How Real Estate Investors Win in an Inflationary Environment

The latest CPI (Consumer Price Index) readings were released today and it’s fair to say that Mr. T has the best summary: Pain. The CPI grew at a 7.5% annualized rate, the highest growth rate in 40 years. So, how should you be thinking about inflation as an investor? CPI measures a basket of everyday consumer goods, so when the CPI index rises, your buying power decreases. That is, unless you invest your hard-earned dollars into something that provides a cash yield and/or appreciation to counteract the inflation.

Real estate is known as the best hedge against inflation because it has the potential to accomplish both strong cash yields and price appreciation. Let’s dig deeper:

Cash Flow and Appreciation

When you buy a property you acquire the future cash flows that property generates. The cash flows are a function of demand for the product and market lease rates. Owning property in high-demand locations ensures plenty of demand, which usually translates into higher rents over time. Cash flows are not the only protection from inflation – you could also benefit from appreciation as future buyers may pay a higher price than you originally paid for the increased cash flows. Another reason you might benefit from appreciation is because of inflationary pressures pushing up the replacement cost.

Replacement Cost

An important concept to understand in real estate is the idea of replacement cost. Replacement cost is the amount it takes to replicate an already-existing building.

Example: If you develop a building in 2012 for $10 million, that same building could conceivably cost you $20 million to replicate in 2022 due to increases in land value, construction costs, labor costs, etc. That’s critically important because the developer who wants to compete with your 2012 building must factor in these costs to determine whether the project is feasible. If the developer determines it is feasible, it’s probably because your 2012 building cash flows at – or close to – a level that justifies a $20 million basis. If not, then your building benefits from tougher barriers to entry and more limited supply. Either way it’s a win.

The Bottom Line on Inflation and Real Estate

The inflation conversation is actually quite simple: You can hide your savings under the mattress or opt into a low-yield savings account, but inflation can cause you to incur a negative real return. Instead, by investing in assets like real estate, your investment returns could and should be able to comfortably outpace inflation over the long-term, generating positive real gains for you and your loved ones to enjoy.

Jeffrey Karsh

Mr. Karsh is a founding partner and CEO of Streitwise and Managing Partner of Tryperion Holdings.

Prior to forming Streitwise, Mr. Karsh was an Acquisitions Analyst for Canyon Capital Realty Advisors and the Canyon-Johnson Urban Funds, where he was responsible for underwriting, structuring and executing value-add and opportunistic transactions. He holds a Bachelor of Arts degree in Political Science from the University of Pennsylvania. Mr. Karsh is a member of ULI and is also a Real Estate & Construction member of the Jewish Federation of Greater Los Angeles.

SW Manager, LLC (“Manager”) is a wholly-owned subsidiary of and controlled by Tryperion Holdings, LLC (our “Sponsor”). Manager is the external manager and advisor of 1st Streit Office Inc. (“1st Streit Office”) and 1st Streit Office Operating Partnership LP (our “Operating Partnership” and, together with 1st Streit Office, “Our Current Offering”). 1st Streit Office is the sole general partner of our Operating Partnership, through which all of our assets will be owned and substantially all of our operations will be conducted. All references herein to “Streitwise” refer, as applicable, to Manager, 1st Streit Office, the Operating Partnership, or any of their affiliates (collectively, the “Streitwise Entities”). Unless explicitly stated to the contrary, all references to “we,” “us,” and/or “our” shall refer to the Streitwise Entities. By using Streitwise, you accept our Terms of Service and Privacy Policy.

An offering statement regarding this offering has been filed with the SEC. This offering is structured as a non-traded real estate investment trust, or “REIT,” under Regulation A+ of the JOBS Act. The SEC has qualified that offering statement which only means that Streitwise may make sales of the securities described by that offering statement. It does not mean that the SEC has approved, passed upon the merits or passed upon the accuracy or completeness of the information in the offering statement. You should read the Offering Circular before making any investment which is available here: streitwise.com/oc

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Performance: Past performance is not a guarantee of future results. All historical returns, target returns, or hypothetical projections may not reflect actual future performance.
Risk: This investment involves a certain level of risk and may result in partial or total loss. We cannot guarantee that we will reach our target return for our investors.
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¹ Dividends & returns: Current annualized dividend based on the most recent dividend declaration as of the quarter ending 9/30/2024. Dividend return calculations based on NAV at the time of dividend return. 3Q24 dividend payout of $0.13/share equates to a 7.2% dividend based on the current NAV. The REIT has averaged a 7.2% annualized dividend yield since 2020 and a 8.3% annualized dividend yield since 2017 based on the average NAV for the respective periods. See Quarterly Report for all returns history.
² Source: FTSE NAREIT All Equity REITs vs S&P 500.
³Sponsor Performance: Related to investments by Sponsor, Tryperion Holdings, as part of one of its prior programs, and not of any of the Streitwise Entities. Reflects gross IRR on realized investments in the Sponsor’s investment portfolio since inception. Sponsor performance data as of 4Q23.
⁴Target returns: We will seek to invest in real properties and other real estate-related assets that we believe can produce a strong return through a combination of cash flow and appreciation. We cannot guarantee that we will reach this target return for our investors.

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Investing in an Inflationary Environment