Is real estate a hedge against inflation? You’d think so given it’s both a real asset and an income generator. Meaning, a real estate asset’s value should rise as a function of replacement cost, which itself rises with inflation, and rents should reset as a function of CPI, among other things. Research generally supports that logic, especially over the long term, but with critical caveats.

Real estate’s effectiveness as an inflation hedge depends on three key factors:

Listed and direct real estate perform differently under inflationary pressure. Listed REITs, in particular, have “mixed outcomes regarding their ability to hedge against inflation,” according to a new paper.¹ Prior studies have left this relationship unresolved, although most indicate at least some inflation protection from listed REITs, especially over longer periods.

The new paper tackles this ambiguity, drawing on data from six different countries from 1990-2023. It finds that listed real estate is a reliable inflation hedge during stable periods over the short- and long-term. When inflation rises, listed real estate values increase. However, in turbulent economic times - characterized by high market volatility - listed real estate underperforms as a hedge in the short-term, with values flat or falling as inflation rises, but they adjust upward as the study period lengthens.

The authors suggest this pattern exists because investors during turbulent times charge higher risk premiums for new investments, so regardless of changes in inflation, real estate values fall until the market stabilizes.

Interestingly, directly owned real estate, by contrast, is an effective short-term and long-term hedge in “both in stable periods and during times of economic turmoil.” The author acknowledge what you’re probably thinking about privately owned real estate: Values “tend to be smoothed because appraisals are subjective, infrequent, and often lag current market conditions.” They adjusted NAVs to account for this known phenomenon (with a handy “reverse filtering desmoothing method”) and found effectiveness as an inflation hedge in all conditions.

The lesson so far: If you have a short-term investment horizon, listed REITs may not be an effective inflation hedge.

A separate, recently published paper also set out to demystify the performance of listed REITs relative to inflation.² The authors deconstructed inflation into expected and unexpected components.

Expected inflation is primarily drawn from the Survey of Professional Forecasters, a quarterly report distributed by the Federal Reserve Bank of Philadelphia that estimated near-term economic measures, including inflation. This forecasted inflation is considered “priced in” to asset values. Unexpected inflation, also called inflation “shocks,” is the gap between actual inflation and expected inflation, and in layman’s terms happens when inflation is significantly higher or lower than forecasted.

Both papers note that prevailing research finds a negative relationship between inflation shocks and REIT performance, which is the opposite of what you want your REIT investment to do and what some people term “a perverse hedge.” But the relationship isn’t always negative, and “is more about what the inflation shocks indicate about the … underlying economic state.”

Specifically, inflation shocks come in two primary flavors. If the market interprets a shock as signaling a high-inflation/low-growth environment - some version of stagflation - risk premiums rise and equity values fall. But a shock might also indicate economic health and a low chance of “low-inflation, low-growth” conditions, which drives equity values higher.

In strong economic periods, as mentioned above, listed REITs tend to perform well as an inflation hedge, and their returns show no clear positive or negative relationship to inflation shocks. In weaker economic periods, though, market sentiment is more likely to change with new information. The study found that when there was an inflation shock, REIT stocks performed “strongly negatively in the higher inflation environment of the 1980s and early-1990s but strongly positive during … the lower inflation environment since the late-1990s.”

The implication: not all inflation shocks are created equal. REIT stocks actually perform quite well as an inflation hedge in weaker economic periods so long as the market still anticipates generally low overall inflation and modest growth. This trend was also found to be true for the broader stock market.

This paper makes a strong case for “inflation non-neutrality"- the idea that real estate stocks are impacted by inflation shocks, especially in weaker economic environments. But the direction of the impact, positive or negative, depends on the broader economic climate, as measured by overall inflation and standard economic signals like GDP growth, employment, interest rates, etc.

Here’s the bottom line: Real estate is widely assumed to be an inflation hedge, and you can make a strong research-based case that directly owned real estate will meet that goal over any hold period. But listed real estate is less predictable as an inflation hedge. Its effectiveness depends on whether inflation is expected or a surprise and the strength of the prevailing macroeconomic environment. For short-term holds, listed REITs require real scrutiny and market timing if you want them to hedge inflation risk. The good news: Over long-term holds, both listed and direct real estate have an established and well understood track record as effective inflation hedges. Sometimes the myth is actually true.

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Since the early 1990s Americans have increasingly taken their meals at restaurants, and in 2018 restaurant spending surpassed grocery store spending for the first time, and the trend continues to this day. As dining out becomes a bigger piece of American life, one artist is quietly chronicling its architecture.

In 2017, John Donohue began sketching every restaurant in New York City. His style is spare—just pen and paper—and always done on-site, quickly, before the details fade. What began as a tribute to beloved local spots has grown into a kind of drawn archive, now spanning cities like Philly, LA, and Paris. In an age of food content overload, Donohue’s work feels like the opposite: slow, analog, and full of quiet affection.

Link: https://alltherestaurants.com/

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