Inflation: REITs have become a ‘port in the storm’ for investors, expert explains

Jonathan Morris, REIT Academy Managing Director, joins Yahoo Finance Live to discuss the outlook on real estate investment trusts (REIT), inflationary environments with rising housing prices, and the risks related to REITs.

Video Transcript

RACHELLE AKUFFO: Welcome back to Yahoo Finance Live, everyone. Real estate investment trusts, or REITs, are typically an attractive way to recession-proof your portfolio as well as hedge against inflation. For more on this, I'm joined by Jonathan Morris, REIT Academy founder and Georgetown University professor. Good to have you on the show, Jonathan. So for people who aren't familiar with REITs and how they work, how would you break it down?

JONATHAN MORRIS: Well, simply put, a real estate investment trust is a large-scale company, most of whom are publicly held, that acquire and develop new properties to grow. They've been around for a long time. In the last 25 years, the industry has grown from around $400 billion to $1.6 trillion.

So it's a very large-scale industry. And it is intended for individual investors to be able to easily access large-scale commercial real estate investments through buying shares in REITs.

RACHELLE AKUFFO: So then talk about the relationship between rates and inflation as a hedge against inflation.

JONATHAN MORRIS: Sure. I think as you pointed out in your intro, real estate is and has always been considered an inflation hedge. So what that means is if you own commercial real estate or even residential real estate, you've seen the values of that real estate go up pretty significantly. That is a hedge against inflation-- meaning other aspects of the economy are going up, but so is real estate.

So it offsets at least one to one or even more what other pricing is doing. So it has been a port in the storm, if you will, for a lot of investors. When inflation comes around and they own real estate, they feel somewhat protected by rising prices due to the fact that their investments are rising as well.

RACHELLE AKUFFO: Obviously, there are a lot of different types of REITs. So are there some that tend to perform better than others during times of volatility or high inflation?

JONATHAN MORRIS: Sure. There's now about 15 sectors-- sectors are defined as hotels, or apartments, or office buildings, or industrial warehouses-- many of which have long-term leases to tenants. So for example, a company called Boston Properties, who I worked for for many years, they have 53 million square feet of class-A office buildings in five major markets.

But they push very hard to keep what's called their weighted average lease term, or WALT, out very far. So right now, their weighted average lease term across all of that portfolio is about seven or eight years. So the vast majority of any of the leases in the portfolio will not come due for a very long period of time. And the goal is to have those leases continue paying rent, even through the rising interest rate cycle that we're in right now.

RACHELLE AKUFFO: So let's talk a little bit about the cycle. Obviously, you had the pre-pandemic phase, you then have the spike during the peak of the pandemic. And now we're seeing, obviously, the Fed raising interest rates, getting ready to be more aggressive with its tightening as well. How do you expect the REIT market to compare how it was pre-pandemic versus how people should be bracing with might happen as rates continue to go up?

JONATHAN MORRIS: That's a great question. In 2008 and 2009, the REIT market and the executives of the major public REITs learned a very valuable lesson. And that lesson was to make sure that their loans did not all come due at any one point in time. Or as a matter of fact, what they've done is they've scheduled loans to mature very far out in the future.

So they don't face any near-term loan maturities. If you have a loan maturity, that means you've got to go back into the market and get a new loan. And that new loan today would be significantly more expensive in terms of interest rates than it was previously. And in 2021, interest rates really came down very, very low.

And many of the executives of REITs and the boards decided to refinance a large amount of their existing debt. So they pushed the maturities out even further and they brought their what's called net interest costs down. So the well-managed public REITs have braced for what we're seeing now.

RACHELLE AKUFFO: Certainly some advice I know people could have really used a while ago. We do thank you for coming on the show. Jonathan Morris, there, REIT Academy founder and Georgetown University professor. Thank you.