The common wisdom held by the market is that REITs outperform during rising inflation. However, this analysis goes back to the 1970s, so nearly all outperformance comes from the late 1970s and early 1980s, when inflation was very high.
Restricting the analysis to just 2000 through the present shows that there is zero relationship between REIT performance and inflation.
All REIT sectors averaged rental rate growth above inflation in the prior economic cycle. However, high inflation also leads to higher expense growth, lower development yields, and likely higher interest rates, which offsets potential performance gains.
Advisors should caution their clients to moderate their expectations for performance gains in inflationary environments.
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