In our recent year-end letter to investors, we noted our belief that real estate prices had bottomed and that going into 2024 an improving interest rate environment along with strong operations would have a positive impact on returns.
So far, our expectations have largely proven correct. Through the first three months of the year operating incomes have increased across much of the portfolio, benefiting from higher occupancy, as well as reductions in expenses such as taxes and insurance.
Strong Q1 performance
This growth in net income has directly translated to increased property values, with the Flagship Fund generating a positive return of approximately 2.46%1 through the first quarter despite the fact that interest rates have yet to actually begin coming down. Meanwhile the Income Fund has continued to benefit from the higher rate environment maintaining an annualized distribution rate of 7.91%.
To be fair, the magnitude of these returns represents only a portion of the ground to be made up relative to the total decline in real estate values that occurred since the peak in 2022. However, we believe this is just the beginning of a recovery that we expect to continue to gain momentum through the rest of the year.
As highlighted previously, we also expect the Flagship Fund will increasingly see the benefits from having much of its portfolio transition from being under development into stabilized operations. Assets which generated little to no income during construction have now delivered and are continuing to lease-up, which should lead to increasing cash flows and the potential for greater value appreciation.
Buying the bottom
Meanwhile, a silver lining of the higher interest rates of the past 18+ months is that there’s also been very little new construction taking place. According to NAHB, new multifamily starts fell by approximately 14% in 2023, and are expected to decline a further 20% in 2024. This means that over the next several years we can likely expect a period when there isn’t enough new supply delivered to meet demand, which typically translates to stronger rent growth and higher returns for existing asset owners, aka our Fundrise Funds.
Although the vast majority of the institutional real estate industry entered a recession last year, the rebound in our returns is due to the continued strength of the underlying portfolio: buying the right asset type (residential instead of office), in the right location (sunbelt instead of large coastal cities), and applying modest leverage.
As a result of the sustained strong operating performance of the properties, we’ve been able to put our capital reserves to work as an active buyer through this period where prices have been arguably more attractive than at any other point in the last decade (Although we have been quiet as we went on offense, we’ll have more to share on this in an upcoming investor letter).
Looking ahead
As always, the activities of today translate into the returns of tomorrow. We expect that as interest rates fall over the next several years, the assets acquired during this period of depressed pricing will be one of the largest drivers of outsized returns in the future.
Of course, knowing that buying the bottom is smart and actually doing it are two very different things. Most investors understand that they should be aiming to buy low and sell high, however study after study shows that, in fact, the opposite tends to occur with investors frequently selling positions after periods of low returns (or losses) and investing more into the assets that have most recently delivered the best performance.
As self-proclaimed “tortoises” (not “hares”) we hold strongly to the belief that in the long-run patience wins out, and that those investors who share that belief with us will end up seeing the best performance in the end.
Onward.
Appendix
Exhibit A: 2024 YTD returns of client accounts by individual Fundrise sponsored fund2
| Fund name / Objective | Average principal3 | Launch date | Net return |
|---|---|---|---|
| Registered Funds | |||
| Flagship Real Estate Fund | $1,140,566,664 | Jan 2021 | 2.45% |
| Income Real Estate Fund | $574,188,701 | Apr 2022 | 1.85% |
| Innovation Fund | $122,218,895 | Jul 2022 | 0.69% |
| Growth | |||
| Growth eREIT | $210,522,102 | Feb 2016 | 1.86% |
| Growth eREIT II | $131,761,222 | Sep 2018 | 0.32% |
| Development eREIT | $108,766,242 | Jun 2019 | -0.27% |
| Fundrise eFund | $80,866,812 | Jun 2017 | 0.11% |
| Growth eREIT III | $48,589,969 | Feb 2019 | 3.04% |
| Growth eREIT VII | $69,695,954 | Jan 2021 | 2.20% |
| Balanced | |||
| East Coast eREIT | $115,257,357 | Oct 2016 | -1.33% |
| Heartland eREIT | $74,777,373 | Oct 2016 | 1.55% |
| West Coast eREIT | $74,041,489 | Oct 2016 | 2.15% |
| Balanced eREIT II | $39,369,004 | Jan 2021 | 4.49% |
Exhibit B: 2024 YTD net returns of all client accounts of Fundrise Advisors by investment plan objective4
| Plan objective | Income | Balanced | Growth | Custom | Overall |
|---|---|---|---|---|---|
| Dividends | 1.04% | 0.47% | 0.22% | 0.60% | 0.48% |
| Appreciation | 0.80% | 1.49% | 1.46% | 1.22% | 1.35% |
| Net Total Return | 1.83% | 1.95% | 1.68% | 1.82% | 1.83% |
Exhibit C: Trailing 1-year and since inception net returns of registered funds through Dec 31, 2023
| 1 year | Since inception | |
|---|---|---|
| Flagship Real Estate Fund | -11.79% | 11.85% |
| Income Real Estate Fund | 7.93% | 13.00% |
