Last week, the Labor Department reported that the consumer price index (CPI) for the month of August was up 5.3% year over year. The CPI is a measure of how prices for certain consumer goods have changed, and this year we've seen some of its highest readings in nearly 13 years.
While CPI came in slightly below economists' expectation of 5.4% and was down from July's reading, inflation is still above what investors have grown accustomed to over the past decade. Federal Reserve officials say this inflationary pressure is likely temporary, but we have seen CPI readings over 5% for five months in a row now, and it's hard to say if inflation pressures will alleviate any time soon.
As investors, this makes positioning your portfolio a tricky matter. I think the best thing investors can do is invest in solid businesses that could also perform well in inflationary environments. One area that could do well if inflation stays high is real estate, specifically multifamily real estate. One company that has a strong track record of success and is positioned for long-term growth is multifamily lender Walker & Dunlop (WD -1.64%).
Real estate as an inflation hedge
Essential goods -- those things like housing, food, and energy -- can be a good place to position as inflationary pressures are present. That's because companies providing those products can respond to inflationary pressure by increasing prices for consumers. In particular, housing can be a good investment because it's always in demand and rents tend to follow prices higher during inflationary times.
Another reason multifamily can be good is because of the short duration of leases. While commercial real estate leases can be five or 10 years long, multifamily properties -- such as apartments -- can have leases of one year or less. These shorter lease terms mean multifamily operators are more agile and can adjust rental rates faster in response to inflationary pressures.
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Steady growth for Walker & Dunlop in 2021
According to the Mortgage Bankers Association (MBA), Walker & Dunlop was the top multifamily lender in the United States in 2020, making over $30 billion in loan originations, edging out competitors CBRE Group and Jones Lang Lasalle.
Walker & Dunlop posted mixed results in the second quarter. The multifamily lender saw total revenue increase 11.3% from last year to $281 million. In the first half of this year, the lender has seen revenue increase 3.8% from last year.
The lender's expenses increased as well, with personnel expenses up 32.3% in the second quarter and up 21% in the first half of the year. As a result, the lender has seen its net income decline nearly 10% in the second quarter compared to last year. However, on the year the lender still sees net income growth of 3.8%.
Strong trends in multifamily lending
The MBA projects a 13% increase in multifamily loan originations for 2021, with expected originations of $409 billion beating last year's record $360 billion in volume. Next year the MBA projects multifamily lending will top $421 billion, a 3% increase from its 2021 projected figures.
Freddie Mac projects strong multifamily origination volume too, with loans expected to be between $385 billion and $410 billion for the year. According to Steve Guggenmos, Freddie Mac's vice president for multifamily research and modeling:
We believe the multifamily market will continue to grow in the second half of 2021 as the country and the economy rebuild after the challenges brought on by the COVID-19 pandemic. Larger gateway markets continue to feel the impact of the pandemic, such as New York City and San Francisco, but the majority of markets will continue to see rent growth through the rest of 2021. Underlying demand drivers support strong multifamily market fundamentals and have set a foundation for continued growth as economic conditions improve.
Walker & Dunlop is positioned for long-term growth
Walker & Dunlop is positioned well to succeed given the current backdrop. CEO Willy Walker has expressed optimism about a wave of loan maturities that should drive volume in the multifamily space in coming years. Specifically, he's excited about the next five years, when $378 billion worth of multifamily loans will mature -- giving Walker & Dunlop an opportunity to grab market share.
The company also made a solid move this year when it acquired a majority stake in Zelman & Associates, a leading research firm focused on housing. This acquisition helps Walker & Dunlop continue its push into investment banking while also giving the company a footprint in the single-family rental space.
Walker sees the single-family rental space as a great opportunity to grow business because of how fast the space is growing. The market for single-family rentals is estimated to be worth $3.4 trillion, compared to the multifamily market which is worth $3.5 trillion.
Given the economic backdrop and uncertainty regarding inflation, investors should look to add solid companies that can perform well if inflation sticks around for longer than expected. Walker & Dunlop is a great company that can fill this role, and its tailwinds for long-term growth should drive the stock higher regardless of what happens to inflation in the coming quarters.
