Pugh Management Investor Letter: A new investment era with Fed rate cuts coming soon.
"I can see clearly now, the rain has gone" - Jimmy Cliff
The past two years have been challenging for real estate investors, particularly those who invested between 2021 and 2023. These years have seen markets react sharply to fluctuating interest rates and inflation. Throughout 2023, the market anticipated interest rate cuts, initially expected in Q4 2023, then delayed to Q2 2024, and now projected for Q3 2024.
Jerome Powell at Jackson Hole Symposium, August 23, 2024.
Today, Federal Reserve Chairman Jerome Powell stated, “The time has come for [Fed] policy to adjust and begin considering interest rate cuts.” In his speech at the Jackson Hole Symposium, he highlighted the current environment of stabilized and reduced inflation. Powell emphasized, “The FOMC’s primary focus has been to bring down inflation…Our restrictive monetary policy helped restore balance between aggregate supply and demand, ensuring inflation expectations remain well-anchored. Prices have only risen 2.5% over the past 12 months.”
Chart courtesy of U.S. Bureau of Labor Statistics, August 23, 2024.
Regarding the Fed’s employment mandate, Powell noted, “The cooling in labor market conditions is unmistakable,” adding, “We do not seek or welcome continued cooling in labor market conditions.”
“With this announcement, the Fed has officially pivoted and intends to lower interest rates at its next meeting in September.”
Blackstone believes real estate has bottomed and entered into a new cycle. Jon Gray, Blackstone Insights Series
As investors in both the public and private equity and debt markets, we believe this new direction in interest rate policy is a welcome relief. Though in our view, the real estate market has not yet reached its bottom, as it typically lags behind more liquid assets like public equities.
Due to this lag, we anticipate opportunity to acquire discounted real estate properties in 2025, with ground-up development recovering in late 2025 and early 2026.
We will continue to seek pricing dislocations in the Central Florida and Northeastern U.S. markets.
“We believe investments in specialty assets, such as self-storage, multigenerational housing, and small bay contractor space, will continue to see strong demand. ”
Conversely, previously favored sectors like multifamily and large industrial distribution centers (100,000+ SF) may continue to experience challenges due to overbuilding in certain regions. We continue to actively monitor market conditions this as we are invested in these product types.
Gold spot price 12 month chart courtesy of Bullion By Post.
Today in real estate we are invested in a variety of development and value add projects. While all our investments are either profitable or holding their value, we have been pencils down for the past 12 months. With interest rates falling and inflation under control we believe conditions could prove to be more favorable for ground-up construction in the next 24 months. We are positioning ourselves now to buy and develop well located properties in Central Florida, New England, and Texas.
In other asset classes, we hold positions in commodities like gold, silver, and Bitcoin, which benefit from a declining U.S. Dollar. Whether Harris or Trump are elected we anticipate the value of the dollar will continue to decline. We also hold significant portfolio positions in short-term U.S. Treasuries and private debt to generate income at yields of 8-12%. Most of these positions are short-term (3-12 months). This ensures portfolio liquidity should significantly discounted real estate opportunities arise in the next 18 months.
We welcome your thoughts and comments. Please reach out to us to discuss the investment opportunities we have available today at info@pughmgmt.com.
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