Market Commentary | April 22, 2024


Two Sides to the Same Story

An inordinate amount of focus has been placed on which way the wind blows in relation to when the Fed will begin cutting interest rates. By December 2023, reports of moderating inflation drove yields on 10Y Treasuries down toward 3.50% and speculation shifted from if the Fed would cut to when the Fed would cut.

Then in early April when the strong March economic reporting started to appear, all the air went out of the balloon.  On April 5<th, the U.S. Bureau of Labor Statistics reported nonfarm payroll employment rose by 303,000 (about 50% higher than estimates). At 7:30 AM Central Time on April 10th, the Bureau’s release stated that the Consumer Price Index increased 0.4% in March (moving in the opposite direction of the Fed’s 2.0% annual target).

Topping it all off, the Commerce Department reported March retail sales rose 0.7% (more than twice the 0.3% increase economists had expected).

Three reports in rapid succession demonstrating a robust economy and the speculation shifts back from when to if the Fed will cut rates.  We now have 10Y Treasury yields at 4.62% and lower REIT share prices.

Wait, is a strong economy really a REIT headwind?

Higher interest rates are broadly perceived to pressure REIT operating results, but they are only one business factor. The millions of jobs created post-pandemic spur household formation. In response, developers have delivered more new apartments than at any time since 1986 and the resilient jobs market is quickly absorbing the new supply. More jobs finance more consumer spending, but Marcus and Millichap reports that almost no new retail is being constructed. Retail REIT shopping center occupancy is near record highs and rents are rising quickly. That is why this stock price report looks so odd.

Sector Spotlight: Shopping Center REITs – YTD Total Return 04/22/2024

Shopping center (especially grocery-anchored) real estate faces growing demand in the near absence of new supply. The chart describes a stock market that only sees higher interest rates and is blind to the fact that all of those new workers have to eat.

You will notice that your portfolio has added new positions in retail REITs we have traded over the years. Brixmor Property Group (BRX), Kimco (KIM), Kite Realty Group (KRG), Slate Grocery (SRRTF), and Whitestone REIT (WSR) have never been more opportunistically priced. Please visit our website to see our upcoming postings of our new research about these companies and more.

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