Surging Inflation Draws Capital Flows To Real Estate
Inflation is running at its highest rate since 1981. That was a time when the economy was in a recession and jobs were hard to find. So hard, that college grads were standing in line to join the military – and not for officer candidate positions – just job security and benefits.
Today’s inflationary environment is quite different as it comes at a time when jobs are aplenty, and the economy is still benefiting from government stimulus. It can take months for each injection of QE to work its way into and through the financial system. So, as the Fed officially turned off the spigot at the end of March, the effects of QE tailwinds should be felt at least through the end of the third quarter.
Just a couple takeaways from this week’s CPI report that showed annual inflation surging 8.5% higher than a year ago: The stock market initially rallied on the headline as the narrative took hold that it’s hard to believe things can get any worse and peak inflation is setting in. This is the “hopium” narrative. I believe the more pragmatic narrative reveals a broadening of inflationary pressures that will force the Fed to raise rates by a half-point at the May 4 FOMC meeting.
The bond market has currently priced in no less than nine quarter-point hikes in the Fed Funds Rate by year-end. For owners of real estate, a hot CPI number may afford landlords the opportunity to raise rents indexed to CPI and increase cash flow, resulting in potentially higher distributions for investors. And rising rates have the capacity to just keep money flowing out of the bond market and into inflation-sensitive income-producing real estate as one of the quintessential inflation hedges.
This past week, a number of Senators, including Tim Scott (R-SC) and Cory Booker (D-NJ), as well as Representatives, including Ron Kind (D-WI) and Mike Kelly (R-PA), introduced a bipartisan, bicameral bill called the Opportunity Zones Transparency, Extension and Improvement Act (the “OZ Improvement Act”), which is designed to, among other things, enhance and lengthen the benefits for investors seeking to buy into Qualified Opportunity Zone Funds (QOFs). Below is a summary of some of the most relevant parts of the bill in its current form:
Cody H. Laidlaw
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Disclosure: Cody H. Laidlaw is the Chief Investor Relations Officer. Cody is also an investment advisor representative with Seaside Advisory Services, Inc. (d/b/a Seaside Financial & Insurance Services), a SEC registered investment adviser offering advisory accounts and services, and holds a long position in Belpointe PREP, LLC’s Class A units.
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