Inflation is a boon to portfolio values, Milken speakers say, but risks remain
Property managers speaking at the Milken Institute global conference said the good news is that inflation is boosting the value of their existing portfolios, but there are warning signs that some properties may not perform as planned in the future.
Speaking at a real estate panel on Tuesday, Barry Sternlicht, chairman and CEO of Starwood Capital Group, said he was watching three metrics: interest rates, rents and replacement costs.
If rents for many types of properties don’t continue to rise, some of those properties could be in trouble, he said. Additionally, Sternlicht said, “replacement costs are shifting sharply north” due to a labor shortage, shutdowns in China and the proposed federal infrastructure bill, which he said him, will make the raw materials more difficult to find. Property prices will continue to rise, he said.
Inflation may slow, but it will pick up, Sternlicht said.
What makes this cycle different from the global financial crisis of 2008-2009 is that the supply of properties is currently under control, he said.
“I started my career in times of inflation,” he said. “I’m half-happy it’s here because what you own is worth more” and higher wages make it easier for tenants to pay higher rents, Sternlicht said.
But investors need to be “very careful in what you do today,” he said.
The war in Ukraine is another reason investors should be cautious, said Jonathan Goldstein, CEO of global real estate firm Cain International, speaking on the same panel as Sternlicht. If the war in Ukraine spreads to other countries in Europe, it would be bad for all real estate sectors, Goldstein said.
The world must find a way to diffuse the situation, he said. That would be good for all asset classes and good for real estate, Goldstein said.
He said that with the cost of buying properties sometimes higher than the return, location is more important than ever. Mr. Goldstein said he favors locations such as Miami and Fort Lauderdale, Fla., where rents are rising.
Mr Sternlicht said the housing market will get worse than it is now.
The Fed will raise rates and “that’s going to scare people off,” he said. Instead, Sternlicht favors Europe because rates won’t rise as much as in the United States. However, neither MM. Neither Sternlicht nor Goldstein said they would invest in France due to regulations.
“France is more communist than Russia,” Mr. Sternlicht said. “I have a house in Saint-Tropez, but I don’t want to invest there.”