Matt Malone of Opto explains why real estate does well in inflationary environments.
Transcript
Hi. I'm Matt Malone, head of Investment Management. I've spent over 15 years in the private markets in a variety of different roles, including performing diligence and analysis on alternative investment managers, structuring funds in the alternative investment space, and talking to financial advisors and their clients about alternative investment solutions to their portfolios.
So investors, especially now, are very concerned about inflation. We've been seeing inflation numbers creep up. There's a question of whether it's transitory or permanent. Investors are looking for real assets to protect themselves against inflation. And the reason why real assets and real estate specifically can provide an inflation hedge is that because they are tied to a hard asset, their value tends to appreciate over time. There's a limited supply, there's a limited amount of land on the earth. There's a limited amount of land in each city. And if you're an investor in an asset that's scarce in times of rising inflation, that's a good thing.
You want to be invested in something that's scarce and unique. Real estate is one of those assets, particularly in high-demand areas, but also they have an income generation component that can also be more or less sensitive to changes in the environment. So if you think about the different real estate sectors, on one end, you kind of have office, which tends to have longer-term leases, and then you move into sectors that have increasingly shorter-term leases. So if you think about multifamily or apartments, you know, you tend to have maybe 12-24 month leases and then you could move even into hospitality, which effectively has a one-day lease.
All of these different sectors have different rates of sensitivity to changes in inflation. So when you're thinking about using real estate as an inflation hedge, you want to be very thoughtful about your sector focus and make sure that the type of leases and the type of structure in the underlying real estate is able to adjust on a regular basis and you're not locked into a longer-term lease that may not have inflation protection built into it.
This is an important diligence item for investors looking at real estate strategies. If they're looking to use real estate, to hedge inflation, to think about how the income is being generated from that real estate and whether it's sensitive enough to changes in the underlying economy.