Cracks Emerge In Jobs Market

Real Estate Weekly Outlook

This is an abridged version of the full report and rankings published on Hoya Capital Income Builder Marketplace on April 6th.

U.S. equity markets snapped a three-week winning streak while benchmark interest rates dipped to seven-month lows after a critical slate of employment data revealed some cracking in the long-resilient labor markets. Just as volatility from the regional bank crisis began to subside – and as hopes of a “soft landing” were renewed – OPEC injected fresh uncertainty into financial markets this week with a surprise production cut, which sent oil prices sharply higher and revived some concerns of prolonged inflationary headwinds.

Following its strongest weekly advance in five months, the S&P 500 finished fractionally lower this week, while the Mid-Cap 400 and Small-Cap 600 each posted steeper declines of over 2.5%. The tech-heavy Nasdaq 100 finished lower by 0.9% but remains higher by nearly 20% on the year, significantly outpacing the other major benchmarks. After leading on the upside in the prior two weeks, real estate equities were among the laggards this week despite continued downward pressure on longer-term benchmark interest rates. The Equity REIT Index slipped 0.8% on the week, with 13-of-18 property sectors in negative territory, but the Mortgage REIT Index advanced 0.4%.

Seizing the spotlight from the busy slate of employment data, the Organization of the Petroleum Exporting Countries (“OPEC”) made a surprise announcement to cut more than a million barrels of output a day starting next month, sending the WTI Crude Oil benchmark to above $80/barrel – higher by about 6% for the week and continuing a three-week rally from recent lows in mid-March of $67. Despite the surprise production cut, however, benchmark interest rates dipped to fresh seven-month low this week before rebounding on Friday in the abbreviated session following the March jobs report. The policy-sensitive 2-Year Treasury Yield dipped to as low as 3.63% this week before paring its declines to close at 3.99%. The 10-Year Treasury Yield declined to as low as 3.25% before closing the week around 3.40%. Six of the eleven GICS equity sectors finished lower on the week, with Industrials (XLI) and Consumer Discretionary (XLY) 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.

Unveiled to a closed U.S. equity market due to the Easter holiday, the critical BLS nonfarm payrolls report showed that the U.S. economy added 236k jobs in March – slightly below expectations of 240k and marking the lowest monthly increase since December 2020. All three major employment reports earlier in the week also missed consensus estimates on the downside. ADP Research reported that private payrolls rose 145,000 last month, which was below the median estimate of 200,000. The Labor Department, meanwhile, reported that there were 9.93 million job openings in February – falling below 10 million for the first time in nearly two years. Jobless claims data showed that initial claims jumped to 228k last week while continuing claims jumped to 1.82M – significantly above the 200k and 1.7M consensus estimates – while prior weeks were revised significantly higher as part of an updated methodology that the DOL says were necessary to adjust for pandemic-related distortions.

The most relevant inflation-related metric in determining the path of Fed policy – Average Hourly Earnings – was also cooler-than-expected, rising at a 4.2% annual rate, which was below the forecast of 4.3%. Over the past three months, the annualized increase in AHE has averaged 3.6%, which is only slightly above the 2015-2019 average of 2.9%. Perhaps skewing the AHE numbers a bit, job gains in recent months have been concentrated in sectors with lower average hourly earnings, including in the leisure and hospitality sector – which added 70k jobs in March. There was more “good news” on the inflation front in the household survey, which showed that the labor force participation rate recovered to its highest level since March 2020 at 62.6%.

Equity REIT Week In Review

Best & Worst Performance This Week Across the REIT Sector

Asset manager Blackstone (BX) slid more than 6% on the week after it disclosed that it again had to limit withdrawals from its $70 billion non-traded real estate platform in March – the fifth straight month that the firm’s flagship fund limited redemptions. Total redemption requests for March jumped to $4.5B – up 15% from the prior month, and Blackstone fulfilled just 15% of these requests – $666M – down from 35% in February and 25% in January. Blackstone has been exercising its right to block investor withdrawals from its privately-traded fund BREIT since November after requests exceeded its cap set at 2% of net asset value (“NAV”) in any month and 5% of NAV in a calendar quarter. BREIT – which determines its NAV internally subject to review from a third-party appraiser – claims to have generated a positive 8.4% net return in 2022 during which time publicly-traded equity REITs were lower by 26% and private market commercial real estate valuations declined 13.2%, per estimates from Green Street Advisors. Naturally, investors have seized on the opportunity to redeem shares at these premium NAV valuations, and outflows are likely to continue until this valuation gap narrows.

Storage: Major M&A news highlighted an otherwise fairly quiet slate of news flow in the holiday-shortened week. Life Storage (LSI) – which we own in the Dividend Growth Portfolio – rallied nearly 10% after it agreed to be acquired by Extra Space Storage (EXR) in a $12.4B all-stock deal that will combine the second and fourth largest storage REITs. The transaction will create the largest storage facility operator in the U.S. in terms of the number of locations, eclipsing Public Storage (PSA), whose $11B bid for LSI earlier this year was rejected. The combined company will own 3,500 self-storage facilities, representing over 264 million square feet and serving over two million customers. Life Storage stockholders will receive 0.8950 shares of EXR share per share of LSI, representing a price of $145.82/share as of the prior day’s close. Life Storage also became the 43rd REIT to hike its dividend this year, raising its quarterly payout this week by 20% to $1.20/share.

Net Lease: W. P. Carey (WPC) was among the laggards this week after announcing a $470M sale-leaseback deal for four pharmaceutical R&D and manufacturing campuses with Apotex Pharmaceutical. One of WPC’s largest deals of the past decade, the deal brings WPC’s total year-to-date investment volume to approximately $650M – the most active REIT during this period. The Apotex portfolio is comprised of 11 properties covering 2.3 million square feet across four campuses around Toronto. Structured as a triple-net master lease with rent payable in US dollars and fixed rent escalations over a 20-year term, the sale-leaseback transaction closed concurrently with private equity firm SK Capital’s majority buyout of Apotex, financing a portion of the buyout. Last week in Net Lease REITs: Business As Usual, we discussed how strong balance sheets and lack of variable rate debt exposure have positioned these REITs to be aggressors as over-levered private players seek an exit.

Apartment: Veris Residential (VRE) rallied more than 7% this week after it announced the completion of its $420 million sale of Harborside 1, 2, and 3 Class A office buildings in Jersey City, NJ – marking the effective completion of its strategy shift away from office and into a pure-play multifamily REIT. A relatively well-time strategy shift that began in late 2021 for the company formerly known as Mack-Cali, apartment assets now account for approximately 98% of its net operating income, up from 39% as of the end of the first quarter of 2021. The closing of this transaction completes over $2 billion of non-strategic asset sales during the past two years.

Hotels: Ryman Hospitality (RHP) advanced 1% this week after it provided preliminary Q1 operating results, noting that total Revenue Per Available Room (“RevPAR”) rose to $452.89 in Q1 – which was 22% above its comparable pre-pandemic level from Q1 of 2019. RHP commented that its strong RevPAR metrics were “driven by record first quarter Average Daily Rates (“ADR”) and strong outside the room spend as the number of group room nights traveled continued to increase.” Small-cap Sotherly Hotels (SOHO) – which owns ten hotels in the Sunbelt region – finished flat on the week after providing an operating update with preliminary Q1 metrics. SOHO reported RevPAR of $113.28 for the quarter, which was roughly 2.5% below its comparable pre-pandemic RevPAR in Q1 of 2019. SOHO reported ADR of $189.08 in Q1, which was about 7% above pre-pandemic levels, which offset a roughly 10 percentage-point drag from lower occupancy. Recent TSA Checkpoint data shows relatively strong demand trends in early 2023 with both January and February exceeding pre-pandemic throughput levels, but March saw a slight downshift in demand to about 2% below comparable 2019-levels.

Industrial: Southern California-focused Rexford (REXR) slipped 2% this week after it announced $360M in acquisitions across three industrial property purchases. The properties include: 1) 3520 Challenger Street, Torrance, located in the LA – South Bay submarket for $14.2 million; 2) 9000 Airport Boulevard, Los Angeles, located in the LA – South Bay submarket for $143.0 million; 3) 9223 and 9323 Balboa Avenue and 4285 Ponderosa Avenue, San Diego, located in the Central San Diego submarket for $200.0 million. Elsewhere, Plymouth (PLYM) slipped about 1% after providing preliminary Q1 operating metrics, noting that it signed 769K sf of leases with a 15.9% increase in rental rate on a cash basis on these leases – a slight deceleration from PLYM’s 18.1% cash leasing spread in Q4. The total leases include 646K sq. ft. of renewal leases and 123K sq. ft. of new leases.

Single-Family Rentals: This week, we published Single Family Rentals: Renting The American Dream. One of the best-performing property sectors this year, Single-Family Rental REITs have rebounded as the previously-sluggish U.S. housing sector has shown signs of life amid a moderation in mortgage rates. The dire predictions of a “hard landing” in rental markets have been rebuffed in recent months by steadying rental rates and strong occupancy trends seen across the major rent indexes. While multifamily markets face supply headwinds over the next year, single-family builders have pulled back from an already historically supply-constrained single-family market, fundamentals that support sustained inflation-beating rent growth. That said, recent upstart entrants that pushed the leverage limits are learning the hard way that SFRs are a capital-intensive and logistically-challenging business that requires considerable scale to operate profitability through business cycles, which may be a catalyst to drive further market share gains to larger institutions that have access to cheaper and deeper capital.

Mortgage REIT Week In Review

Mortgage REITs were mixed this week, stabilizing after a two-week rally that followed sharp declines in early March. The iShares Mortgage Real Estate Capped ETF (REM) – which had dipped nearly 14% in the first two weeks of March – has erased half of those declines over the past three weeks with another 0.4% advance this week. On an otherwise quiet week of news flow, Rithm Capital (RITM) finished lower by about 2% after it announced that it will be expanding its business into Europe and opening a new office in London. Rithm Europe will be led by recently hired Marty Migliara, the former head of EMEA origination and lending in Bank of America’s global mortgages and securitized products team. Rithm Europe will seek equity and debt investments across the real estate and consumer finance sectors in the region, sourcing opportunities for both private funds and Rithm Capital’s $32 billion balance sheet.

We’ve kept our eyes on the underlying Residential MBS (MBB) and Commercial CMBS (CMBS) markets throughout the recent banking crisis. These indexes remain in positive territory for the year – a surprise for some, considering the amplified media focus in recent weeks – as downward pressure from wider spreads has been more than offset by tailwinds from the decline in benchmark interest rates. CMBS spreads widened from 1.16% at the end of Q4 to 1.42% at the end of Q1 (26 basis points) and held steady through the first week of Q2, while RMBS spreads widened from 0.50% to 0.63% during the quarter (13 basis points) and were also steady this week. We discussed in our Mortgage REITs report last week how sharp changes in benchmark rates and/or spreads in either direction can wreak havoc on mortgage REITs that are caught over-levered or improperly hedged – a risk that is particularly acute for agency-focused mREITs that typically employ more extensive hedging programs.

REIT Capital Raising & REIT Preferreds

In our State of the REIT Nation report, we noted that after a historically quiet year of capital-raising activity in 2022, some of the larger REITs have returned to the primary markets in recent weeks to take advantage of the pullback in rates over the past month. This week, Realty Income (O) announced $1B in new bond issuance – the third largest capital raise in the REIT sector this year behind American Tower’s (AMT) $1.5B senior note offering and Simon Property’s (SPG) $1.3B senior note offering. Realty Income’s offering included $400M of 4.70% senior unsecured notes due 2028 and $600M of 4.90% senior unsecured notes due 2033. Elsewhere, Ventas (VTR) priced a CDN $600M in 5.398% Senior Notes due 2028 to refinance its 2.80% Senior Notes due 2024 and 4.125% Senior Notes due 2024. While some larger REITs have started to dip their toes back into the water, S&P reported that capital-raising activity across the U.S. REIT sector was roughly 70% below last year’s levels in Q1. REITs raised $6.76B in capital across 19 offerings in Q1 compared to $23.62B raised in Q1 2022 from 68 instruments.

2023 Performance Recap & 2022 Review

Through fourteen weeks of 2023, the Equity REIT Index is now lower by 0.1% on a price return basis for the year, while the Mortgage REIT Index is lower by 3.3%. This compares with the 7.0% gain on the S&P 500 and the 0.9% gain for the S&P Mid-Cap 400. Within the real estate sector, 9-of-18 property sectors are in positive territory on the year, led by Self-Storage, Industrial, and Single-Family Rental REITs. At 3.29%, the 10-Year Treasury Yield has declined by 59 basis points since the start of the year, which is more than a full percentage point below its 2022 highs of 4.30%. The US bond market has stabilized following its worst year in history as the Bloomberg US Aggregate Bond Index has gained 3.5% this year.

Hoya Capital Rings NYSE Closing Bell

Hoya Capital rang the NYSE Closing Bell on Wednesday afternoon to commemorate the listing of (RIET) and to recognize the four-year anniversary of the launch of (HOMZ). To honor the occasion, Alex Pettee, President of Hoya Capital, and Sheila Pettee, CEO of Hoya Capital, were joined by Jon Herrick, Head of Markets at the NYSE, to close the U.S. trading day.

Thank you to all that were able to come to share this amazing experience together – and to everyone who cheered from afar! It was incredible to celebrate alongside friends, colleagues, professors, teammates, students, investors, and family. On behalf of the Hoya Capital team, we’d like to thank all of our readers, subscribers, and investors for their continued support!

Economic Calendar In The Week Ahead

Inflation is in the spotlight in another jam-packed week of economic data in the week ahead. The main event comes on Wednesday with the Consumer Price Index for March, which investors and the Fed are hoping will show a cooling of inflationary pressures. The headline CPI is expected to moderate to a 5.2% year-over-year rate, while the Core CPI is expected to decelerate to 5.6%. As with recent months, the metric we’re watching most closely is the CPI-ex-Shelter Index. On Thursday, we’ll see the Producer Price Index, which is expected to show an even more significant cooling of price pressures with the headline PPI expected to slow to a 3.1% year-over-year rate – down from the recent peak last March at 11.8%. On Friday, we’ll see Retail Sales data – which is expected to show a second straight month-over-month decline in sales – along with the first look at Michigan Consumer Sentiment for April, a report which includes the closely-watched inflation expectations survey.

For an in-depth analysis of all real estate sectors, check out all of our quarterly reports: Apartments, Homebuilders, Manufactured Housing, Student Housing, Single-Family Rentals, Cell Towers, Casinos, Industrial, Data Center, Malls, Healthcare, Net Lease, Shopping Centers, Hotels, Billboards, Office, Farmland, Storage, Timber, Mortgage, and Cannabis.

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.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.