LaSalle launches its 2016 Mid-Year ISA - Investors should seek balance in mature phase of cycle

Chicago (July 19, 2016) – Fluctuations in the real estate market caused by the UK’s vote to leave the European Union is likely to be shorter-lived and less severe than many investors fear, according to LaSalle Investment Management’s mid-year Investment Strategy Annual (‘ISA’) 2016.

The correction in real estate pricing is expected to be largely restricted to the UK over the next 18 months, and medium-term capital inflows into real estate will only be interrupted, not reversed, the ISA finds. The UK’s decision to leave the EU has led to a sharp rise in the U.S. dollar vs. the sterling, but that will have little impact on the US economy. The predicted re-pricing of UK real estate will lead to an opportune time to enter the British market – particularly for US dollar-denominated investors.

Overall, the ISA suggests that investors should seek a balance between defensive and offensive strategies as the U.S. continues through the mature phase of the real estate cycle. Other findings include:

  • A likely slowdown in GDP and job growth will result in lower growth in real estate demand in 2016 and 2017.  However, U.S. property markets are well positioned with low vacancy rates and rent growth should stay positive over that timeframe.
  • Niche property sectors including health care, self-storage, lab space, manufactured homes and student housing will offer more growth and less volatility than major property sectors such as apartment, industrial, office and retail
  • Markets with low upcoming supply and low availability of warehouse space, almost all on the coasts, are poised for strong rent growth over the next three years.
  • Despite signs that the Federal Reserve will raise interest rates slowly, U.S. real estate transaction volume will slow after a record-setting 2015. Additionally, the “triple low” environment caused by continued low global growth rates, inflation expectations, and interest rates could drive foreign capital seeking higher yield to the U.S.

The ISA finds that investment volumes and leasing activity in the US may slow slightly relative to peak levels in 2015. However, given the ultra-low interest rate and bond yield environment, the ISA predicts that there will be renewed downward pressure on core capitalization rates in the U.S.

Jacques Gordon, Global Head of Research and Strategy at LaSalle, said: “Across the globe, the fundamentals of supply and demand appear to be well-balanced going into the second half of the year in most of LaSalle’s major markets. Furthermore, turmoil in capital markets might also open higher-yielding buying opportunities from distressed sellers as the implications of the Brexit vote in the UK ripple around the world.  Although the UK has been the epi-centre for political and financial tremors since June 24th, the law of unintended consequences suggests that investors should also closely watch for ripple effects in the EU, North America and even all the way to Asia-Pacific.

Bill Maher, Head of Research and Strategy for the Americas at LaSalle, said: “Investors should focus on long-term DTU trends when considering investments during the second half of 2016. This includes  mixed-use properties, “next tech” knowledge markets, and emerging millennial neighborhoods for retail and apartments.

“Demographics, technology, and urbanization (DTU) will continue to drive strong demand in live-work-play districts dominated by tech-firms and millennial workers in the U.S. However, many of the most obvious sub-markets are now fully priced and new supply has ramped up forcing investors to seek less obvious DTU drivers.

“Additionally, much of the millennial generation is ready to start a family and will start to consider school quality in their choice of residence. Now is the time for investors to get ahead of this trend.”