Over the past two years, multifamily properties have been hard to beat for their return on investment. While the initial shock of the pandemic made investing in multifamily risky, those concerns were largely allayed by the end of 2020. Smaller and mid-sized cities saw an influx of new residents who were intent on buying property. However, when the housing market quickly ran out of inventory and single-family home prices spiked, many of those new residents found themselves priced out of buying. Instead, they turned to multifamily rental options. By the end of 2021, the multifamily market’s average year-over-year rent growth was 13.5 percent and average apartment occupancy was 96 percent.

Although that rent growth is expected to continue in 2022, there is an economic headwind that has some multifamily investors concerned: inflation.

In March, the U.S. inflation rate leapt to 8.5 percent, the highest it has been since 1982. In an effort to forestall further inflation growth, the U.S. Federal Reserve this month raised interest rates by a whopping one-half percent (the biggest rate hike in more than 20 years). This has helped to calm some fears but it has not changed industry warnings that some degree of higher inflation will likely persist for the foreseeable future.

Typically, inflation is the byproduct of a growing economy, which includes a growing job market with rising salaries, which in turn enables people to pay higher rents. As an asset class, multifamily housing has typically acted as a hedge against inflation. Multifamily investors have been able to outperform inflation by financing their properties with long-term fixed debt and increasing asking rents almost every year.

Inflation and rising rents are not likely to deter renters, who continue to struggle in a market that remains about five million homes short of what is needed to fill the demand of would-be homeowners. But for investors, inflation can impede a property’s profitability.

When the costs of goods and services rise, that affects every area of the economy. In the multifamily arena, it makes the cost of hiring property managers, landscapers, handymen and other personnel more expensive than it was one year ago. Inflation also leads to higher interest rates, which makes borrowing money more expensive.

That might suppress demand among people seeking to buy their forever home, but thus far it hasn’t been enough to deter multifamily investors from investing. In fact, a lot of investors are expecting interest rates to continue to increase. This has them determined to act even faster on their investments so that they can lock in financing sooner rather than later. With continued rent growth on the horizon, investors have determined that it’s worth paying more for financing now than facing the uncertainty of future interest rate hikes.

None of this is to say that inflation is a minor factor. While asking rents have been growing, the increased cost of operations has made profitability a key concern, and made the role of property managers even more critical. An experienced property manager can strike the right balance between running properties in a cost-effective way while still ensuring that tenants feel valued, and that they’re getting their money’s worth in an increasingly pricey landscape.