Public real estate returns and inflation shocks: The central role of inflation nonneutrality

We study the comovement of public real estate returns and inflation shocks over 1981–2022, using both survey‐based expected inflation and the Consumer Price Index (CPI). We find a complex relation that is: strongly negative during weaker‐economic (WE) times over the 1980s and 1990s, when stagflation was more a concern; strongly positive during WE times over roughly 2000–2022, when low growth with low inflation tended to be more a concern; and marginally negative otherwise. Linking inflation to both macroeconomic fundamentals and real estate operational data, we show that inflation shocks comove with changing beliefs about the underlying economic‐growth state and/or the risk premium. Thus, we argue that inflation nonneutrality has a central role in understanding our findings.