Market Views

Real Estate Investing at an Inflation Inflection Point

Coordinated stimulus and a reopened U.S. economy have combined to push up prices. Within the right sectors, real estate may provide cash flow yield and growth against this backdrop.

Why has inflation risen?

Improving pandemic conditions, private sector liquidity, pent-up consumer demand have combined to spur economic growth in 2021. In the short run, these coordinated factors combined with tight labor markets and supply chain imbalances have driven the highest inflation prints in years.1 These dynamics may push up interest rates once the Fed tightens policy.

Figure 1: Inflation on the Rise in 2021

Annual inflation in 2021 is expected to reach the highest level since 2007, significantly greater than the 15 year average

Source: Morningstar, annual inflation represented by US BLS CPI All Urban NSA, as of 12/31/2020. Goldman Sachs Global Investment Research, estimate for 2021 CPI growth, as of 7/21/21.

What does inflation mean for real estate?

Real estate can offer dynamic cash flows. Unlike traditional bonds that generate fixed cash flows, the income streams from real estate can rise over time. Prioritizing assets with shorter lease durations in sectors with strong underlying growth fundamentals can result in faster translation of higher market rents into underlying operating cash flows. Hotels effectively have one-night leases. Other sectors, including apartments and warehouses, also tend to have shorter-duration leases. Certain assets with longer duration leases, such as net lease properties, often include contractual rent escalators to mitigate inflationary risks.

Sector selection matters. Bond-like assets that have long-term leases with limited rent resets are more susceptible as rates rise. Sectors facing tenant demand headwinds, such as U.S. regional malls and urban office buildings, may not be able to command near-term rent increases that can keep up with inflation.

Cap rates have room for interest rates to rise. Today, real estate trades at a historically high premium to 10-year Treasuries, with the major sectors cap rate spread significantly wider than the historical average.2 3 Given this starting point, rising interest rates may not necessarily result in a commensurate increase in cap rates or decline in real estate values.

Limited supply generally supports valuations. Supply, even within in-demand sectors like industrial,4 remains in check. In an inflationary environment, increases in the cost of land, construction, and labor are likely to make new supply less financially feasible.

Private real estate income is a potential hedge to inflation

Figure 2: Real Estate Income and Inflation Since 1995 (Indexed, 1995=100)

Real Estate Income and Inflation Since 1995 (Indexed, 1995=100)

As of December 31, 2019. Green Street Advisors, Bureau of Labor Statistics. Represents Blackstone Real Estate’s view of the current market environment as of the date appearing in this material only. There can be no assurance that the trends described herein will continue or not reverse. Past performance does not guarantee future results. Net operating income (NOI) growth represents the average NOI growth by year across the apartment, industrial, mall, office and strip retail sectors. The Consumer Price Index (CPI) measures changes in the prices paid by urban consumers for a representative basket of goods and services. NOI may not be correlated to or continue to keep pace with inflation.

U.S. private real estate values generally have increased during periods of rising interest rates

Figure 3: Private Real Estate in Rising Interest Rate Environments

Note: Morningstar, NCREIF. The time periods above (1993-1994, 1998-1999, 2003-2007, 2012-2013, 2016-2018) constitute select episodes over the 25-year period from 1993 to 2018 when treasury yields increased by more than 135bps. U.S. Private Real Estate Return is represented by the NCREIF Property Index (NPI) annualized return; annualized returns refer to the specified time period plus one additional year. The NPI quotes returns that do not reflect the use of leverage or the impact of management and advisory fees. Returns net of management and advisory fees would be materially lower. The NPI is a quarterly time series composite total rate of return measure of investment performance of a very large pool of unleveraged individual private real estate properties acquired in the private market for investment purposes only. The annualized return for the NPI for the time periods shown (1993-2018) is 9.2%. The rise in 10-yr UST is represented by the peak and trough 10-yr UST during each time frame presented. Past performance is not necessarily indicative of future results.

Access Real Estate Investing at an Inflation Inflection Point


  1. Bloomberg consensus forecasts, as of 7/21/21.
  2. Green Street Advisors, as of 3/1/21. Major sectors include apartments, industrial, mall, office, and strip centers. Past performance is not indicative of future results. There is no guarantee that any of these trends will continue or will not reverse. Past events and trends do not imply, predict or guarantee, and are not necessarily indicative of, future events or results. There is no guarantee that any risk can be mitigated in whole or in part. Real Estate products are subject to the risk of capital loss and investors may not get back the amount originally invested.
  3. Major sectors real estate cap rate was 5.4% as of March 31, 2021. 10-Yr UST was 1.7% as of March 31, 2021. The “long-term average” reflects the period between March 1986 to March 2021. “Major Sectors” is sourced from Green Street Advisors and reflects the equal weighted average of the asset weighted averages for the five major property sectors (apartments, industrial, mall, office, and strip center).
  4. CBRE-EA, as of 3/31/21.

Key Risk Factors

Certain countries have been susceptible to epidemics which may be designated as pandemics by world health authorities, most recently COVID-19. The outbreak of such epidemics, together with any resulting restrictions on travel or quarantines imposed, has had and will continue to have a negative impact on the economy and business activity globally (including in the countries in which funds invest), and thereby is expected to adversely affect the performance of a fund’s investments. Furthermore, the rapid development of epidemics could preclude prediction as to their ultimate adverse impact on economic and market conditions, and, as a result, presents material uncertainty and risk with respect funds the performance of their investments.

The foregoing information has not been provided in a fiduciary capacity under ERISA, and it is not intended to be, and should not be considered as, impartial investment advice.

Certain information contained in these materials constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology or the negatives thereof. These may include financial estimates and their underlying assumptions, statements about plans, objectives and expectations with respect to future operations, and statements regarding future performance. Such forward-looking statements are inherently uncertain and there are or may be important factors that could cause actual outcomes or results to differ materially from those indicated in such statements. Blackstone believes these factors include but are not limited to those described under the section entitled “Risk Factors” in its Annual Report on Form 10-K for the fiscal year ended December 31, 2019, and any such updated factors included in its periodic filings with the Securities and Exchange Commission, which are accessible on the SEC’s website at www.sec.gov. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in these materials and in the filings. Blackstone undertakes no obligation to publicly update or review any forwardlooking statement, whether as a result of new information, future developments or otherwise.

Important Disclosure Information

The views expressed in this commentary are the views of Private Wealth Solutions group of The Blackstone Group Inc. (together with its affiliates, “Blackstone”) and do not necessarily reflect the views of Blackstone itself. All information in this commentary is believed to be reliable as of the date on which this commentary was issued, and has been obtained from public sources believed to be reliable. No representation or warranty, either express or implied, is provided in relation to the accuracy or completeness of the information contained herein.

Investment concepts mentioned in this commentary may be unsuitable for investors depending on their specific investment objectives and financial position. Tax considerations, margin requirements, commissions and other transaction costs may significantly affect the economic consequences of any transaction. Concepts referenced in this commentary and should be reviewed carefully with one’s investment and tax advisors.

This commentary does not constitute an offer to sell any securities or the solicitation of an offer to purchase any securities. This commentary discusses broad market, industry or sector trends, or other general economic, market or political conditions and has not been provided in a fiduciary capacity under ERISA and should not be construed as research, legal, tax or investment advice, or any investment recommendation. Past performance is not necessarily indicative of future performance.

Blackstone Securities Partners L.P. (“BSP”) is a broker-dealer whose purpose is to distribute Blackstone managed or affiliated products. BSP provides services to its Blackstone affiliates, not to investors in its funds, strategies or other products. BSP does not make any recommendation regarding, and will not monitor, any investment. As such, when BSP presents an investment strategy or product to an investor, BSP does not collect the information necessary to determine—and BSP does not engage in a determination regarding—whether an investment in the strategy or product is in the best interests of, or is suitable for, the investor. You should exercise your own judgment and/or consult with a professional advisor to determine whether it is advisable for you to invest in any Blackstone strategy or product. Please note that BSP may not provide the kinds of financial services that you might expect from another financial intermediary, such as overseeing any brokerage or similar account. For financial advice relating to an investment in any Blackstone strategy or product, contact your own professional advisor.

In the United Kingdom and the European Economic Area: issued by The Blackstone Group International Partners LLP (“BGIP”), authorised and regulated by the Financial Conduct Authority (FRN: 520839) in the United Kingdom. This communication does not constitute a solicitation to buy any security or instrument, or a solicitation of interest in any Blackstone fund, account or strategy. The content of this communication should not be construed as legal, tax or investment advice.

This material is exclusively for use by persons who are Professional Clients or Eligible Counterparties for the purposes of the European Markets in Financial Instruments Directive (Directive 2014/65/EU) and must not be distributed to retail clients or distributed onward. Recipients should bear in mind that past or estimated performance is not necessarily indicative of future results and there can be no assurance that a fund will achieve comparable results, implement its investment strategy, achieve its objectives or avoid substantial losses or that any expected returns will be met. The activity of identifying, completing and realizing attractive investments is highly competitive, and involves a high degree of uncertainty. There can be no assurance that a fund will be able to locate, consummate and exit investments that satisfy its objectives or realize upon their values or that a fund will be able to fully invest its committed capital. There is no guarantee that investment opportunities will be allocated to a fund and/or that the activities of a sponsor’s other funds will not adversely affect the interests of such fund.

Recipients should bear in mind that past or estimated performance is not necessarily indicative of future results and there can be no assurance that a fund will achieve comparable results, implement its investment strategy, achieve its objectives or avoid substantial losses or that any expected returns will be met.

The activity of identifying, completing and realizing attractive investments is highly competitive, and involves a high degree of uncertainty. There can be no assurance that a fund will be able to locate, consummate and exit investments that satisfy its objectives or realize upon their values or that a fund will be able to fully invest its committed capital. There is no guarantee that investment opportunities will be allocated to a fund and/or that the activities of a sponsor’s other funds will not adversely affect the interests of such fund.

Recipients should be aware that an investment in a fund is speculative and involves a high degree of risk. There can be no assurance that a fund will achieve comparable results, implement its investment strategy, achieve its objectives or avoid substantial losses or that any expected returns will be met. A fund’s performance may be volatile. An investment in a private equity fund or other alternative investment should only be considered by sophisticated investors who can afford to lose all or a substantial amount of their investment. A fund’s fees and expenses may offset or exceed its profits.

There can be no assurances that any of the trends described herein will continue or will not reverse. Past events and trends do not imply, predict or guarantee, and are not necessarily indicative of, future events or results.

Certain information herein has been obtained from sources outside Blackstone, which in certain cases have not been updated through the date hereof. While such information is believed to be reliablefor purposes used herein, no representations are made as to the accuracy or completeness thereof and none of Blackstone, its funds, nor any of their affiliates takes any responsibility for, and has not independently verified, any such information.

Issued by The Blackstone Group International Partners LLP (“BGIP”), which is authorised and regulated by the Financial Conduct Authority (firm reference number 520839) in the United Kingdom.

This communication is directed only at persons: (a) who are “Professional Clients” as defined in the Glossary to the UK Financial Conduct Authority Handbook; or (b) to whom it may otherwise lawfully be communicated. It is intended only for the person to whom it has been sent, is strictly confidential and must not be distributed onward.

So far as relevant, the only clients of BGIP are its affiliates. No investor or prospective investor is a client of BGIP and BGIP is not responsible for providing them with the protections afforded to clients. Investors and prospective investors should take their own independent investment, tax and legal advice as they think fit. No person representing BGIP is entitled to lead investors to believe otherwise.

If communicated in Belgium, Denmark, Finland, the Republic of Ireland, Lichtenstein or Norway, to per se Professional Clients or Eligible Counterparties for the purposes of the European Union Markets in Financial Instruments Directive (Directive 2014/65/EU), this communication is made by The Blackstone Group International Partners LLP (“BGIP”) of 40 Berkeley Square, London, W1J 5AL (registration number OC352581), which is authorised and regulated by the Financial Conduct Authority (firm reference number 520839) in the United Kingdom and which maintains appropriate licences in other relevant jurisdictions.

If communicated in any other state of the European Economic Area or to elective Professional Clients for the purposes of the European Union Markets in Financial Instruments Directive (Directive 2014/65/EU), this communication is made by Blackstone Europe Fund Management S.à r.l. (“BEFM”) of 2-4 Rue Eugène Ruppert, L-2453, Luxembourg (registration number B212124), which is authorized by the Luxembourg Commission de Surveillance du Secteur Financier (reference number A00001974). This communication is exclusively for use by persons identified above and must not be distributed to retail clients. It is intended only for the person to whom it has been sent, is strictly confidential and must not be distributed onward.

This communication does not constitute a solicitation to buy any security or instrument, or a solicitation of interest in any Blackstone fund, account or strategy. The content of this communication should not be construed as legal, tax or investment advice.

In Switzerland, this material is for the exclusive use of qualified investors as defined in article 10(3) Swiss Collective Investment Schemes Act (“CISA”). This communication does not constitute a solicitation to buy any security or instrument, or a solicitation of interest in any Blackstone fund, account or strategy. The content of this communication should not be construed as legal, tax or investment advice.

No action has been or will be taken in Israel that would permit the distribution of this document to the public in Israel. This document has not been approved by the Israel Securities Authority. This document is being distributed only to and is directed only at persons
who are Qualified Investors within the meaning of The Securities Law, 5728-1968 (Israel).

Persons who are not Qualified Investors must not act on or rely on this document or any of its contents. Any investment or investment activity to which this document relates is available only to Qualified Investors and will be engaged in only with Qualified Investors. Qualified Investors in receipt of this document must not distribute, publish, reproduce, or disclose this document (in whole or in part) to any person who is not a Qualified Investor. Neither the general partner, nor the investment advisor, is registered or intends to register as an investment adviser or an investment portfolio manager under the Israeli regulation of investment advice and investment portfolio management law, 5755-1995 (the “investment law”). Furthermore, these interests are not being offered by a licensed marketer of securities pursuant to the investment law.

This communication relates to a fund which is not subject to any form of regulation or approval by the Dubai Financial Services Authority (“DFSA”).

The DFSA has no responsibility for reviewing or verifying any document or other documents in connection with this fund. Accordingly, the DFSA has not approved this document or any other
associated documents nor taken any steps to verify the information set out in this document, and has no responsibility for it. This document is intended for distribution only to persons of a type as classified by the DFSA’s Rules (i.e. “Professional Client”) and must not, therefore, be delivered to, or relied on by, any other type of person

Blackstone Securities Partners L.P., a subsidiary of The Blackstone Group Inc. (“Blackstone”) through which Blackstone conducts its capital markets business and certain of its fund marketing and distribution, is a member of FINRA.

PWS202105086S