Key takeaways
- US equity markets suffered from higher inflation, which pushed the Federal Reserve to accelerate its tightening plans, the continuation of the war in Ukraine and fears of an upcoming recession.
- Real estate as an asset was mixed during the quarter. It started on a very strong footing but suffered due to a deterioration in investor sentiment from increasing rates later on.
- Elevated inflation numbers and uncertainty around the Fed’s monetary policy are likely to continue to negatively affect real estate transactions. However, REITs remain a potentially strong inflation play as landlords increase rents to keep up with rising prices.
Market Summary
The dominant market theme for Q2 2022 was the Federal Reserve Open Market Committee’s reaction function to a string of elevated inflation readings. Closer to the end of the quarter, US equities plunged into bear territory. However, a deterioration of economic conditions and a decrease in consumer spending triggered a reverse in the 10-yr yield, which had been climbing on the back of higher inflation. Commodities started to level by mid-June after a strong quarter, also signaling the potential for an upcoming economic slowdown.
US equities ended the quarter down in the double digits, with tech stocks being the largest detractors. The Dow Jones Industrial Index was spared the worst of the selloff, losing approximately 11%, while the S&P 500 was down 16%, while the Nasdaq suffered the most from tech weakness, losing in excess of 22%.1 For all three averages, H1 2022 has been the worst start of the year since 1970.
The Federal Reserve raised interest rates twice during the quarter, on May 4 and on June 16 – by 50 and 75 basis points, respectively. Nevertheless, the 10-year Treasury yield closed the quarter at 2.9%,2 with investors starting to price in a potential recession. The S&P 500 US Investment Corporate Bonds Index was down 7% on the quarter, while the corresponding High Yield Corporate Bond Index lost 9%.3
Real estate
Real estate as an asset class was mixed. It started the quarter on a very strong footing, on the back of low mortgage rates and pent up demand from investors eager to find ways to hedge against rising inflation. Investors poured money into specific markets, such as the sunbelt states, that exhibited strong population and job growth dynamics.
All in all, annual single-family home prices rose by 19.4% in Q2 2022. This is down from Q1’s upwardly revised 20.5% but still close to a record high.4 As real estate usually lags, prices remained strong throughout the quarter and only started moderating (or stopped rising) in mid-June.
In the first half of 2022, public REITs lost -19.2%, due – for the most part – to broader market volatility.5 Non-publicly traded REITs valuations, including Yieldstreet’s REIT fund, typically do not fluctuate due to their infrequent trading.
Most notably, commercial real estate has continued to thrive despite an environment of rising rates, likely as its growth lagged residential real estate. The sector saw a 56% year-over-year increase, with multi-family rentals accounting for over half of that increase.6 The combination of declining home affordability and increased demand has driven many potential home owners to renting, therefore benefitting the multi-family sub-sector. However, as inflation data began surprising on the upside, the Fed’s accelerated tightening triggered a spike in mortgage rates, which had a cooling effect on transaction volume given investors had to account for higher debt costs.
Rent growth in the US continued to be strong, with a 9.2% year-over-year increase in the second quarter of 2022, albeit slightly down from 11.4% in the first quarter.7 However, the rising cost of debt has put downward pressure on property cash flows.
Yieldstreet’s Growth and Income REIT
Yieldstreet launched a REIT Fund that seeks to primarily make equity investments in commercial real estate properties across key U.S. markets and property types. The Fund’s main investment objective is to generate capital appreciation, its secondary objective is to generate current income.
The Fund offers potential for stable income and capital appreciation, while its diversified nature can allow investors to gain access to multiple Yieldstreet commercial real estate offerings at a lower minimum compared to investing in single offerings.
Three separate investments are currently included in the Fund:
1. Tucson Multi-Family Equity – a 94% occupied garden-style multi-family complex located in Tucson, Arizona.
Over the last 5 years, Tucson has seen increasing migration trends from California, Washington, Colorado, and other high cost states, which is pushing housing prices and rental demand to levels not seen before. According to Axios, population growth over the last decade was 10% while the median home price increased by 32% year-over-year. Other major demand drivers in the area include the Davis Monthan Air Force Base and Raytheon Missiles and Defense. The property sits along a major retail corridor, Broadway Boulevard, which gives renters access to over 4 million square feet of retail space and 100+ restaurants and bars. The Loop – rated the #1 recreational trail in the U.S. according to USA Today – is located less than 5 miles from the property and gives renters access to over 131 miles of paved pathways and bike trails, which many use for their everyday work commutes.
2. Atlanta Multi-Family Equity – a 90% (up 11% since Nov 2021) occupied luxury multi-family complex located in Atlanta, Georgia.
Given the increases seen in population and job growth in Atlanta, and in rents in Midtown Atlanta, Downtown Atlanta is becoming an attractive option for renters. The trend of the convergence of Downtown and Midtown is expected to continue given transformative projects such as Centennial Yards, The Stitch, and continued job/population growth. The Class-A property, a property that is one the highest quality buildings in its market and area, was completed in 2020, as such the amenity package is considered best-in-class with a luxury resort style rooftop pool and sundeck, an outdoor theater, a rooftop indoor/outdoor lounge, state-of-the-art fitness center, electric car charging station, etc.
3. Dallas Fort-Worth Multi-Family Equity – a 93% occupied garden-style multi-family complex in Dallas-Fort Worth, Texas.
The Property’s location benefits from major employment centers in the immediate area that drive renter demand, including American Airlines’ corporate headquarters, the DFW International Airport, and the Great Southwest Industrial District, which is one of the largest industrial parks in the nation. Given the job demand drivers in the vicinity, the Dallas-Fort Worth area attracts young professionals and young families, which has contributed to the area having the largest population gain in the U.S in 2020. According to CBRE, available jobs grew by 147k in 2020.
Over time, it is expected that the Fund will provide exposure to additional investment types, property types and cities.
Outlook
As inflation numbers remain elevated, uncertainty around the Fed’s monetary policy continues to affect investor sentiment, contributing to volatility in public markets.
In the debt market, confidence is low, as lenders are either cutting down on leverage or increasing lending rates. We are seeing a significant slowdown in deal volume, as potential buyers can’t justify the prices as they face higher interest rates, while the sellers are slow to accept the price reduction.
We expect Q2/Q3 transaction volume to be significantly lower than previous quarters and only expect for it to pick up once debt markets stabilize and market participants get a better sense of “market value.”
1 Source: Bloomberg
2 Source: Bloomberg
3 Source: S&P 500 Investment Grade and High Yield Corporate Bonds Indices
4 Source: Fannie Mae’s Home Price Index
5 Source: REIT.com
6 Source: Forbes
7 Source: CoStar Group
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2 Represents an net annualized return, using an internal rate of return (IRR) methodology, with respect to the matured investments shown in your Portfolio experience, utilizing the effective dates and amounts of subscriptions and distributions to and from the investments, net of management fees and all other expenses charged to the investments.[read more]