Positive momentum through the quarter with rate cuts continuing to drive value

As anticipated, operating fundamentals remained strong through the third quarter with occupancy rising and rents continuing to grow across much of the portfolio.

Meanwhile, as expected, the Federal Reserve began its pivot towards a more dovish policy stance, cutting its Fed Funds rate by 50 basis points in September while also signaling its intention to continue cutting rates significantly over the next 24 months. (This is the first such reduction since the Fed began raising rates in March of 2022 and represents the start of a dramatic turn from the higher rate environment of the previous two years).

The impact of rate cuts on real estate and private credit

Although we suspect most of our investors no longer need reminding, for the sake of consistency, we’ll reiterate once more that real estate values typically move inversely to interest rates and this new cycle of falling rates is expected to result in rising values and stronger returns for investors.

We stated at the beginning of the year that we believed real estate values had largely bottomed and accordingly we’ve seen values recovering in nearly every asset type through the first three quarters.

We believe now that real estate, especially residential and industrial real estate, is poised for an extended recovery that is likely to manifest in a relatively long run of increasing property values.

While falling interest rates will be the primary driver of this potential bull run, several additional (somewhat unexpected) tailwinds have continued to build up, making certain asset classes look even more attractive.

First, higher rates all but shut down new construction, which means that in the coming years there will be very few new developments delivered. This means less competition from new apartments, rental homes, and warehouses.

Meanwhile, demand is not only growing but actually growing at a faster pace than most were predicting at the start of the year, driven by a combination of significantly higher immigration, fewer existing homeowners moving, large investments in infrastructure, and an increasing trend in on-shoring.

In other words, there’s a large and increasing demand for rental housing and new industrial warehouses but very little new supply, which economics 101 would tell us means higher rents which, in turn, should translate to higher property values.

So while falling rates alone would be expected to yield positive returns, this combination of falling rates with a large and growing supply-demand imbalance has the potential to result in outsized value for existing investors in such assets, aka the majority of the Fundrise real estate portfolio.

Meanwhile, the private credit sector remains unusually strong (particularly in real estate) thanks in part to the void created from traditional banks remaining largely on the sidelines. We continue to see extremely attractive risk adjusted returns that we expect to look that much more appealing as rates on cash accounts and money markets begin falling.

Though we suspect this window of opportunity may only remain open for another 12-24 months, we intend to deploy as much as possible to capture this outsized value for our investors.

The Innovation Fund continues to invest in top companies

Beyond the real estate portfolio, the Innovation Fund continues to deliver exciting growth from its ever expanding list of venture investments. Since the start of the year, the portfolio has grown to include 5 of the top 6 companies from CNBC’s top 50 disruptor list, as well as all of the top 6 companies from Forbes Cloud 100 list; including Open AI, Anthropic, Databricks, Canva, and Anduril just to name a few.

As we’ve shared before, we believe we are in the very earliest stages of perhaps the largest technological shift since the advent of the internet, with many of today’s foundational AI and data startups poised to emerge as the next great generation of technology companies.

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As we head into the end of the year, we expect property fundamentals to remain strong with additional rate cuts leading to incremental increases in valuations.

Although markets appear to remain healthy, we are still acting with caution, ensuring that we are positioning the portfolio to be well protected against the risk of possible recession, and as always aiming to deliver results for those investors who remain patient with longer-term horizons.

Appendix

Exhibit A: 2024 YTD net returns of advisory client accounts by individual Fundrise sponsored fund²

Exhibit B: 2024 YTD net returns of all advisory client accounts of Fundrise Advisors by investment plan objective⁴