INFLATION FEARS & REITS: -3.14% in August, +15.3% YTD
“There are times when fear is good. It must keep its watchful place at the heart’s controls.” – Aeschylus
PERFORMANCE: Serenity Alternative Investments Fund I returned -3.14% net of fees in August vs the REIT index which returned -3.0%. Year to date (YTD) the fund has returned +15.3% vs +16.7% for the REIT index.
INFLATION FEAR: REITs under-performed the broad market in August on fears of higher inflation and interest rates.
WATCHFUL ON GROWTH: Is REIT growth at risk with Oil at $100?
EMOTIONAL CONTROL: Lodging REITs continue to increase guidance, despite macro headwinds.
Observing the mainstream financial media, it is no surprise that modern day investors are often fearful.
“Rates exploding higher”, “Inflation well above target”, “Fed poised to hike”. All these recent buzzwords are enough to induce investor anxiety, especially amongst real estate investors!
And these fears are all legitimate. It was only a few years ago (2022), when the fed increased rates aggressively, REIT growth slowed, and the entire REIT industry fell -25% over a year.
Interest rate and growth concerns are always legitimate investor questions, but luckily for us, data is available to help us contextualize and manage our emotional reactions to incendiary headlines.
How do recent moves in inflation and interest rates compare to 2022?
In 2022 inflation averaged +8.0%, in 2026, it recently reached +3.4%.
In 2022, the 10-year treasury started the year at +1.63% and ended the year at +3.88% (+225
basis points).
In 2026, the 10-year treasury started the year at +4.19% and just hit +5.00% (+81 basis points).
In 2022, the Federal Reserve hiked interest rates 7 times, by +425 basis points.
In 2026, the Federal Reserve has hiked interest rates 1 time, by +25 basis points.
For all the financial handwringing in the 24 hour news cycle, the reality is that interest rates and inflation are changing and a much slower rate than they were 4 years ago and pose a much lower risk to REIT cash flows.
And a more significant, KEY difference, is that growth in 2026 is accelerating for many REIT property types, more than offsetting recent interest rate moves, with continued tailwinds headed into 2027. In 2022, REIT growth decelerated rapidly.
Now imagine what would happen if inflation and interest rates peak in the next month or two, and then fall through the first 6 months of 2027? As REIT growth continues to improve?
While a certain dose of fear is prudent in order to properly manage risk, there should also be room for optimism when the data suggests it. Recent moves in interest rates may be frustrating, but they also might set up for the next powerful leg higher in the current REIT bull market.
Is a -3% month in REITs really a Greek tragedy? Or is it a buying opportunity?
PERFORMANCE: -3.14% in August, +15.3% YTD
Serenity Alternative Investments Fund I returned -3.14% in August net of fees and expenses with +94% net exposure versus the MSCI US REIT Index which returned -3.0%. On a YTD basis, the fund has returned +15.3% versus +16.7% for the REIT index. Over the past 5 years Serenity Alternatives Fund I has returned +7.4% annually, net of fees and expenses versus +4.3% for the REIT index.
The most profitable position in the fund for August was Summit Hotels (INN), a short position which returned -13.8%. Summit was the lowest ranked Lodging REIT in the Serenity CORE model going into the month and acts as a hedge within the portfolio for the fund’s Lodging exposure. At the end of July, we tempered our exposure and expectations for Lodging REITs as multiple 2026 tailwinds for the sector had played out. We shorted Summit, assuming that if Lodging REITs struggled (which they did in August), Summit had a high likelihood of falling more than peers. This proved to be the case, providing positive attribution for this position in August.
The worst performing position in the fund in August was Host Hotels (HST), a long position which returned -12.7%. Host, unfortunately, also under-performed Lodging peers in August, after a slightly disappointing Q2 earnings release. Host maintains one of the best balance sheets and management teams of all the Lodging REITs and has seen RevPAR accelerate meaningfully in 2026 relative to 2025. While expectations have come in for Lodging names recently, we believe Host is well positioned to deliver strong results into year end. 2027 estimates remain low for Host, which could set the company up for positive surprises over the next 6 months. Serenity remains long.
REIT FEAR: Have inflation and interest rates killed the REIT bull market?
With the first Fed interest rate hike since 2023 officially on the books, investor sentiment has moved firmly into the “higher for longer” camp on inflation and interest rates. In the last Fed hiking cycle, REITs came under significant pressure, falling -25% in 2022, and triggering a multi-year bear market across the commercial real estate industry.
It is not surprising then, that REIT investors are fearful of another fed hiking cycle.
But 2026 is very different than 2022, and a few key caveats are needed on the inflation front.
First of all, core inflation is much lower in 2026 than it was in the previous fed hiking cycle. From May of 2021 to October of 2023, core inflation (inflation ex food and energy) did not drop below +4%, and peaked above +6%. In 2026, core inflation has round tripped from +2.5%, to +2.8%, and back to +2.4% in August. What does this mean? That almost the entirety of the recent inflationary impulse has been driven by food and energy prices, two things the Fed has very little control over.
This is a key reason I am skeptical that rate hikes will have any impact on headline inflation. As many people have observed, the Fed cannot print barrels of oil.
If we take this analysis a step further, and strip out rent as well, inflation has actually fallen to +1.9% YoY. This series averaged +6.35% in 2022 and is now in-line with the Fed’s long-term target of +2%.
Now I will acknowledge that consumers do need to eat and drive their cars, so stripping key categories OUT of the inflation calculus does not tell the whole story. But what about businesses that do not have energy or food as a key input? They are doing just fine.
Traditionally, the Fed relies more heavily on core inflation as an indicator than headline CPI because it is less volatile. Energy shocks are traditionally treated as (wait for it) “transitory” in the Feds model, which is a dirty word after 2022, but this time it actually might be the case that inflation is transitory. In fact, core inflation is suggesting just that.
A persistent uptick in core inflation would be much more worrisome than an energy shock that may prove to be temporary. Currently, there is little evidence that core inflation is moving higher.
The Bottom Line: The recent uptick in inflation, while concerning, is much different than the inflationary surge we saw in 2022. Core inflation has not moved higher, suggesting the headline CPI number may moderate rapidly if the recent energy shocks abate. For this reason REIT investors should be much less concerned that a significant number of fed hikes are in the pipeline.
GROWTH RISKS: What to watch for in macro data…
While inflation and interest rates garner the lions share of headlines in the REIT sphere, as we have written recently, growth is in fact a much more important factor for long-term REIT performance. REITs remain positive YTD due to accelerating growth, and DESPITE a more than +80 basis point move higher in the 10-year treasury yield.
The KEY question then becomes, will $100 oil slow REIT growth?
This question is front and center for investors as we head rapidly towards 2027. And while the impact of oil prices on REIT demand is incredibly difficult to quantify, we can look towards the other side of the demand/supply equation for some clues.
The chart below shows starts, permits, and units under construction for the multi-family industry going back 20 years. Following the post-pandemic building boom of 2022 and 2023, units under construction has normalized near pre-pandemic levels, and will likely continue to fall over the next 2 years.
Similar dynamics exist for Warehouse construction, Self-Storage assets, and even Offices. Competitive supply in commercial real estate continues to retreat, paving the way for continued improvements in the operating environment for owners of high-quality real estate.
The Bottom Line: While demand can be difficult to forecast, competitive supply is much easier to quantify, and trends look favorable for REITs over the next 18 months, as less supply is delivered in most commercial real estate property types.
LODGING: The perfect current microcosm?
So to recap, inflation looks less problematic than the headline may suggest, and competitive supply for REIT portfolios continues to moderate, acting as a tailwind for REIT fundamentals. Let’s complete the circle, then and examine some REIT cash flows. This is where the rubber really meets the road.
The Lodging industry is a good place to start when looking for macro impacts on REIT portfolios. Lodging REITs re-price their assets on an almost daily basis, and RevPAR is reported by smith travel on a weekly basis. Therefore, if oil prices or inflation are going to erode REIT cash flows, it is likely to show up in Lodging portfolios first.
So what are we hearing from the Lodging REITs in September of 2026?
The picture to the right is from Diamondrock’s (DRH) September 2026 investor presentation. As you can read in the graphic, July and August were ahead of company expectations, with Q3 RevPAR trending towards +5%.
This is significant, because most analysts have growth trending towards +0% by 4Q of this year for the Lodging REITs, and being flat to negative for 2027. Said another way, expectations are for a growth slow-down into year end, and Diamondrock is reporting that this is NOT happening.
Pebblebrook (PEB) has reported something similar. Their September presentation contains the following bullets.
Pebblebrook is experiencing RevPAR growth that is DOUBLE the top end of their guidance for Q3 of 2026. Digest that sentence for a second. Like Diamondrock, Pebblebrook expected a growth slow-down in Q3, and it has NOT materialized. This is not the kind of data that comes out of an economy being significantly impacted by high gas prices and higher interest rates.
Again, all the caveats are necessary here regarding the risks of structurally higher oil prices and interest rates. In the future they very well may have a negative impact on REIT demand. But based on recent data, that does not seem to currently be the case. The most economically sensitive REIT property type is outpacing expectations by a WIDE margin, DESPITE recent economic headwinds.
The Bottom Line: Recent updates from multiple Lodging REITs are uniformly positive on the demand front. While higher Oil prices and interest rates may impact REIT demand down the road, the impact currently seems muted, as Lodging REITs continue to see RevPAR come in much better than expectations.
2026 IS NOT 2022
REIT investors are rightfully fearful of inflation in 2026, but the environment for REITs is massively different this time around. Core inflation is subdued, REIT supply is in retreat, growth is accelerating for many REIT property types, and even the most macro-sensitive REITs continue to post strong fundamental results.
Looking forward to 2027, it is worth asking the question…what if energy prices mean-revert, and inflation falls back towards +2.5% or even +2%? In that environment, the Fed could be CUTTING interest rates in 2027, while cyclical REIT growth accelerates.
We got a taste of that environment in early 2026, prior the Iran war, when REITs started the year +11% during January and February.
Higher interest rates in the short term are painful, as is +$100 oil. But don’t let fear take the wheel. Examine the data and embrace the possibility that REITs could be back in the driver’s seat in 2027.
Have no fear, 2027 will soon be here!
Martin D Kollmorgen, CFA
CEO and Chief Investment Officer
Serenity Alternative Investments
*All charts generated using data from Bloomberg LP, S&P Global, and Serenity Alternative Investments
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