How to Navigate Real Estate Inflation in a Changing Market

Persistent, long-term inflation is a staple of every economy. In the U.S. between 1913 and 2025, consumer prices increased by more than thirtyfold, which works out to an annualized inflation rate of roughly 3.16%.¹

During periods of elevated inflation and low economic growth, such as America in the 1970s, traditional stock-heavy portfolios often face poor real (inflation adjusted) returns.²

Inflation has once again taken hold of global economies in the years since the COVID-19 pandemic. While not as extreme as the 1970s, inflation today remains stubbornly above the Federal Reserve’s 2% target, thanks in part to higher prices for construction, labor, food, and energy.³

For investors, this raises an important question: how can a portfolio be positioned when the cost of nearly everything is rising? 

This environment is prompting some accredited investors to consider private real estate funds, since property values, rents, and long-term, fixed-rate debt structures have historically offered some protection against inflation.⁴

However, not all real estate is created equal. Understanding how inflation impacts property valuations, operating expenses, and rents can help high-net-worth investors make better decisions about where and how to allocate capital.

1. Rent growth

One advantage of single-family and multifamily real estate in periods of high inflation is that they operate on one-year leases. This allows property managers to periodically adjust rents to reflect current market conditions and keep pace with inflation.⁴ Depending on the rate of rent growth relative to the pace of expense growth, investors can potentially experience steady or even higher Net Operating Income (NOI) over time.

2. Appreciating property values

Useful physical assets, like rental housing, have intrinsic value. As the cost of raw materials and labor rises—as they have consistently over the long run⁵—the cost to construct new buildings likewise increases. This limits new supply in the market which, when outpaced by increasing demand, can potentially drive up rents of existing properties.⁶ This can result in NOI growth and cause the valuation of cash-flowing properties to increase. 

3. Fixed-rate debt

When a fund acquires a property using long-term, fixed-rate financing, inflation works in the borrower’s favor. Because inflation whittles away a currency’s purchasing power over time, the real cost of that fixed debt decreases over the long run. Essentially, the fund is borrowing more “expensive” dollars but paying back its debt with “cheaper” dollars.

Fixed-rate debt likewise hedges against the rising interest rates that typically accompany inflation. In contrast to variable-rate loans, which tend to rise with inflation,⁷ fixed-rate mortgages remain unchanged no matter how high inflation or market interest rates climb. This growing gap between potentially rising income and capped debt costs may amplify returns for equity investors.

Additionally, private real estate investments carry inherent risks—including market downturns, tenant default, illiquidity, and interest rate volatility during refinancing—which can impact net returns.

These operational hurdles highlight the advantage of investing passively through a private real estate fund. Large fund managers, such as DLP Capital, possess buying power, established vendor relationships, and operational efficiencies. This can potentially allow funds to negotiate better pricing and absorb rising costs more effectively than individual property owners can.

Still, inflation can broadly be a tailwind for income-producing real estate. Because cash-flowing properties generate more revenue than expenses, NOI can grow (in dollar terms) even if revenue and expense inflation were the same in percentage terms.

Explore passive investments in multifamily real estate with DLP Capital-sponsored funds today.