By Adam Ruggiero, William Pattison, Michael Steinberg and Austin Iglehart
Accelerating economic growth and a small supply pipeline relative to history have left real estate fundamentals in a solid position, especially when compared to similar periods in past cycles. As a new congress takes office next month, however, the risk of government gridlock also rises, similar to the split congress that took office in 2011. For several years following 2011, legislation was slow to move, a government shutdown slowed economic growth, and U.S. Treasury debt was either put on negative watch or downgraded by the major rating agencies. Today, rising deficits and the threat of government dysfunction may leave the Federal Reserve in the unfortunate position of balancing its low inflation mandate with the economic repercussions of potential further rating downgrades. This dynamic, as well as tariffs and a tight labor market, point toward potentially higher inflation in 2019 and beyond. Portfolio managers who increase their allocation to inflation protected sectors, such as real estate, may therefore be better positioned to outperform.
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