Lower Forever? Fed Shift Reinforces Rally


  • U.S. equity markets continued their relentless rally this week amid a bullish convergence of positive economic and housing data, encouraging coronavirus trends and a dovish tack from the Federal Reserve.
  • Lower forever? A strategy shift that we view as fundamentally positive for the interest-rate-sensitive real estate sector, the Fed is abandoning the approach of utilizing "preemptive strikes" on inflation.
  • Gaining for the eighth week out of the past nine and closing at all-time record highs on all five trading days this week, the S&P 500 jumped another 3.3% this week.
  • "Shutdown-sensitive" sectors rebounded following the emergency-use approval of the potentially "game-changing" five-minute coronavirus test. Equity REITs gained 2.2% with 17 of 18 property sectors finishing in the green.
  • Housing data stayed red-hot as well. New Home Sales surged to the strongest sales rate since 2007 while Pending Home Sales and Mortgage Applications data suggested that housing will continue to lead the post-pandemic recovery.
  • This idea was discussed in more depth with members of my private investing community, iREIT on Alpha. Get started today »

Real Estate Weekly Outlook

U.S. equity markets continued their relentless rally this week amid a bullish convergence of positive economic and housing data, encouraging coronavirus trends, and a dovish tack from the Federal Reserve in which the central bank signaled its intentions to keep rates lower for longer. While the high-flying mega-cap technology stocks continue to power the rally, the gains this week were more broad-based following the emergency approval of a five-minute coronavirus test from Abbott Laboratories (ABT), which has been heralded by many experts as a "game-changer" for the "shutdown-sensitive" sectors.

real estate news

(Hoya Capital Real Estate, Co-Produced with Brad Thomas)

Gaining for the eighth week out of the past nine and closing at all-time record highs on all five trading days this week, the S&P 500 (SPY) jumped another 3.3% this week while the Dow Jones Industrial Average (DIA) managed to climb back into positive territory for the year. Despite being a quiet week of REIT newsflow, it was a solid week for the broad-based Equity REIT ETF (VNQ), which gained 2.2% as 17 of 18 property sectors finished in the green, led by strong gains from the hotel, retail, and student housing REIT sectors. Mortgage REITs (REM), meanwhile, gained 2.9% this week as continued strong housing market data has been the "tide that lifts all boats."

real estate investing

Ten of the eleven GICS equity sectors finished higher on the week led by the Communications (XLC) and Technology (XLK) sectors. A development that we view as fundamentally positive for the interest-rate-sensitive commercial and residential real estate sectors, the Federal Reserve signaled this week that it is abandoning the policy course which prescribed a "preemptive strike" on inflation while also transitioning to an average inflation targeting approach. Together, these strategy shifts imply a monetary policy regime that will keep nominal short-term rates "lower for longer." Residential REITs and real estate-related financials led the Hoya Capital Housing Index to gains this week despite uncharacteristic weakness from the homebuilders, which have consolidated gains following a relentless rally over the last quarter driven by the continued "V-shaped" housing recovery.

homebuilding ETF

On that point, New Home Sales topped estimates in July, surging 13.9% from June and were higher by 36.3% from last year. The 901k seasonally-adjusted rate was the strongest sales rate since 2007. Last week, Existing Home Sales surged by 24.7% in July from last month and rose nearly 9% from last year, according to data released by the National Association of Realtors. This was the strongest monthly gain in the history of the survey and was the highest sales pace since December 2006. The supply of existing homes dipped 21% from last year, representing a 3.1-month supply at the current sales pace, down from 4.2-months last year, and the lowest in the survey's history. new home sales 2020 1

The red-hot housing market is showing no signs of cooling, either. Also this week, Pending Home Sales also topped estimates in July, jumping 5.9% from last month and are now higher by 15.5% from last year. The Mortgage Bankers Association reported this week that mortgage applications to purchase a home increased again last week and are now higher by 33% from last year. The wave of refinancing appears to be finally cooling, however, as applications for refinancing loans are higher by "just" 34% from last year after a boom in April that saw applications rise by more than 200% from last year. The 30-Year Fixed Mortgage Rate with conforming loan balances stands at 3.11%, just above record-low levels, and down 62 basis points from last year.

housing recovery

Real Estate Economic Data

Below, we analyze the most important macroeconomic data points over the last week affecting the residential and commercial real estate marketplace.

real estate data

In addition to a busy slate of housing data, we also saw Personal Income and Spending data this week, which came in ahead of estimates, a common theme over the last several months as the Citi Economic Surprise Index has remained at or near record-high levels. Incomes rose 0.4% in July and are now 5% above pre-pandemic levels from February as WWII-levels of fiscal stimulus has more than offset the near-term hit from the spike in shutdown-related unemployment. Personal spending rose 1.9% from last month, but remains roughly 5% below pre-pandemic highs as Americans continue to save rather than spend this increased income. The savings rate stood at 17.8% in July, the highest level ever for the month of July. The stalemate in the renewed stimulus package, however, threatens to slow the pace of the rebound.

personal income

Ahead of a frantic slate of employment data next week, Initial Jobless Claims declined to 1.01 million in this week's report, retreating from 1.10 million in the prior week. On a non-seasonally adjusted basis, however, Initial Claims declined to 821k and have been below the 1-million threshold for four straight weeks. More encouragingly, Continuing Claims dipped by another 200k to 14.54 million last week. Since the peak in May at roughly 25 million, Continuing Claims have retreated by 10.4 million. Of note, two states - California and New York - which make up roughly 18% of the U.S. population, accounted for more than 33% of the Initial Claims filed last week as "lockdown policies" have plunged these economies into a seemingly uncontrolled tailspin, a theme we discussed in Apartment REITs: Urban Exodus.

jobless claims

Commercial Equity REITs

With the choreographed shift in the Federal Reserve's inflation-targeting and "preemptive strike" strategy, it's possible that we can finally say goodbye to the "Rates Up, REITs Down" paradigm and say "good riddance" to these monetary policy strategies. We've long argued that the Fed's "preemptive strikes" on inflation from 2004 to 2006 in which the Fed Funds rate was raised 17 times in two years were the most significant proximate cause of the Great Financial Crisis and perhaps the most disastrous and perplexing monetary policy blunder since the creation of the Federal Reserve system in 1913. This week, we published REITs: This Time Was Different where we discussed some of the fundamental factors that resulted in the "lost decade" for REITs.REITs highs 2020

While the coronavirus crisis isn't yet over, the REIT sector appears likely to avoid the type of long-term, lingering pain that was felt by the sector during the Financial Crisis. Some aspects of this crisis were more acute than the Financial Crisis - including the wave of dividend cuts - but strong balance sheets and access-to-capital prevented the type of shareholder dilution that resulted in a "lost decade" for much of the REIT sector from 2005 to 2015. It took eight years for the Vanguard REIT ETF (VNQ) to recover to pre-recession highs after the Financial Crisis. The plunge in NOI growth in Q2 underscores, however, the central theme that we've discussed extensively throughout the coronavirus pandemic: it all comes down to rent collection.


Importantly, underscored by fresh data released by NAREIT this week, rent collection has sequentially improved across all sectors over the last four months, which bodes well for a rebound in these metrics in 2H20. As a result, the wave of dividend cuts across the REIT sector has slowed to a trickle in recent months, but we did see one additional REIT add their name to the list today. Office REIT Empire State Realty Trust (ESRT) suspended its dividend for Q3 and Q4, becoming the 64th equity REIT in our universe of 170 REITs to suspended or reduce their dividend, but only the fifth office REIT to do so.

equity REIT dividend cuts

However, we also see two dividend increases this week from REITs. Office REIT Kilroy Realty (KRC) boosted its dividend a penny, the first office REIT to raise distributions this year. Industrial REIT EastGroup (EGP), meanwhile, announced a dividend increase as well, becoming the 23rd REIT to boost dividends this year, and the fifth industrial REIT to do so. As we've discussed at length over the last five months, the "essential" property sectors - housing, industrial, and technology - continue to diverge in performance and dividend-paying ability from the more troubled property sectors.

dividend increases

Speaking of troubled sectors, this week we also published Shopping Center REITs: An 'Essential' Bargain. Despite being the primary "distribution center" to many suddenly-thriving essential retailers, shopping center REITs have plunged more than 40% in 2020 amid the ongoing coronavirus crisis. Shopping Center REITs reported a 17.7% decline in same-store NOI growth in Q2 - by far the worst on record - as landlords struggled to collect rent from non-essential tenants. The long-term outlook, however, looks far more positive than their regional mall peers, as leasing spreads remain firmly positive and rent collection has improved to above 80% in August. While we’ve remained bearish on retail REITs, the magnitude of the sell-off in shopping center REITs appears unjustified, particularly among the grocery-anchored REITs like Regency Centers (REG) and Retail Opportunity (ROIC).

rent collection 2020

We also heard some potential M&A newsflow this week. Reuters reported today that private equity firm Digital Colony Partners has contacted cell tower REIT Crown Castle (CCI) to signal interest in buying a minority stake in its fiber-cable business. CCI is the second-largest REIT by market capitalization behind fellow cell tower REIT American Tower (AMT). Along with SBA Communications (SBAC), the three cell tower REITs own a dominant share of communications towers in the United States. The REIT's fiber business has been a relative laggard compared to the macro cell tower business over the last several years amid the roll-out of 4G and 5G technologies. Crown Castle commented this week it intends to keep both its wireless towers and fiber cable businesses. We discussed the sector in our recent report: Cell Tower REITs: Fireworks Abound As Competition Heat-Up.cell tower landscape

Mortgage REITs

Mortgage REITs rebounded this week as residential mREITs gained 3.1% while commercial mREITs finished higher by 2.9%. While the mREIT newsflow was scarce, the FHFA had two major policy announcements affecting the mortgage markets. The chief housing regulator announced that it will extend the temporary halt on foreclosures and evictions on GSE-backed mortgage loans until the end of the year. The moratorium, which applies to all properties with single-family mortgages backed by Fannie or Freddie, had been set to expire at the end of August. Earlier in the week, the FHFA also announced that the implementation of the proposed "adverse-market" refinancing surcharge will be delayed until at least December 1st. The oddly-timed proposal from the FHFA received significant pushback from lawmakers and housing groups.

mREITs 2020

We recently published our Mortgage REIT Earnings Recap. After 31 of 42 mREITs cut or suspended dividends from March through June, we haven't seen any additional cuts since the start of July. However, only one mREIT, Arbor Realty (ABR), has raised distributions to rates above last year's levels. Several residential mREITs have resumed or raised dividends after initially cutting including MFA Financial (MFA), Ellington Financial (EFC), Great Ajax (AJX), ARMOUR Residential (ARR), New Residential (NRZ), PennyMac Mortgage (PMT), and Two Harbors (TWO), but none of these distributions are back above pre-pandemic levels. We see the current distributions rates as relatively attractive with an average dividend yield of 7.8% for residential mREITs and 7.7% for commercial mREITs.

mortgage REIT dividend increases

REIT Preferreds

Last quarter, we published REIT Preferreds: Higher-Yield Without Excess Risk. The REIT Preferred ETF (PFFR) ended the week lower by 0.5%. This week, AG Mortgage Investment Trust (MITT), the worst-performing mREIT this year, announced that it has amended its exchange offer for its three issues of preferred stock - MITT.PA, MITT.PB, and MITT.PC - specifying the number of shares it will accept for each of the issues subject to the offer while also revising the proration methodology accordingly. Among REITs that offer preferred shares, the performance of these securities has been an average of 19.0% higher in 2020 than their common shares. Preferred stocks generally offer more downside protection, but in exchange, these securities offer relatively limited upside potential outside of the limited number of "participating" preferred offerings that can be converted into common shares.

rEIT preferreds

2020 Performance Check-Up

For the year, Equity REITs are now lower by roughly 15.2% and Mortgage REITs are off by 39.1% compared with the 8.9% gain on the S&P 500 and the 0.6% gain on the Dow Jones Industrial Average (DIA). Six of the eighteen REIT sectors are now in positive territory for the year as timber and self-storage REITs joined the data center, cell tower, single-family rental, and industrial REIT sector this week. On the residential side, five of the eight U.S. housing industry sectors in the Hoya Capital Housing Index are in positive territory for the year. Astoundingly, the gap between the best-performing REIT sector - data centers - and worst-performing REIT sector - hotels - is a whopping 77% in 2020. At 0.73%, the 10-year Treasury Yield has retreated by 119 basis points since the start of the year and is roughly 250 basis points below recent peak levels of 3.25% in late 2018.

real estate performance

Next Week's Economic Calendar

Employment data highlights next week's busy economic calendar, headlined by ADP data on Wednesday, jobless claims on Thursday, and the BLS nonfarm payrolls report on Friday. Economists are looking for employment gains of roughly 1.4 million in August following July's better-than-expected gain of 1.8 million. We've remained quite a bit more optimistic than consensus on the employment and economic outlook, urging investors not to underestimate the "unstoppable force" of WWII-levels of fiscal stimulus and the unprecedented levels of monetary support. We'll also see Construction Spending data on Tuesday and a flurry of PMI data throughout the week.

real estate economic data

If you enjoyed this report, be sure to "Follow" our page to stay up to date on the latest developments in the housing and commercial real estate sectors. For an in-depth analysis of all real estate sectors, be sure to 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, Storage, Timber, Prisons, Real Estate Crowdfunding, and REIT Preferreds.

Disclosure: Hoya Capital Real Estate advises an Exchange-Traded Fund 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. Index definitions and a complete list of holdings are available on our website.

housing 100 index

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It is not possible to invest directly in an index. Index performance cited in this commentary does not reflect the performance of any fund or other account managed or serviced by Hoya Capital Real Estate. Nothing on this site nor any published commentary by Hoya Capital is intended to be investment, tax, or legal advice or an offer to buy or sell securities. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and should not be considered a complete discussion of all factors and risks. Data quoted represents past performance, which is no guarantee of future results. Investing involves risk. Loss of principal is possible. Investments in companies involved in the real estate and housing industries involve unique risks, as do investments in ETFs, mutual funds, and other securities. Please consult with your investment, tax, or legal adviser regarding your individual circumstances before investing. Hoya Capital, its affiliate, 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 is available and updated at www.HoyaCapital.com.

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