How Inflation Affects Delaware Statutory Trust Returns

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Delaware Statutory Trusts (DSTs) carry a lot of promise, especially for investors looking for passive income, enhanced diversification, and tax-deferral benefits. However, like any other real estate investment, DSTs can still feel the effects of economic realities like inflation. Whether you are already invested in a DST or considering one to end a 1031 exchange, understanding how rising prices influence both income and long-term appreciation is critical. This knowledge helps you prepare for these scenarios and weather them with confidence.

Realized 1031 explores the relationship between inflation and DST returns to provide the insights you need. Let’s take a closer look.

Inflation and Net Operating Income

The most direct effect of inflation is on net operating income (NOI). The rising price of goods also increases the cost of maintenance, utilities, repair services, and more. This issue then shrinks NOI if rent isn’t adjusted accordingly.

Multifamily and self-storage DSTs are often at an advantage here since tenants often enter shorter leases, providing a chance to increase rates more frequently as new tenants enter. Meanwhile, single-tenant net-lease DSTs may find delays in rent escalation, resulting in more stagnant income.

Lease Structure Matters

Rent escalations built into the lease agreement are crucial for ensuring that the DST remains profitable even in inflationary environments. These provisions allow the DST to periodically increase rent to keep up with inflation. Increases can be applied annually based on an agreed-upon rate or by following the consumer price index (CPI) trends.

The structure of the lease itself affects how DST returns resist inflation. NNN leases, in particular, provide additional resilience. Since the tenant handles property taxes, insurance premiums, and maintenance under this arrangement, they are the ones exposed to rising prices of goods instead of the DST.

Which Property Types Are the Most Sensitive to Inflation?

Certain asset classes are more affected than others in inflationary environments, affecting Delaware Statutory Trust performance.

Property Type	Sensitivity to Inflation	Why
Multifamily Homes	Lower sensitivity - often benefits	Housing demand tends to remain strong during inflation, and rents can be adjusted annually or more frequently to keep pace with rising costs.
Industrial Assets	Lower sensitivity	Strong demand for logistics, warehousing, and manufacturing space allows for rent escalations that can offset inflationary pressures.
Healthcare & Medical Services	Very low sensitivity	Healthcare services are essential, making tenant demand more stable even as the cost of goods and services rises.
Retail	Moderate sensitivity (varies)	Retailers selling essential goods are more resilient, while specialty or discretionary retailers are more vulnerable during inflationary periods.

Interest Rates and Capitalization Rates

Interest rates also increase along with inflation. DSTs are shielded during their life cycle from this issue since financing services follow fixed rates. However, if a DST nears its full cycle event and properties need to be disposed of, then the increased interest rates may reduce valuation due to higher cap rates. Plus, the rising cost of goods and debt services may make investors more hesitant to invest in real estate. Together, these factors contribute to overall lower returns at the end of the holding period.

Inflation as a Real Asset Tailwind

Based on our discussions above, inflation brings lots of challenges for DST assets. However, there’s the so-called real estate inflation hedge, alluding to the idea that real property is generally more resilient against inflation compared to other investments.

Tangible properties tend to hold value better than cash or bonds during inflationary times. For one, real estate assets tend to appreciate over time. Plus, the rent escalations in lease agreements allow landlords and DSTs to keep up with the rising rates. Together, these make DSTs resilient investments during inflation. However, we have to remember that cash flow still needs to keep pace. This is where tenant strength comes in.

Tenant Strength and Credit Risk

The credit rating of tenants affects their stability during inflationary periods, and by extension, the performance of the DST. Those with higher credit ratings are more likely to weather inflation, which ensures that the DST can maintain a stable cash flow for investors. The reverse is often true for tenants who have weak finances, especially those in industries that are keenly affected by inflation. For investors, reviewing the sponsor’s due diligence on tenant credit, sector resilience, and lease performance is crucial.

Wrapping Up: DST 1031 Exchange Inflation Impact

DST investment income or returns can be affected by inflation. As the price of goods and services rises, the NOI can go down. This economic challenge can also affect property disposition at the end of the DST’s life, resulting in proceeds that are less than projected. For investors, planning for such possibilities begins during the assessment of the offering memorandum. Checking the lease terms, tenant creditworthiness, rent escalation clauses, and other factors can help you determine whether the DST is ready to handle inflation and preserve cash flow.