BY CHRIS FRALEY, CHIEF INVESTMENT OFFICER
What a time we are living in. Just as we are emerging from the worst global pandemic in a century, Russia launches the first major European ground offensive in 75 years. As we face an uncertain geopolitical environment coupled with historically high inflation rates in the US, I wanted to take a moment to address our Member base about these unprecedented times. First and foremost, our hearts go out to the people of Ukraine and all around the world who are being impacted by this tragic conflict. Family and health are always first.
Understandably, supply chain concerns are on investors’ minds across all investment mediums. On a global scale, sanctions and effects from the Russian invasion of Ukraine on commodities pricing such as oil, precious metals and even wheat will have a major impact on many US companies.
I always find it helpful to compare economic indicators to get a sense of perspective when understanding impact. While Russia plays a critical role in global politics due to its nuclear arsenal, you may be surprised to learn that its 2021 GDP of $1.6 trillion was roughly equivalent to that of South Korea or Texas. According to the Investment Company Institute, US retirement assets gained $3.1 trillion in value in 2020, about double the 2021 GDP of Russia.
It is also important to remember that the US has become the largest oil producer in the world. According to the US Energy Information Administration, oil production in the US has tripled from 2008 to 2020. In 2020, the US produced 20% of the global oil output. The recent growth of domestic oil production should help to reduce the shock from global supply disruption.
INFLATION AND REAL ESTATE
There are two sides of the coin when it comes to inflation and real estate. First, inflation negatively impacts real estate by increasing operating expenses, which ultimately effects net operating income and values. Second, rising costs increase total development costs of real estate. The costs of lumber and steel, for example, have skyrocketed over the past two years. Labor is also one of the biggest expenses in real estate development and the high employment environment creates substantial cost escalation.
However, there are several ways that inflation creates value for real estate. Increased development costs have historically had the effect of raising rents, because developers will not create more housing or commercial space unless they get an adequate return from increased revenues to compensate for the increased cost. We’ve seen multifamily rents rise dramatically in the last 12 months across most major markets in the country.
DIVERSIFICATION IS KEY
I have always believed, even more so during times of heightened volatility, that diversity is the key to any successful business or investor strategy. In these uncertain times, we continue to watch and plan diligently. Our Members have access to a variety of real estate investment opportunities across different risk and return levels on the RealtyMogul Platform that empowers them to build a balanced portfolio that best fits their financial needs.
During the last major financial crisis starting in 2008, I was on the Investment Committee of a diversified multibillion-dollar real estate private equity fund. While we experienced losses in land and hotel investments, our income-generating data center portfolio flourished, balancing out the overall returns. We also benefited greatly from geographic diversity. In 2008, the high-growth housing production markets such as Phoenix and Las Vegas experienced deep losses in real estate values, which took years to recover, while the Houston economy benefited from a surge in oil prices. The DC real estate market also fared well throughout the 2008 financial crisis due to the massive government expenditures intended to support the economy.
I will always stress the importance of diversification in any investment portfolio, especially during times of heightened volatility. It is important that investors continue to watch the markets, do their own research, and invest in risk/return profiles that work best for their current financial needs.
While it is impossible to predict what will happen next in this uncertain world we are living in, RealtyMogul will continue to track global events closely and work hard to understand risks and how they may impact domestic real estate on a national and local level. Diversification can potentially assist in a volatile economy, and we hope that the real estate investment opportunities hosted on our Platform continue to empower you to diversify your portfolio in a manner that best suits your financial needs.
1 Investment Company Institute
2 US Office of Management and Budget
4 US Bureau of Economic Analysis
5 US Energy Information Administration
This Note from the CIO is for informational and educational purposes only and is not intended to be relied on to make any investment decisions. This report expresses the views of the author as of the date of writing and are subject to change due to market conditions and without notice.
Certain information contained herein constitutes forward-looking statements (including projections, targets, hypotheticals, ratios, estimates, returns, performance, opinions, activity and other events contained or referenced herein), which can be identified by the use of terms such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue” or “believe” or other variations (or the negatives thereof) thereof. Due to various risks, assumptions, uncertainties and actual events, including those discussed herein and in the respective analyses, actual results, returns or performance may differ materially from those reflected or contemplated in such forward-looking statements. As a result, you should not rely on such forward-looking statements in making any investment decisions.