CUBE - Wake Me Up When September Ends

Summary

• U.S. equity markets posted their third-straight week of declines while interest rates pushed toward post-GFC highs as Fed officials doubled down on their hawkish pivot despite another slate of soft economic data.
• Extending a three-week selloff that has erased much of the market rebound from mid-June to mid-August, the S&P 500 dipped another 3.2% while Nasdaq extended its year-to-date declines to over 25%.
• Real estate equities were broadly lower as well with the Equity REIT Index finishing off by 3.9% with all 18 property sectors in negative territory while Mortgage REITs slumped 5.5%.
• Office REITs received some good news on the "return to the office" front as several major corporations - notably Wall Street bank Jefferies and tech giant Apple - announced or reiterated plans to require employees to return to the office beginning next week.
• Cooling Jobs Market? The U.S. economy added 315k jobs in August - matching consensus estimates - but the 107k downward revision to the prior two months resulted in the lowest increase in net employment since December 2020 while average hourly earnings rose at the slowest pace in six months.

This is an abridged version of the full report published on Hoya Capital Income Builder Marketplace on September 2nd.

Real Estate Weekly Outlook

U.S. equity markets posted their third-straight week of declines while interest rates pushed back towards post-GFC highs as Fed officials doubled down on their hawkish pivot despite another slate of soft economic data in a late-summer sell-off that pushed the major stock benchmarks to their worst August in seven years. Sentiment has soured amid concern that Fed officials - which were wildly off-the-mark in their inflation forecasts last year - may be again making a significant policy mistake in the opposite direction with investors interpreting harsh comments from Minneapolis Fed Chief Kashkari to indicate that the 'Fed Put' to support market valuations has become a 'Fed Call.'

Extending a three-week selloff that has erased much of the market rebound from mid-June to mid-August, the S&P 500 dipped another 3.2% on the week while the tech-heavy Nasdaq 100 dipped another 4% to push its year-to-date declines to over 25%. The selling pressure was sharper across the Mid-Cap 400 and Small-Cap 600 , which posted declines of 4.2% and 5.2%, respectively in broad-based selling across equity and bond markets. Real estate equities were broadly lower as well with the Equity REIT Index finishing lower by 3.9% on the week with all 18 property sectors in negative territory while the Mortgage REIT Index dipped 5.5%. Homebuilders and the broader housing complex, meanwhile, slumped as hawkish commentary pushed mortgage rates back towards recent highs.

Benchmark interest rates marched higher amid the ongoing drumbeat of hawkish Fed commentary as the benchmark 10-Year Treasury Yield jumped 16 basis points on the week to close just shy of 3.20% - the second-highest weekly closing level of the year behind the June 17th peak. The U.S. Dollar climbed to fresh two-decade highs on decent domestic employment data while signs of further economic stress in Europe and Asia dragged Crude Oil prices and the broader commodities complex lower by 5% after Russia delayed the opening of a critical pipeline to Europe while governments scramble to restart energy production of previously-'cancelled' coal, gas, and nuclear plants to avoid a cold winter. Stateside, political rhetoric intensified two months ahead of the midterm elections with control of the House and Senate in the balance. All eleven GICS equity sectors finished lower on the week with Technology ( XLK ) and Materials ( XLB ) stocks dragging on the downside.

Real Estate Economic Data

Below, we recap the most important macroeconomic data points over this past week affecting the residential and commercial real estate marketplace.

The Bureau of Labor Statistics reported this week that the U.S. economy added 315k jobs in August - roughly matching the consensus estimates - a decent report in light of emerging signs of economic weakness observed across other recent indicators. There were signs that the still-tight labor market is cooling, however, as the 107k downward revision to the prior two months resulted in the lowest increase in net employment since December 2020 while earlier in the week, the revamped ADP measure of employment showed disappointing job growth of 132k in August. Average hourly earnings increased 0.3% for the month and 5.2% from a year ago, both 0.1 percentage point below estimates. The headline U-3 unemployment rate and broader U-6 unemployment rate each climbed to a six-month high of 3.7% and 7.2%, respectively, due primarily to an uptick in the labor force participation rate, which recovered to its highest level since March 2020.

Employment gains were relatively broad-based in August with essentially every category seeing net job growth, led by gains in professional and business services, education, and health care sectors. Notably, the leisure and hospitality sector posted its weakest month of job growth since late 2020 while employment in the industry is still down by 1.2 million, or 6.5%, since February 2020. Weakness in the leisure sector was offset by retail hiring, which posted its strongest month of hiring since February. For the second straight month, the category with the strongest relative increase in hiring in August was the mining and logging sector - even as total oil and gas rig counts declined for the first time in 25 months in August. Hiring in the sector - along with U.S. oil production - remains about 10% below pre-pandemic levels.

Equity REIT Week In Review

Best & Worst Performance This Week Across the REIT Sector

Office : The best-performing property sector this week, office REITs received some good news on the "return to the office" front as several major corporations - notably Wall Street bank Jefferies - announced plans to require employees to return to the office full-time beginning next week as loosening labor market conditions and corporate cost-cutting has prompted a more assertive tone from office managers. Apple ( APLE ), meanwhile, reiterated a return-to-office deadline of September 5 for a return of at least three days per week. With office utilization rates still below 50% of pre-pandemic levels according to recent data from Kastle Systems, September will be a critical month to gauge the longer-term trajectory of office space demand. Elsewhere, small-cap Franklin Street Properties ( FSP ) was among the leader on the week after it announced a $103M sale of a pair of properties in Colorado and plan to use the proceeds from the sale to pay down its debt.

Hotels : Leisure and hospitality-focused REITs lagged this week despite encouraging high-frequency data with TSA Checkpoint data showing a strong end-of-summer swell in travel demand that saw throughput exceed 100% of pre-pandemic levels for the first time since March 2020. Meanwhile, STR reported that U.S. hotel Revenue Per Available Room ("RevPAR") was 12.1% above 2019-levels in the final week of August as a 15% jump in Average Daily Rates offset a 2.5% occupancy deficit. DiamondRock Hospitality ( DRH ) slumped despite reinstating its quarterly dividend - which had been suspended since early in the pandemic - at $0.03/share. While still well below its pre-pandemic dividend of $0.12/share, DRH joins four other hotel REITs that have either reinstated or raised their dividends this year including Apple Hospitality ( APLE ) and Host Hotels ( HST ).

Apartments : Equity Residential ( EQR ) was one of the better performers son the week after it provided an operating update in which it noted that its same-store revenue growth remains on track to meet or exceed the midpoint of its recently-boosted full-year outlook. EQR also reported impressive 11.8% blended leasing spreads in August with occupancy rates remaining near record-highs of 96.6%. Apartment List released its August Rent Report this week which showed that rents rose by 0.5% in August - a deceleration from the red-hot pace earlier this year - but still above the typical pre-pandemic trend. So far in 2022 rents are up 7.2% - below the record 14.8% rate at this point in 2021 but well above the 2.3% growth seen in 2019.

Healthcare : Lab space REIT Alexandria Real Estate ( ARE ) was among the laggards this week after it disclosed that it will recognize a $30M impairment charge related to an investment in a 600k SF development project in California, commenting that the "macroeconomic environment has deteriorated and negatively impacted the financial outlook for this Project." While there have been pockets of lab space weakness amid the sharp slowdown in biotech fundraising activity this year, recent reports indicate that overall lab space demand remains robust. CBRE's lab space outlook last month noted that the national vacancy rate for Lab/R&D space decreased in Q2 to 5.2% while the average asking rent increased by another 6%. The BLS employment report this week, meanwhile, showed that hiring in the scientific R&D sector continues to grow at roughly twice the rate of the overall labor force.

Single-Family Rental : Blackstone Mortgage Trust ( BXMT ) announced an October 6th closing date of its $3.6B acquisition of Bluerock Residential Growth REIT ( BRG ) and the spin-off of Bluerock's single-family rental business into a new exchange-listed REIT - Bluerock Homes Trust ("BHOM") BHOM will own interests in approximately 3,800 homes, including 1,800 wholly-owned homes and 2,000 through preferred/mezzanine investment. Blackstone will externally advise Bluerock Homes and the REIT will be the fourth U.S.-exchange listed SFR REIT alongside American Homes ( AMH ), Invitation Homes ( INVH ), and Tricon Residential ( TCN ). Blackstone also owns single-family rental operator Home Partners of America, which owns roughly 17,000 homes and recently made news for pausing home buying activity in several of its SFR markets. Separately, S&P Global announced that Invitation Homes will be added to the S&P 500 Index in its upcoming quarterly rebalance alongside real estate data firm CoStar Group ( CSGP ) - replacing PVH Corp. ( PVH ) and PENN Entertainment ( PENN ).

Retail : Meme mania coming into the REIT sector? Wheeler Real Estate ( WHLR ) and pair of other micro-cap REITs surged this week on elevated volume without any significant catalyst - seemingly the latest stocks to be caught up in the "meme stock" trend reminiscent of early 2021 when several heavily-shorted mall REITs saw significant intra-day swings. This week, we published Mall REITs: Survival of the Fittest . After showing renewed signs of life after a solid earnings season, Mall REITs are again the worst-performing major property sector in 2022 as recession concerns have offset modestly-improving fundamentals. A microcosm of broader retail trends, mall sector dynamics remain a story of "haves and have nots." Higher-tier malls have benefited from a 'thinning-out' of Class C and D malls. High-end mall occupancy rates and foot traffic returned to pre-pandemic levels by mid-2022 as record-low store closings since 2020 have helped to stabilize fundamentals and restore some modest pricing power. A deep recession would be a death-blow for many lower-tier malls, but the higher-tier malls are no longer teetering dangerously on the edge.

Mortgage REIT Week In Review

Mortgage REITs were sharply lower this week amid renewed pressure on mortgage-backed bond ( MBB ) valuations given the recent hawkish Fed commentary and the jump in longer-term interest rates this week. On a slow week of mREIT newsflow, Orchid Island ( ORC ) was among the laggards after it completed its previously announced 1-for-5 reverse stock split. Rithm Capital ( RITM ) - formerly New Residential - pared some of its losses late in the week after announcing a new 40-year fixed-rate interest-only option through its Newrez division which the company says will provide home buyers more affordable monthly payments. Also of note, Annaly Capital ( NLY ) will be added to the S&P Mid-Cap 400 Index in its quarterly rebalance on September 19th - becoming the only mortgage REIT in the S&P Mid-Cap 400 Index.

2022 Performance Check-Up

With eight months of 2022 now in the books, Equity REITs are now lower by 20.8% on a price return basis for the year while Mortgage REITs have slipped 21.3%. This compares with the 17.7% decline on the S&P 500 and the 15.5% decline on the S&P Mid-Cap 400. Within the real estate sector, casino REITs are now the lone property sector in positive territory for the year while eight REIT sectors are lower by at least 20%. At 3.19%, the 10-Year Treasury Yield has climbed 168 basis points since the start of the year, but remains well below its recent June intra-day highs of 3.50% and slightly below its prior post-GFC-highs of 3.25% seen back in late 2018.

Economic Calendar In The Week Ahead

The economic calendar slows down in the Labor Day-shortened week ahead with U.S. equity and bond markets closed on Monday. Purchasing Managers' Index ("PMI") data be the major focus with the revised S&P Global Composite PMI for August being released on Tuesday. Last week, the preliminary U.S. Flash PMI showed the sharpest decline in economic activity since May 2020 with the Composite Index registering 45.0 - well below breakeven 50. Eurozone business activity, meanwhile, declined for the second month in a row to an 18-month low while S&P Global also reported that activity declined in Japan and Australia for the first time early this year. We'll also be watching Jobless Claims data on Thursday. Investors should also expect another noisy week of Fed commentary as the "Blackout Period" before the September FOMC Meeting will begin at midnight on Friday.

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