Multi Family
Of the five property types, multifamily is the second best hedge against inflation. Existing studies show that annual total returns from multifamily properties will increase by 1.09 for every unit increase in expected inflation and 1.19 for unexpected inflation (Huang and Hudson-Wilson 2007).
Note that an effective hedge against inflation will create a one-to-one relationship between inflation and returns.
Office
Of the five property types, office is the best hedge against inflation. Existing studies demonstrate that office properties respond positively to expected and unexpected inflation. That is, returns from office properties increase by 1.47 for every unit increase of expected inflation and 1.48 for unexpected inflation (Huang and Hudson-Wilson 2007). We may expect that if the inflation rate increases, we should see increased returns from office properties.
Retail
Of the five property types, retail has been shown to be the either be one of the best hedges or the worst hedge against inflation depending on if the studies surveyed retail properties with leases that included percentage of sales. Some studies show that there is even reason to believe that there might be a negative relationship between inflation and retail returns (Huang and Hudson-Wilson 2007). Others, however, have shown retail to be a strong hedge against inflation, albeit that they gather data outside the US (Sing and Low 2000). The latter might be persuaded by the assumption that investors may prefer retail as a hedge against inflation, due the long-term leases of the retail sector – often tied to sales – and the fact that expenses are often passed-down to tenants. We may conclude that expectations for retail returns are dependent on the stipulations included in the leases.
Note that may think it preferable to benefit from the flexibility of short-term leases if there is uncertainty about near-term levels of inflation and the economic environment is one in which there may be significant unexpected inflation. If there is limited unexpected inflation, we may prefer to stick to long-term leases.
Jacob Frydman 