the Future with Confidence through Strong Investments

You can’t control the Federal Reserve or overall consumer prices. What you can do is pursue an investment portfolio that contains commercial property with solid infrastructure, long-term tenants, and the potential for rising rents.

Even as inflation rises, your confidence can rise, too, knowing you are seeking sound investment advice by understanding how “sticky” assets can help you reach your financial potential during shaky economic times.

Your peace of mind will allow you to focus on your family and not on your worries about inflation, recessions, or any number of other problems on the horizon. Allow investments in “sticky” assets to provide for your family and create a sense of security in an insecure world.

Further reading: How to Weather a Storm—5 Ways to Diversify for Long-Term Growth