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.

Disclosure: Hoya Capital Real Estate advises two Exchange-Traded Funds listed on the NYSE. In addition to any long positions listed below, Hoya Capital is long all components in the Hoya Capital Housing 100 Index and in the Hoya Capital High Dividend Yield Index. Index definitions and a complete list of holdings are available on our website.

Hoya Capital Research & Index Innovations (“Hoya Capital”) is an affiliate of Hoya Capital Real Estate, a registered investment advisory firm based in Rowayton, Connecticut that provides investment advisory services to ETFs, individuals, and institutions. Hoya Capital Research & Index Innovations provides non-advisory services including market commentary, research, and index administration focused on publicly traded securities in the real estate industry.

This published commentary is for informational and educational purposes only. Nothing on this site nor any commentary published by Hoya Capital is intended to be investment, tax, or legal advice or an offer to buy or sell securities. This commentary is impersonal and should not be considered a recommendation that any particular security, portfolio of securities, or investment strategy is suitable for any specific individual, nor should it be viewed as a solicitation or offer for any advisory service offered by Hoya Capital Real Estate. Please consult with your investment, tax, or legal adviser regarding your individual circumstances before investing.

The views and opinions in all published commentary are as of the date of publication and are subject to change without notice. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. Any market data quoted represents past performance, which is no guarantee of future results. There is no guarantee that any historical trend illustrated herein will be repeated in the future, and there is no way to predict precisely when such a trend will begin. There is no guarantee that any outlook made in this commentary will be realized.

Readers should understand that investing involves risk and loss of principal is possible. Investments in real estate companies and/or housing industry companies involve unique risks, as do investments in ETFs. The information presented does not reflect the performance of any fund or other account managed or serviced by Hoya Capital Real Estate. An investor cannot invest directly in an index and index performance does not reflect the deduction of any fees, expenses or taxes.

Hoya Capital Real Estate and Hoya Capital Research & Index Innovations have no business relationship with any company discussed or mentioned and never receives compensation from any company discussed or mentioned. Hoya Capital Real Estate, its affiliates, and/or its clients and/or its employees may hold positions in securities or funds discussed on this website and our published commentary. A complete list of holdings and additional important disclosures is available at www.HoyaCapital.com.