Inflation And Multifamily Real Estate, With Andy Hagans

How does inflation affect multifamily real estate? During periods of uncertainty, should investors flock to this asset class, or steer clear?

Andy Hagans, Co-founder of The Alternative Investment Database, joins the show once again to offer insights and perspective.

Click the play button above to listen to our conversation.

Episode Highlights

  • How inflation impacts all assets, including stocks, bonds.
  • Why yields declining in traditional asset classes impacts real estate investing.
  • Why cap rate compression and rising prices aren’t deterring multifamily investors.
  • Comparing multifamily real estate yields vs bond yields in periods of sustained inflation.
  • How multifamily investments can act as a hedge against inflation.
  • Why building new multifamily properties is a recurring theme among sponsors.
  • How population trends and differences in economic outlook for areas of the US are impacting multifamily investor activity.
  • Andy’s thoughts on the multifamily real estate outlook in 2022.

Featured On This Episode

Industry Spotlight: The Alternative Investment Database

AltsDb provides world-class tools, education, and analysis to help individual investors, family offices, financial advisors and industry service providers navigate the ins and outs of the alternative investment landscape. Our goal is to serve as the definitive, trusted authority in the alts industry.

Learn More About The Alternative Investment Database

About The Multifamily Investor Podcast

The Multifamily Investor Podcast covers trends and opportunities in the multifamily real estate universe. Host Scott Hawksworth discusses attractive offerings in the space, including direct investments, DSTs, opportunity zones, REITs, and more.

Show Transcript

Scott: Hello, everyone. My name is Scott Hawksworth and welcome to this next episode of the “Multifamily Investor Podcast”. I’m joined by Andy Hagans. Andy is the cofounder of the Alternative Investment Database. Today, we’re going to be talking about inflation and its impact on multifamily investments and a whole lot more. Andy, welcome to the show.

Andy: Thanks for having me, Scott.

Scott: Well, thank you for being here. How has your holiday season been so far?

Andy: It’s been great. No complaints. I’ve had a restful week and I’m ready to get back to work.

Scott: Awesome. Well, with getting back to work, we wanna talk about inflation and multifamily. To kick things off, we’re in this inflationary cycle so my big question is what’s really the impact of inflation on real estate and specifically multifamily real estate?

Andy: Well, Scott, I think actually it’s helpful to zoom out and first just talk about what’s the impact of higher inflation on all kinds of asset prices, right, not just multifamily assets or real estate assets but all assets. And we’ve seen that all kinds of investments have seen, you know, massive price appreciation including the stock market, right. So, take the stock market. Right now, the S&P is yielding, I think, 1.5% to maybe 1.6% dividend yield on the S&P. So, all this liquidity that’s been sloshing around causes prices for investments go to up. So, stocks have gone up.

Bonds have gone up. Of course, the bond market’s heavily manipulated by the Federal Reserve because they’re a gigantic, massive bond buyer so they’re able to manipulate that market a little bit but…and even across other kinds of alternative asset classes, high-end art or, you know, investment art or collectible cars but really, all over the investment landscape, asset prices have gone up. And of course, investors, especially family offices, institutional investors, they have a holistic view and they’re looking for value, they’re looking for yield wherever they can get it. And when I say value, of course it’s relative value, right, because when the price of everything goes up, there’s going to be less absolute value but you’re still looking for that relative value.

So, when the stock market has its huge runup and yields go down both in the stock market and bond market, that means that’s going to affect the real estate market, you know, especially investment vehicles like REITs that are pretty liquid. It’s easy to redeploy capital into them. So, I think in the real estate market we’ve clearly seen yields go down significantly in the past 12 months. Cap rates, they’ve taken a nosedive. So, these assets are getting bid up. But again, I don’t think it’s unique to the real estate market or to multifamily.

I think it’s just a trend across all asset classes. And frankly, I think within real estate and within multifamily, honestly, what investors are saying, how they’re voting with their pocketbooks, is cap rates may be down significantly, prices may be up but this multifamily real estate still might be cheap compared to where the stock market is or compared to where some of these other assets are right now.

Scott: Right. So, I guess to kind of tease that out a bit more, Andy, what’s your take in this sort of inflationary cycle we’re currently in that doesn’t show too many signs of slowing down extensively, at least in the short term? Is multifamily real estate…are these investments something that you think are really good investments and good places to chase returns?

Andy: Sure and, you know, I’ll be talking my book a little bit here. So, I recently made a significant investment in multifamily real estate so I’m long in this asset class. And you’re talking about inflation. That’s what we’re talking about in this episode. Let’s compare real estate, multifamily real estate to bonds for instance. Okay, so what’s the 10 year out? I’m just loading Ten years out, 1.54% today. So that’s the yield you’re gonna get on the 10 year. Now what happens if inflation goes up even further what it is now? I mean, because that yield on a real basis is already negative. But if we have sustained inflation or growing inflation for the next couple of years, that entire yield is gonna get wiped out. Like, 2 or 3 years of inflation are gonna wipe out 10 years of coupon payments on that bond. So really, the only way that you’re gonna get a return on that bond is if interest rates go even lower and the prices get bid up on those funds.

Contrast that to multifamily real estate. Let’s say you purchase or invest in an asset that has a cap rate of 2% or 2.25%. Well, you might say, “Andy, that yield is comparable to the yield on the 10 year. You know, it’s a little bit better.” But think of it this way. If inflation sustains itself at this 6% or 7% we’re at or let’s say that it might even go higher, well, if you own multifamily real estate, that gives you pricing power. Typically, you’re going to pass that inflation on to your tenants with increased rent. And so multifamily allows the owner of the asset to essentially adjust their pricing and adjust their yield in real terms, not in percentage terms but in real terms, based along with that rent market.

And so, if a million-dollar building is yielding $20,000 right now, you might say, “Well, that’s not a great deal.” However, if you lock in that price now and inflation’s 7% in 2022, bam, 8% in 2023, 9% in 2024, all of that cumulative inflation, you’re gonna be able to price that back into your rent as the asset owner. And so, your revenues are going to increase very quickly along with the inflation rate. Contrast that with a bond. Inflation goes up to 7%, 8%, 9%. What happens to your coupon? It’s fixed. It’s fixed at 1.54% and you’re just gonna get murdered. So, I think the historical record of multifamily in inflationary environments has been very, very strong.

And then put that in the context of where we are now which is just this massive housing shortage across the United States where the demand for multifamily housing has literally never been stronger. So multifamily, the appeal is that given that demand, I think investors believe it’s a safe place to park money. There’s always going to be a demand for, you know, a roof over someone’s head, over your family’s head. And at the same time, if we see sustained inflation, there’s an opportunity to have revenue grow along with inflation as well as see appreciation in that asset for, you know, a very attractive total return. I think at the end of the day, it’s that risk to return ratio that looks very attractive in multifamily now even with these elevated asset prices.

Scott: Andy, I mean, I think you’ve broken that down so well and I mean, to put a fine point on it, it’s an argument I’ve made in the multifamily investors guide that I put together that multifamily investments can really act as a hedge against inflation for some of the reasons you were breaking down. I actually…as part of that, there was an article written by some students in Wharton, a research paper and I just wanna read this, during 12-month periods, and this is historically, during 12-month periods of relatively high inflation, the most dependable inflation protection has been provided by commodities, stocks and then they had equity REITs, 68.9% according to that. So that right there shows me, “Hey, this has historically been true and I don’t see, especially given everything you were breaking down there, how that necessarily changes given the environment we’re in right now.

Andy: Yeah, and, you know, I think high net worth investors, they may not know that exact statistic that you have in your guide but I think that they intuitively know it because in 2021…and we’ve covered this at Check out our news coverage, by the way, a little shameless plug. But we’ve covered this. There have been massive inflows to nontraded REITs this past year. NAV REITs are super-hot. So, a lot of investors are locking in their gains with equities and other asset classes and then they’re redeploying that cash into REITs. So, it backs up exactly what you said, Scott. There’s a whole lot of interest in REITs and I see that continuing into 2022.

You know, one other point about these higher prices, cap rates are very compressed right now and so I think investors are seeing, “Well, to go out and buy an asset is gonna be very, very expensive.” And, you know, another news article that we recently published at Alts DB references the fact that some of these holding periods are getting longer. And part of that is that investors are using vehicles like qualified opportunity funds where the investor is rewarded for that longer holding period. But I think there’s also a growing recognition that owning a desirable asset like a very high-quality multifamily asset, owning that over a long period of time, buying and holding great appreciating assets is a great way to not only preserve but to grow wealth.

And I think at the sponsor level what I’m seeing…and we just hosted the Alts Expo. It was our first ever event at the Alternative Investment Database. Very, very popular. We had great engagement and great attendance. And one recurring theme…we had several sponsors there with multifamily, qualified opportunity funds or other types of private funds for accredited investors and one theme I saw over and over from the sponsors, what they were saying was, “Look, we can go out and buy a multifamily asset but we can essentially build one for the same cost and, you know, have that entire asset be brand new without the beat-up roof and, you know, beat-up fixtures, right, and all that sort of thing.”

So of course, there’s risk. There’s always risk involved in a build. You know, you have the time involved, the risk that a project will be delayed, that it’ll get behind schedule. There’s also a lot of uncertainty in the labor market. There’s uncertainty on the supply…

Scott: Materials.

Andy: Yeah. So, there’s a lot of risk and there’s a lot of uncertainty but at the end of the day, with prices bid up on these assets, I think a lot of people are still investing but they’re investing to build. And I think that’s a great thing. I mean, honestly, zooming out, taking off my investor hat for a second, just the fact that, you know, there’s so much investor thesis and belief in building more multifamily across the United States, that’s a fantastic thing. Of course, you also wanna look where they’re building, right. They tend to be building more, you know, in the Sun Belt, in the south, in these parts of the country that the mainstream media likes to mock a lot of the time.

Scott: Yeah.

Andy: It turns out a lot of people are moving to those areas of the country. So, there’s, you know, incredible demand for multifamily housing there and it’s also just a lot cheaper to build. There’s less regulation, you know. Trying to build anything in California or New York City is just a headache or a heavy lift that a lot of sponsors don’t wanna deal with. But it’s great to see so much investment in new multifamily housing and, you know, that’s gonna pay off for citizens of our country down the road just in terms of more affordable housing in desirable places to live.

Scott: Absolutely. And, I mean, to add to that, you look at the job growth in some of these areas and the need for workforce and all of that. That all ties into greater need for multifamily properties. And a lot of these sponsors, they have done so much work to really target where they are going to do these builds and really cracked something that is gonna be easy to stabilize and fill and they kind of have that baked into the cake so to speak, right.

Andy: Absolutely. And I mean, you look where the most investor interest is in building, right. You look at Colorado with the Mountain West. You look at Arizona, the Sun Belt, Texas. And then just all throughout the south, a lot of up-and-coming cities in the south that are attracting residents with, you know, great labor markets, job markets, still relatively affordable real estate although that, you know, begins to change the more and more people move to a city. But really just, you know, less regulation and especially from that builder’s standpoint, you know, trying to get a project off the ground, trying to build it to completion, you know, and then rent it out and stabilize it, it’s just a lot more attractive proposition in some of these southern cities. So that’s where a lot of sponsors are building right now. I mean, even sponsors that, like, their office might be in Chicago or New York City and they’ll tell you, “We would never build in New York.”

Scott: Right.

Andy: “All of our projects are in the south or Mountain West or Sun Belt or wherever.” So just a whole lot of investor interest. And I mean, frankly, it’s a good thing that there is. If you look at the population patterns in the past year during the COVID lockdowns and how many people left California, how many people left New York City and moved to the Sun Belt or moved south, moved to Florida, you know, we need housing and it can’t be all single-family housing. We need multifamily. So, I think that’s a pretty cool thing too. If you’re a multifamily investor, you’re putting your money to work, obviously, you’re enticed by those potentially attractive returns, the potential tax benefits that are very attractive. But it’s also nice to think that you’re putting your money to work, your capital to work in a project that, you know, it’s gonna help people. It’s gonna ultimately deliver good, more affordable housing to places where we need it.

Scott: You know, and to kind of drive that point home further, we’ve also seen this in the general price appreciation across the real estate market and really, it’s happening all over the United States but it really is appreciating faster in those areas that we’re talking about, in those southwest areas and things like that because…

Andy: Red states, Scott. I think we can say it, you know.

Scott: The red states, yeah, because I was reading an article yesterday and Chicago where I reside, I love it here but wow, real-estate prices have appreciated here. It’s lagging behind the rest of the country and just not appreciating at the same level. So, the proof is in the numbers right there.

Andy: Yeah, and we both know people who’ve left Chicago in the past, you know, 12 months for a variety of reasons. So, you don’t even need to politically agree one way or the other or maybe you’re a moderate or none of the above. It doesn’t matter in terms of the investment thesis, though. I think a lot of investor money is, you know, flowing into these areas that have less regulation and that citizens can vote with their feet. One of the great things about our nation is that you have a right to move to another state which I’ve done several times and, you know, a lot of people have done.

Scott: Exactly.

Andy: So, you know, they’re taking advantage and I think that the investor money and the capital follows that trend. So, you know, there’s no need to be political about it. I think you can just look at it objectively and say, “What does the census say?” And then how has that accelerated since COVID and since some of these lockdowns. But I think investors that have invested in a lot of these cities across the south and Texas and the Sun Belt and the Mountain West, they’re poised to have incredible returns because of those investments that they’ve made.

So even though prices, frankly, they’ve been bid up and cap rates are pretty compressed, I think if you look at your portfolio from that overall perspective, I still think that multifamily represents a relative attractive value. And, you know, if you can invest in it inside of a tax advantage wrapper, if you can 1031 into a DST or if you can take some capital gains and plow those into a qualified opportunity fund, then now you take, you know, already pretty attractive returns. You add that tax benefit and they look much juicier on an after-tax benefit.

Scott: Yeah, exactly, exactly. And you mentioned COVID and one point I’d also want to make is how there’s been this work from home virtual revolution that has really not seemed to slow down as much. And so, when people can vote with their feet and they can move wherever they want and then you’re saying, “Wait, I can keep that nice job that’s headquartered in Chicago but I can actually avoid Chicago winters and live in Phoenix,” you know, that’s pretty attractive to a homeowner. And so, I think that also drives things as well.

Andy: Right, or, you know, let’s say that you’re a couple in the Bay Area and you’re earning mid-six figures but you still can’t afford to buy a house, even if you do have to take a salary cut and move into Omaha or suburb of Phoenix, starts to look like, “Wow, I could have a pretty nice lifestyle there.” So, I think that’s the decision that a lot of individual people, a lot of individual families are making and I think you just see the capital following those individual decisions.

Scott: So, Andy, kind of shifting gears. I mean, I think we’ve been talking a lot about the opportunity there. As we look to 2022, we are in this inflationary cycle. I’m curious to your take on where you think things might go as we sort of close the books on 2021 and we’re kind of considering investments and multifamily real estate itself.

Andy: You know, as far as underwriting those, Scott, one thing to keep in mind, cap rates are super compressed, okay. That’s true. I don’t see that changing because there’s still a lot of liquidity sloshing around. And I think in your underwriting model you have to remember that if inflation sustains itself above that 6% level for the next two to three years, that’s gonna be built into the rent market as well. So, I see rent prices are probably gonna increase substantially in the next couple of years. So, when you kinda look at it that way, the cap rate doesn’t seem quite so bad.

I do think it’s likely that we’re gonna see continued tightness in the labor market to put it lightly and that we’re going to see continued challenges in our supply chain, again, to put it lightly. So, I don’t see inflation bouncing back down to 2% or 3%. And if it does, if the CPI print is 2% to 3%, I think a lot of people just aren’t going to believe it because there’s a lot of gamesmanship and a lot of subjectivity and tweaking to the CPI, shall we say.

So that’s something that most multifamily investors are very cognizant of. It’s very top of mind. And we may just be entering a consolidation phase, both in the equity markets and in the real estate market. You know, the real estate market was just white hot the first half of 2021, through the summer and it’s cooled off a little bit depending on where you live. That’s not necessarily a bad thing for everybody to kinda take…you know, catch their breath a little bit. We might just be in, you know, a consolidation phase. There’s always a chance of another drawdown and there’s a chance the market could run up. So, I’m not really in the forecasting business but if I were and I had to make a bet, I wouldn’t bet on inflation going down in the next 12 months.

Scott: You know what? Andy, I’ve known you for a long time and I wouldn’t bet against you on that.

Andy: Well, thank you, Scott. Thank you.

Scott: So, Andy, thank you again so much for joining me on this show today. And if folks want to find out more about the Alternative Investment Database, maybe brush up on some of the news articles that you guys publish, where can they do that? Where should they go?

Andy: Well, they can check out our website at and I also have to give a plug for our podcast. So, if you just open up Spotify or iTunes and search for the “Alternative Investment Podcast”, our podcast will pop up. You can subscribe and get new episodes as we release them.

Scott: Excellent. Thanks again, Andy. And for folks listening, you can get our show notes at We’ll have a bunch of links to articles for the types of topics we are covering today as well as have all those links for the Alts DB.