• U.S. equity markets rebounded Thursday ahead of the critical nonfarm payrolls report as inventors monitored the progression of the debt ceiling deal through Congress and cheered surprisingly dovish Fed commentary.

• Pushing back into positive territory for the week, the S&P 500 finished higher by 1.0%, while the tech-heavy Nasdaq 100 once again led the advance with gains of 1.2%.

• Real estate equities were mixed as strength from residential and technology REITs offset weakness from office and retail REITs. The Equity REIT Index finished flat while Mortgage REITs rallied 1.7%.

• Extending its rally sparked last week by the blowout Nvidia (NVDA) earnings results last week, Digital Realty (DLR) was among the leaders today on reports of M&A activity in the data center space with Brookfield Infrastructure (BIP) and DigitalBridge (DBRG) are reportedly competing for Compass Datacenters.

• Asset manager Blackstone (BX) disclosed that it again had to limit withdrawals from its non-traded real estate platform in May - the seventh straight month that the firm's flagship fund limited redemptions. Investors who have stood in line since last November have now received 90% of their money back.

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Income Builder Daily Recap

U.S. equity markets rebounded Thursday ahead of the critical nonfarm payrolls report as inventors monitored the progression of the debt ceiling deal through Congress and cheered surprisingly dovish Fed commentary. Pushing back into positive territory for the week, the S&P 500 finished higher by 1.0%, while the tech-heavy Nasdaq 100 once again led the advance with gains of 1.2%. The Dow advanced 153 points, while the Mid-Cap 400 and the Small-Cap 600 each gained about 1%. Dovish comments from Philadelphia Fed President Harker sparked a third day of gains for Treasuries. The 2-Year Treasury Yield declined 7 basis points to 4.34%, while the 10-Year Yield declined by 3 basis points to 3.61%. Real estate equities were mixed today as strength from residential and technology REITs offset weakness from office and retail REITs. The Equity REIT Index finished flat with 9-of-18 property sectors in positive-territory while the Mortgage REIT Index rallied nearly 2%. 

Real Estate Daily Recap

Best & Worst Performance Today Across the REIT Sector

Today we published State of REITs: Distress & Opportunity. Whether fundamentally justified or not, commercial and residential real estate markets continue to bear the brunt of the Federal Reserve's historically swift monetary tightening cycle. Commercial real estate, in particular, has been the boogeyman that bank executives have blamed for unrelated distress. While there are pockets of distress, actual default rates remain historically low. The pockets of distress are almost entirely debt-driven, with the notable exception of coastal urban office properties. Nearly every property sector reported "same-store" property-level income above pre-pandemic levels. Property-level fundamentals are fine, but some balance sheets are not. Many real estate portfolios - particularly private equity funds and non-traded REITs - were not prepared for anything besides a near-zero-rate environment. With commercial property values now 15-20% below 2022 highs, and with interest rates doubling from last year, the tide is just beginning to recede for many highly-levered portfolios or those lacking access to capital.

Speaking of distress, asset manager Blackstone (BX) disclosed that it again had to limit withdrawals from its non-traded real estate platform in May - the seventh straight month that the firm's flagship fund limited redemptions. BREIT received $4.4 billion of redemption requests in May and paid out just 30% of those requests to investors, up slightly from the 29% of requests fulfilled last month. BREIT has paid out $7.5B to redeeming shareholders since November 30, 2022 when redemption limits began. BREIT noted that an investor that requested their money back beginning last November - and did so in every month since then - has received 90% of their money back - which BREIT cited as evidence that "the semi-liquid structure is working as intended." As noted in our Casino REIT report last week, analysts have questioned BREIT's self-reported NAV, and investors have seized on the opportunity to redeem shares at these premium NAV valuations.

Data Center: Extending its rally sparked last week by the blowout Nvidia (NVDA) earnings results last week, Digital Realty (DLR) was among the leaders today on reports of M&A activity in the data center space. Brookfield Infrastructure (BIP) and DigitalBridge (DBRG) are reportedly competing to purchase privately-held Compass Datacenters for more than $5.5 billion, including debt. Compass currently operates roughly 16 data centers across the US, Europe, and Israel. Brookfield and DigitalBridge are leading separate consortiums with an outcome of the sale process is expected by next month. Last week, Nvidia said that it is "significantly increasing its supply of data center chips" to meet "surging" demand resulting from investments in artificial intelligence ("AI"). In our REIT Earnings Recap, we noted that data center REITs have seen improved pricing power in recent quarters as supply/demand conditions have tightened after a three-year stretch of lackluster rent growth. 

Office: Sunbelt-focused office REIT Highwoods Properties (HIW) announced that it sold two non-core assets for combined proceeds of $40.2M at an implied capitalization rate of 6.5%. HIW commented that the transactions "highlight that high-quality buildings with healthy occupancy continue to generate solid interest from qualified buyers" and noted that proceeds from these sales will "fortify our already healthy balance sheet." Independence Park - a 116K square foot office building in Tampa -  was sold for $19.5M. The property is 100% occupied by a single user under a lease the company signed with the new user last year. As part of the sale of One Independence Park, the Company provided $9.8 million in non-recourse first mortgage seller financing at an annual rate of 5.50%. Riverbirch - a 60K square foot office building in Raleigh - was sold for $20.7M. It's also 100% occupied by a single customer that recently renewed under a long-term lease. As we discussed in Office REITs: How Bad Is It, we believe that the longer-term outlook remains far "sunnier" in the Sunbelt and in secondary markets with net population growth, shorter commute times, and a more favorable industry mix.

Mortgage REIT Daily Recap

Mortgage REITs continued their strong week amid a broader rally across fixed-income markets with residential mREITs advancing 1.9% today while commercial mREITs gained 1.2%. Ready Capital (RC) announced after the close today that its Board approved a $100.0M stock repurchase program of its common stock. The buyback plan follows the closing yesterday of its acquisition of fellow mortgage REIT Broadmark Realty, which was the first of six REIT merger deals announced over the past three months. Hannon Armstrong (HASI) was among the leaders today after it announced that it increased its revolving credit facility by $240M to $840M and also expanded the accordion feature by $420M, resulting in total capacity of up to $1.26B.

Economic Data This Week

Employment data highlights a critical week of economic data in the week ahead, headlined by JOLTS report on Wednesday, ADP Payrolls data and Jobless Claims data on Thursday, and the BLS Nonfarm Payrolls report on Friday. Economists are looking for job growth of roughly 180k in May, which follows a solid month of April in which the economy added 253k jobs. The closely-watched Average Hourly Earnings series within the payrolls report - which is the first major inflation print for May - is expected to show a cooldown in wage growth in May to 4.3%. 'Good news is bad news' will likely be the theme of these reports as several Fed officials have pinned their decisions to pivot away from aggressive monetary tightening on a long-awaited cooldown in labor markets. As noted above, swaps markets imply a 65% probability that the Fed will hike rates by 25 basis points in their mid-June meeting to a 5.50% upper bound, continuing the swiftest rate hike cycle since the early 1980s. We'll also see housing data on Tuesday via the Case Shiller Home Price Index and Construction Spending data on Thursday and we'll see another busy slate of PMI data throughout the week. 

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