Real Estate and Inflation: How to Make Sure You’re Fully Protected Now

Real estate and inflation are often discussed in the same breath—and for good reason. When executed with discipline and market awareness, real estate can serve as a powerful inflation hedge. Particularly in multifamily investing, shorter lease terms allow rents to adjust more frequently, offering a practical buffer against rising costs.

But not all real estate is created equal when it comes to inflation protection. So, how can you make sure you get the best inflation hedge you can possibly get? As a long-term investor, the key lies in selecting assets with the right fundamentals: conservative financing, tight supply-demand dynamics, and long-term durability— in addition to understanding market cycles.

Why Undersupplied Markets Strengthen Real Estate and Inflation Protection

To truly hedge against inflation, focus on supply-constrained markets. When new apartment deliveries are limited and demand remains steady, pricing power increases. That’s essential in an inflationary environment.

In contrast, oversupplied markets typically experience higher vacancy rates, which erode pricing power and leave investors exposed. For example, sectors like downtown office or big-box retail often suffer from chronic oversupply. In such cases, even in periods of high inflation, landlords may lack the leverage to raise rents.

Key takeaway: Undersupplied markets allow landlords to maintain strong occupancy and push rents—preserving real returns.

A Historical Case Study: Overbuilt Retail in the 2008 Crisis

A clear example of oversupply risk occurred during the 2008 financial crisis. That year, 881 car dealerships shuttered. In 2009, GM and Chrysler announced another 2,000 closures.

These sites—highly specialized, with limited reuse options—suffered devastating vacancy rates. Most sat idle for years, producing zero income. In an inflationary scenario, such assets would have failed entirely as inflation hedges.

Lesson learned: Location matters, but supply and utility matter more. Redevelopment of these sites required major capital, making recovery long and uncertain.

What the Research Says: Inflation Hedging and Vacancy Rates

An academic study by Wurtzebach, Mueller, and Machi (1991) reinforces this logic. Their conclusion? Commercial real estate hedges effectively against inflation only when:

  • Vacancy rates remain below 10%
  • Rent increases are possible through market strength or property-level improvements

Assets in oversupplied markets or with no value-add upside will likely fall behind during inflationary periods. Therefore, understanding market cycles, submarket health, and tenant demand is essential.

No asset class or location is immune to imbalances. Real estate is inevitably cyclical, but if you are a long-term investor using long-term, fixed-rate debt, you will have a much easier time riding out the inevitable down cycles without loss of principle.

Bottom line: A healthy location with upside potential—plus pricing power—is your best ally against inflation.

The Role of Long-Term, Fixed-Rate Debt

In addition to supply-side discipline, financing strategy plays a vital role in inflation protection. Long-term, fixed-rate debt shields investors from short-term interest rate spikes. Even more, amortizing structures build equity over time, reducing refinance risk.

At PRPI, we typically use:

  • 10-year fixed-rate debt with 30-year amortization, or
  • 35-year fully amortizing debt where feasible

This protects against the threat of being a forced seller—particularly during volatile interest rate cycles. In fact, we’re refinancing two properties in 2023 under this framework. Early estimates show refinancing proceeds may:

  • Return 100% of investor capital
  • Deliver meaningful tax-free profit

This is the compounding power of long-term discipline.

Inflation Isn’t the Only Force—Cycles Create Opportunity

While inflation looms large for long-term investors, chasing returns is about more than just cost hedging. Markets move in cycles—and those very fluctuations offer windows for strategic entry.

Sometimes, that means investing in:

  • Strong markets experiencing short-term oversupply, or
  • Weak markets where supply has dried up but household formation is rising

In either case, controlling your going-in basis is paramount. If your purchase price is flawed, no amount of future performance can save the deal.

Remember: Post-close, nearly everything can be improved—except your basis.

Final Thoughts: Real Estate and Inflation Reward Long-Term Discipline

Inflation is real. Volatility is real. But with the right fundamentals—tight supply, long-term fixed debt, and market cycle awareness—real estate can still deliver.

More than just a hedge, real estate becomes a vehicle for tax-advantaged wealth creation, capable of adapting to both inflationary and deflationary pressures.

Want to see how we navigate real estate and inflation with conviction? Explore our strategy page and learn how PRPI builds durable returns through every market cycle.