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During his testimony before the Senate Banking, Housing and Urban Affairs committee on Tuesday, Fed Chair Powell said inflation "won't leave a permanent mark." But one investor thinks inflation may be here to stay. 

Christopher Merrill is the co-founder and CEO of Harrison Street and sees the stickiness of price increases first-hand with his firm's focus on demographic-driven real estate, such as student housing and nursing homes. Despite the challenges these segments faced during the pandemic, Harrison Street was able to rake in an additional $7 billion last year, bringing AUM to $39 billion.  

Merrill sat down with Leslie Picker to discuss how his strategy has endured over the years and why he thinks inflation may linger for a decade.  

 (The below has been edited for length and clarity.)

Leslie Picker: [Your] strategy, it's weathered the financial crisis, it survived COVID, despite, for a while there, there was some disintermediation in nursing homes and universities. But what about inflation? What about this current macroeconomic environment that feels so uncertain right now? Do you think inflation is here to stay? And how does that impact your portfolio?

Christopher Merrill: I think for one, the certain levels that we're seeing today, I would assume that there will be, as we see improvements in supply chain, I think we'll see some of those numbers come off a little bit. But yeah, I think it's prudent in the way that we're thinking about the businesses that  one should expect some level of now inflation in their portfolio going forward. And frankly, one of the benefits is a large part of the assets in our portfolio, we can reprice. I think when you mentioned that comment on the capital that we've had investing in our asset classes, a lot of it has to do with the ability to have inflation protection built in because we can reprice a lot of our portfolios on a monthly or annual basis.

Picker: What does that mean by reprice? Does that mean raise the rent, essentially?

Merrill: Yes, in a lot of ways it does. It means either raise the rent, get more in line with what market is. If we're building an asset, it's really going to be the opportunity to align that with current market fundamentals. We're seeing a lot of increase in demand. There's been a lot of reduction in supply lately. So really, it's getting that  demand-supply balance in check. And the ability to, again, reprice on the revenue side, really will help protect against inflationary pressures on these asset classes.

Picker: Are you already doing that? Give us a sense of what the inflation picture looks like on the ground right now.

Merrill: I think we're seeing it. The best sense for us is a few things. When you look at our self storage portfolio, we're seeing a lot of increases month-to-month right now. We've seen 6%-7% month-to-month increases in the storage space. Then you take senior housing, which was a sector that everyone was very concerned about coming out of, or, at really the start of the pandemic. We were a bit contrarian, because we saw the fundamentals, we saw the data. And now the third quarter saw the largest absorption in senior housing ever. So I think what you're seeing is a lot of these asset classes that really have that need-based fundamental, more demographics. We're seeing strong occupancy in student housing, we're seeing strong occupancy in our medical office, our life science portfolio. I think it really is about the asset classes we're involved in. But for us, these need-based assets' demographics we think =bode well in the current environment.

Picker: What does that mean, in terms of putting capital to work? You've raised almost $7 billion this year, you have to spend that somewhere. Does inflation give you more pause in terms of putting that capital to work? Or given the price inelasticity that you mentioned of the properties that you're buying, does that make it more appealing to put capital to work right now?

Merrill: We've been fortunate that the investment opportunities have been tremendous, I think we'll invest upwards of $13 billion into both real estate and real assets this year, both North America and Europe. And a lot of that is there are folks that have certainly hit the pause button, that may be sitting on the sidelines as they triage some of their existing traditional assets. We've really never invested in the retail, the hotels, the office, we've always focused more on the demographic side of things. So for us, it's allowed us to sort of look forward and we're playing the long game. For us, it's about demographics, it's not trying to time markets. 

The real challenges, these asset classes that we're in, in the education, healthcare, life science space, they're just hard to access. And so we've been working hard, creating a moat around our business for these relationships. And now a lot of folks are really trying to find ways to access these asset classes, because they see the resilience of them.

Picker: Where are the biggest opportunities right now? 

Merrill: It's a tough one. It's like trying to pick which one of my children I like the best. I think for us, education, healthcare is where our focus is as a firm. We think there's great opportunities to expand our relationships. We're doing a number of public-to-private partnerships with universities and health systems. We're investing heavily in the life science sector. We're seeing great opportunities in data centers, in digital. We're also growing - we have a social infrastructure strategy - we're growing our renewable portfolio, investing in wind, solar, hydro, and district energy. And the nice thing for us is, you know, again, as a demographic investor, need-based investor, these are global themes. So we've expanded the business into Canada. And we've also expanded into Europe in these segments. 

Picker: You mentioned public-private partnerships and your work you've done with universities. We're seeing a lot of mobility in Washington on stimulus. Do you see any potential opportunity for you on that front, whether it's through infrastructure, or spending bills as a whole?

Merrill: I think when you look at the spending bills, there are specific things in there that I think will help part of our portfolios. The spending on broadband, those broadband upgrades will be I think a positive for our data center business. You're seeing enhancements in the power grid. I think that will help transmission within our renewable space, in solar, in wind. I think though, really outside of the bill, one of the benefits we've seen is this $9 billion in COVID technology spending that we've seen over the past year and a half. That's really been a really strong boost to a lot of our life science tenants. And I guess the new build back better plan they're talking about really has a focus on renewable energy and again, that will, I think, bring more focus on our clean energy portfolio, as well. But I guess the real big picture is, going back to the question about inflation, is with all this spending of money, what are your views on inflation? And that's why we think there is going to be some inflation for the near future because of this stimulus and a lot of capital that is coming into the system.

Picker: That's interesting. Not everybody feels that way. How long into the future do you think that the stimulus will keep inflation high, or potentially, and I'll ask you this question, go higher from here?

Merrill: I think in the near term, the numbers have been pretty high so I think we'll see some tapering there. I think it's prudent - I've heard some people say that, within 12 months, there won't be talk of inflation - I think it's prudent to, as you're doing your portfolio allocation, you're thinking about investing, to assume that there is going to be some level of inflation in the near term, and really, for the next decade, because of how much money we're printing right now in the system. So, again, I think it's prudent to really build your portfolio with that anticipation of inflation. I think we're seeing a lot of investors increase their asset allocation to hard assets or real estate, and real assets I think, in lieu of that. I think people do see that there is going to be some pressure in these areas.