Fed Hikes • 'Pain' Necessary • Rent Updates
U.S. equity markets finished sharply lower Wednesday after the Federal Reserve initiated another "jumbo" 75-basis-point interest rate hike while Chair Powell reiterated that economic "pain" was necessary to cool inflation.
Dipping back below the 'bear-market' threshold of 20% declines, the S&P 500 dipped another 1.7% today to its lowest level since July while the tech-heavy Nasdaq deepened its drawdown to 30%.
Real estate equities were among the better performers as longer-term interest rates pulled back from fifteen-year highs following the Fed rate decision. The Equity REIT Index declined by 1.6% today.
Fed Chair Powell's insistence that the U.S. economy remains "strong and robust" was perhaps the most hawkish of comments, clashing with data showing that the U.S. economy may record a third-straight quarter of GDP contraction in Q3, which has only occurred once since 1975.
Apartment Income (AIRC) was among the better performers today after providing an upbeat operating update amid recent signs that the rate-driven housing market cooldown is beginning to moderate rent growth. AIRC noted that it achieved blended rent growth of 14.0% in August.
Real Estate Daily Recap
U.S. equity markets finished sharply lower Wednesday after the Federal Reserve initiated another "jumbo" 75-basis-point interest rate hike while Chair Powell reiterated that economic "pain" was necessary to cool inflation. Dipping back below the 'bear market' threshold of 20% declines, the S&P 500 dipped another 1.7% today to its lowest level since July while the tech-heavy Nasdaq 100 deepened its year-to-date drawdown to 30%. Real estate equities were among the better performers as longer-term interest rates pulled back from fifteen-year highs following the Fed rate decision. The Equity REIT Index declined by 1.6% today with 17-of-18 property sectors in negative territory while the Mortgage REIT Index slipped 0.9%.
While the 75-basis-point rate hike was consistent with expectations, Fed Chair Powell's insistence that the U.S. economy remains "strong and robust" clashed with recent data showing that the U.S. economy may record a third-straight quarter of GDP contraction in Q3, which has only occurred once since 1975. The 10-Year Treasury Yield declined 6 basis points to 3.51% while the 2-Year Yield rose to 4.06%, resulting in the widest 10-2 yield curve inversion in over forty years. All eleven GICS equity sectors finished lower today while the US Dollar Index rallied to fresh two-decade highs. Crude Oil declined 1% despite an apparent escalation in the Russia/Ukraine War.
Real Estate Daily Recap
Best & Worst Performance Today Across the REIT Sector
Apartment: Apartment Income (AIRC) - which we own in both the REIT Focused Income and REIT Dividend Growth Portfolios - was among the better-performers today after providing an upbeat operating update amid recent signs that the rate-driven housing market cooldown is beginning to moderate rent growth. AIRC noted that it achieved blended rent growth of 14.0% in August, the highest among the coastal apartment REITs that have provided recent updates. It projects that occupancy will "continue to increase" into year-end and that full-year operating expenses are expected to remain roughly flat. AIRC commented, "the economy is unusually turbulent, but AIR’s early prospects for 2023 are excellent. At year-end, the expected earn-in from 2022 leasing activities is expected to provide approximately 5% Same Store Revenue growth in 2023, with expected loss-to-lease providing the opportunity for additional growth." Recent data from Zillow (Z) shows that national rent growth has cooled from its early 2022 peaks but remained higher by more than 12% year-over-year in August amid a lingering undersupply of housing.
Industrial: This afternoon, we'll publish an updated report on Industrial REITs on the Income Builder Marketplace. A perennial performance leader in recent years, Industrial REITs have been slammed this year despite delivering stellar operating performance. Demand for well-located logistics and warehouse space continues to significantly outstrip supply through the end of Q2, even as early effects of the global economic cooldown become apparent. Just as valuations were recovering from the Amazon (AMZN) dip on news that the e-commerce giant pumped the breaks on its aggressive pandemic-fueled footprint expansion, the sector has taken a fresh leg lower after FedEx (FDX) announced a similar "cost management" move last week, citing weakening global demand. While we've been vocal in recent months that the global economic outlook has weakened more substantially than policymakers and Fed officials have been willing to acknowledge, the magnitude of the selloff in industrial REITs appears quite a bit overdone as industrial real estate demand is fundamentally less 'economically sensitive' than many presume. We discuss recent allocations and our updated outlook in the new report.
Mortgage REIT Daily Recap
Per the REIT Rankings Tracker available to Income Builder subscribers, mortgage REITs were mostly lower today despite a bid for mortgage-backed bonds (MBB) as investors parsed comments from the Fed. Residential mREITs declined 1.0% on the day while commercial mREITs slipped 0.6%. After the close today, Two Harbors (TWO) announced that its Board of Directors approved a 1-for-4 reverse stock split of the company’s common stock which is expected to take place on November 1, 2022. The company’s common stock will continue trading on the NYSE under the symbol “TWO” but will be assigned a new CUSIP number. TWO also held its dividend steady at $0.17/share, payable on October 28, 2022.
Economic Data This Week
We'll publish a full analysis and commentary of this week's developments in the real estate industry, as well as an analysis of the busy week of economic data in our Real Estate Weekly Outlook this weekend.
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