Market Commentary | November 8, 2021

by | Nov 8, 2021 | Market Commentary |

Over the last few months, two topics have dominated economic/investment debate:  the pace and strength of economic recovery and surging inflation.  After just a half hour’s television broadcast, the topic count was reduced to only one.

In his appearance on CNBC’s Squawk Box this morning, Dr. Scott Gottlieb declared that the “End of the COVID pandemic is in sight.  He was commenting on the imminent FDA approval of Pfizer’s protease inhibitor drug Paxlovid and its high efficacy in preventing hospitalization or death in people at high risk of contracting severe COVID-19.

Ten minutes later, the same program shared the Labor Department report that 531,000 new jobs were created in October bringing the unemployment rate down to 4.6%.  The same report detailed that the average hourly wage for private sector workers rose 0.4% over the prior month and 4.9% compared to the year ago period. This rate of wage inflation is more than twice the Fed’s 2% overall target.

Labor costs are not the only prices rising. The Case Shiller National Home Price Index is up 19.8% Y-O-Y.  West Texas Intermediate Crude (WTI) is up 67.95% year to date. If you’ve been to the grocery store, you know that almost every item in your shopping cart is going to cost you more.

As investors we’re concerned that inflation is going to erode the purchasing power of our capital and the income it produces. We are looking for assets that will hedge against the deleterious effects of inflation. In certain circumstances, real estate works wonderfully in this hedging capacity.

We are now about ¾ through 3rd quarter earnings season and the results demonstrate how various property types respond to the changing economy.  Multifamily housing, industrial/logistics, and even retail sectors each reported high single digit rent roll-ups in renewal leases and rate gains of as high as 20% on new lease signings.  Higher grain and lumber prices translate to higher lease rates on our farmland and more profitable harvests on our timberland, respectively.

For REIT investors this creates a virtuous cycle. Higher rents become higher earnings. Higher earnings afford dividend increases. Dividend increases translate to higher share prices.  Real estate doesn’t just hedge against inflation, it can capture it.

So far this year more than 80 equity REITs have hiked their dividends, some more than once.  We own many of them. We seem to be in the right places but will keep our eyes open for new opportunity in the changing environment.


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