Real estate debt has always been a valuable component of any portfolio; however, it is emerging as a viable solution to a wide array of investor concerns today. It’s a strategy that offers a range of benefits with attractive risk-adjusted returns across market cycles.
Read our six reasons why investors should consider adding it to their portfolios, and learn more about our capabilities in Europe and the United States below.
1. Attractive risk-adjusted returns: In today’s environment, the combination of elevated interest rates and attractive credit spreads mean that real estate debt offers compelling returns relative to other fixed income alternatives. The potential for achieving these higher yields, while maintaining a relatively conservative risk profile, is appealing to institutional investors looking to mitigate risk.
Real estate debt can offer different opportunities through the market cycle, with the ability to adjust advance rates during market downturns to minimize risk, while benefiting from cyclical recoveries.
2. Stable and predictable income: An allocation to real estate debt may allow investors to enhance their portfolio income returns. The coupon-like nature of interest payments from borrowers can provide consistent and stable cash flows for investors, with a significant portion of the total return being achieved through income returns.
3. Downside protection and capital preservation: Real estate debt offers the ability for investors to gain exposure to the same underlying real estate, but via a protected position in the capital structure, offering an often-significant equity cushion to buffer against potential value fluctuations.
Careful structuring can further enhance downside protections; these investments are typically collateralized by the physical underlying property, providing security that differs to some other forms of fixed income investments. In a default event, active asset management is critical, and managers who have the expertise to step in and manage the underlying asset can further protect against potential losses and in some instances create upside value.
Senior or unlevered whole loan lenders sit in the last-loss position, allowing investors to consider more actively managed business plans than they might be comfortable investing in via an equity commitment.
4. Diversification benefits: Real estate debt provides exposure to one of the largest segments of the real estate market, typically with lower volatility than real estate equity. And adding real estate debt to an institutional portfolio can enhance diversification, as it often has low correlation with traditional asset classes like stocks and bonds, which can help to improve overall risk-adjusted returns.
5. Regulatory efficiency and opportunity: For insurance companies, real estate debt is treated favorably under Solvency II and other similar regimes, making it a capital-efficient way to deploy assets and capture attractive relative returns. Additionally, enhanced regulation has led to retrenchment by traditional bank lenders, creating opportunities for investors working with non-bank alternative lenders, such as institutionally managed debt funds.
6. Inflation hedge: As inflation rises, so too do the interest rates central banks often use to combat it. Real estate debt investments, particularly those with floating-rate loans linked to central bank rates, can therefore offer some protection against inflation.
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Important notice and disclaimer
This publication does not constitute an offer to sell, or the solicitation of an offer to buy, any securities or any interests in any investment products advised by, or the advisory services of, LaSalle Investment Management (together with its global investment advisory affiliates, “LaSalle”). This publication has been prepared without regard to the specific investment objectives, financial situation or particular needs of recipients and under no circumstances is this publication on its own intended to be, or serve as, investment advice. The discussions set forth in this publication are intended for informational purposes only, do not constitute investment advice and are subject to correction, completion and amendment without notice. Further, nothing herein constitutes legal or tax advice. Prior to making any investment, an investor should consult with its own investment, accounting, legal and tax advisers to independently evaluate the risks, consequences and suitability of that investment. LaSalle has taken reasonable care to ensure that the information contained in this publication is accurate and has been obtained from reliable sources. Any opinions, forecasts, projections or other statements that are made in this publication are forward-looking statements. Although LaSalle believes that the expectations reflected in such forward-looking statements are reasonable, they do involve a number of assumptions, risks and uncertainties. Accordingly, LaSalle does not make any express or implied representation or warranty and no responsibility is accepted with respect to the adequacy, accuracy, completeness or reasonableness of the facts, opinions, estimates, forecasts, or other information set out in this publication or any further information, written or oral notice, or other document at any time supplied in connection with this publication. LaSalle does not undertake and is under no obligation to update or keep current the information or content contained in this publication for future events. LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication and nothing contained herein shall be relied upon as a promise or guarantee regarding any future events or performance. By accepting receipt of this publication, the recipient agrees not to distribute, offer or sell this publication or copies of it and agrees not to make use of the publication other than for its own general information purposes.
Copyright © LaSalle Investment Management 2025. All rights reserved. No part of this document may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of LaSalle Investment Management.
A reader waking up from a quarter-long slumber on April 1, 2025 would be forgiven for confusing the headlines for an April Fools’ Day prank. They would scan the news and see stories about:
• large tariffs alternately announced, rescinded, delayed and reintroduced at a breakneck pace (see LaSalle Macro Quarterly, or LMQ, p. 4);
• US equities in correction territory as ex-US markets, including even China’s, outperform (LMQ p. 25);
• increasing calls that the risk of a US recession is rising (LMQ p. 20); and
• substantial upward revisions in forecasts of long-term European GDP growth (LMQ p. 21).
Each of these is at least partly (and in some cases completely) contrary to expectations from the beginning of this year. But the quick reversal in the economic narrative is no April 1st joke. The post-election consensus of a supercharged US economy pulling ahead of the rest of the world has clearly been challenged, if not upended.
In this period of elevated policy uncertainty, real estate investors should focus on what they can and should do amidst all the noise. At the risk of stating the obvious, we think it helps to take a step back and break down the analysis into three basic steps of incorporating news flow into investment strategy — the what, the so what, and action steps. But as we will discuss, the first two are characterized by so much uncertainty that it is also helpful to start from the end and work backwards, asking: What can investors do to improve their chances of successfully navigating this environment regardless of what happens?
Normally, the “what” of political developments and other events is the easy part. But since the US presidential inauguration, the Trump administration has made policy announcements — especially regarding trade and federal employment — at a rapid pace. Some of these seem to have taken even insiders by surprise. Widespread post-election expectations that actual policy would be more measured than campaign-trail rhetoric have proven incorrect.1 Reversals and postponements have also been a regular occurrence.
Adding to the news flow are announcements by other countries. These include the tit-for-tat of retaliatory tariff measures. But there have also been substantial structural shifts, most notably the German coalition agreement to spend more on infrastructure and defense. This news is arguably linked to a realization by European leaders that, given less collaboration with the US, Europe will have to forge its own path to generate economic growth and provide for its security.2 Aside from the break that this represents from the post-World War II order, this change is significant because it is a key driver of higher economic growth expectations for Europe.
The result of all this is a “layering” of announcements that is difficult to digest at once (see our attempt at a timeline at LMQ p. 4). It is even more of a challenge to roll-forward the news into reasonable predictions for subsequent weeks, let alone months. As a result, measures of economic policy uncertainty have risen to levels close to historic highs (LMQ p. 5). Indeed, the implications of the many recent developments on the growth and inflation outlook include first-order effects such as the direct impacts of lower government spending on GDP and higher prices on tariffed goods (LMQ p. 7), but also the second-order effects of broadly elevated uncertainty.
Uncertainty is the enemy of investment decision-making. This applies both to financial investment as well as spending by businesses in plant, property, equipment and digital tools. Empirical research has shown a clear negative relationship between uncertainty and investment.3 If businesses are unsure (as they are today) about the rules of the road — for example, around the basic terms of trade governing imports and exports — they may be hesitant to commit capital to long-horizon projects. At the same time, expectations of lower taxes and less regulation may push them back toward optimism.
Our analysis of recent events comes with a dose of humility. While LaSalle dedicates significant resources to tracking and analyzing the constant flow of indicators and news — as highlighted by the LaSalle Macro Quarterly (LMQ) — we do not purport to have a unique competitive advantage doing so. We would expect that our readers follow a range of news outlets, forecasters and other observers in staying abreast of the news flow and making sense of it.
We do feel, by contrast, that our experience managing property and data from our portfolio puts us in a strong position to assess the likely impacts of policy developments on real estate. Even in the context of elevated overall uncertainty, we can make several observations with relative confidence.
First, we suspect that a key real estate impact of recent policy trends could be higher replacement costs. Tariffs on construction materials, such as steel, are likely to drive up their price. In addition, a lower level of migration into the US may reduce the supply of construction labor there. Increased European spending on infrastructure and defense could also contribute to higher global and regional materials costs. Higher replacement costs would mean that rents would have to rise more to justify new development, ultimately leading to higher net operating income (NOI) growth. This could counterbalance the impact of macro factors such as a potentially slower economy, as well as property type-specific impacts such as softer demand for housing in the context of muted household formation by immigrants. A simpler way to state this is that real estate can act as an inflation hedge.4
Second, we see value in undertaking granular research to identify potential winners and losers from the current policy environment. This approach can help investors identify real estate that is likely less exposed (or may even benefit from) current trends, while flagging potentially more-impacted market segments. Although the exact mix of government policies remains uncertain, the direction of travel is clear enough in some areas to make a few relative calls. For example, a move away from global free trade could weaken real estate demand related to import-export activities, for example in proximity to ports, while bolstering it in emerging near-shoring hubs.
These sorts of analyses can operate both at the national level, for example by identifying more and less trade-exposed countries (e.g., LMQ p. 9), and at the metro-area level, by examining city-level economic exposures (LMQ p. 10 and 11). One specific economic concentration worth mentioning is that of government employment in Washington, DC. Clearly, job cuts by the newly formed Department of Government Efficiency (DOGE)5 are a risk, but there are mitigating factors such as mandated in-person work; we predict a net negative effect for DC real estate demand, but we have not yet seen much impact on the ground or in the data.
Finally, we note that economic softness comes with mixed effects for real estate. As a long-duration, interest rate-sensitive asset class, it is quite possible that a mild or moderate economic slowdown that leads to lower long interest rates could, in fact, be a positive for real estate values in the aggregate. That said, there are likely to be winners and losers, depending on the relative sensitivity of an asset’s performance to interest rates versus sensitivity to economic growth.6
A bigger risk than a slowdown alone is that of stagflation: weak growth at the same time that sticky inflation keeps rates high. However, most economic research suggests that tariffs represent a one-time upward adjustment to the price level, rather than a driver of a sustained, self-reinforcing cycle of higher inflation;7 as such, central bankers may be more willing to ”look through” the impact of tariffs. So far, a recent softening in 10-year Treasury yields suggests that bond markets agree with that assessment (LMQ p. 26).
All this points to avoiding excessive pessimism on the direction of values, while remaining cautious and selective. But being discriminating is not the only thing investors can do. We also advocate for turning the process of incorporating news flow into strategy on its head. Because we know so little about where the dust will settle on many of the policy shifts, let alone the impacts of those shifts, it is also prudent to ”work backwards” from the implementation step. Some of the most prudent actions an investor can take do not depend on the specific geopolitical or policy debate of the week.
A key recommendation in this regard is to build a globally diversified portfolio. That the market narrative has shifted quickly from one of US dominance of global growth, to a more balanced view with Europe gathering pace, reinforces that countries’ trajectories may exhibit lower correlations in a more fractured global economy. Rapid reversals of market narratives can generate significant market volatility, particularly when they are “priced to perfection” as the post-election optimism now appears to have been. Diversification should help to absorb that volatility, while avoiding being “left out” of unexpected positive shifts. A microcosm of this occurred recently in the public REIT market, where post-election euphoria led to what appeared to us a significant underpricing of European listed real estate.
Investors are also likely to benefit from diversification across the capital stack, which is why we recommend a permanent allocation to real estate debt. As we discussed in our ISA Focus report, “Investing in real estate debt,” debt investment provides low-correlation returns that are by definition not sensitive to volatility contained entirely within the first-loss equity position. While the risk of a recession in the next year is debatable but possibly rising, the risk of an eventual recession is always 100% in the long run. A debt allocation can help add stability and predictability to a portfolio’s return regardless of the exact path the economy takes.
• Investors should not get lost in the noise. Our view, expressed in the ISA Outlook 2025, is that we are at the ”dawn of a new real estate cycle.” This call is not dependent on a highly certain or favorable macro context, but rests on observations specific to real estate. These include pricing that has caught up with bond yields, valuations that have caught up with pricing, solid property fundamentals and substantially approved debt availability, among other factors. Neither a booming economy nor falling rates are necessary conditions for a revival in investment activity or the existence of attractive investment opportunities.
• There will likely be both winners and losers among specific real estate strategies. Granular analysis of risks and mitigants should inform revised assessments of relative value. To get these shifts right, investors must continue to ask: What is priced in? Overreactions are possible, which can create opportunities for investors to take advantage of volatility.
• Near-term uncertainty can distract from a longer-term picture that is arguably clearer. Over a horizon of years and decades, trends toward higher trade barriers and a more fragmented world seem likely to continue. Moving from a global economy where countries with a comparative advantage in producing a particular good do so and sell it to other countries, to one in which trade barriers create more siloed supply chains, would likely have complex effects. Classic economic theory suggests that transition could hinder productivity. But it could also spur real estate demand as productive capacity and inventories are un-pooled and duplicated. Correlations between real estate markets could also decrease. Investors should be ready to build portfolios with these dynamics in mind.
Footnotes
1 We made this mistake as well, saying that “legislative obstacles exist to enacting full campaign-trail rhetoric” in our November 11, 2024 ISA Briefing, “The ‘Red Sweep’ and real estate: has the outlook changed?”.
2 Source: Signum Global Advisors, Piper Sandler, Oxford Economics
3 According to analysis by Piper Sandler, there is an inverse correlation of -42% between a sustained upward shift in policy uncertainty (as measured by the US Economic Policy Uncertainty Index) and GDP growth; a doubling of uncertainty over a quarter is consistent with -1.5% real GDP growth over the following year. For academic work on this relationship, see Baker, Bloom and Davis, 2016
4 For more discussion of real estate’s role as an inflation hedge, see LaSalle’s ISA Portfolio View.
5 DOGE is seeking to quickly remodel the US government to be more effective at a lower cost. If successful, the project could contribute to the US economy’s productive capacity by reducing the crowding-out effect of government spending on private sector activity. Inconveniently, the prospects for reducing government spending face many constraints, not least the fact that a very large proportion of US government spending is committed to entitlement programs like Social Security, Medicare and Medicaid, which most politicians have pledged not to touch. Moreover, in the short term, reduced government employment and lower outlays would directly reduce GDP. Sources: Piper Sandler, Signum Global Advisors
6 In LaSalle’s ISA Outlook 2025, we highlighted our Portfolio Balance framework, which describes real estate market segments according to their historical sensitivities to economic growth and interest rates. The framework segments markets and sectors into four categories: growth-led, rate-led, stable, and reactive. We found that while short-leased, economically sensitive sectors like hotels may see values soften in a recession, other sectors may actually see values benefit if interest rates soften enough.
7 Source: Economic Policy Institute, Federal Reserve Bank of Boston, Piper Sandler
Important notice and disclaimer
This publication does not constitute an offer to sell, or the solicitation of an offer to buy, any securities or any interests in any investment products advised by, or the advisory services of, LaSalle Investment Management (together with its global investment advisory affiliates, “LaSalle”). This publication has been prepared without regard to the specific investment objectives, financial situation or particular needs of recipients and under no circumstances is this publication on its own intended to be, or serve as, investment advice. The discussions set forth in this publication are intended for informational purposes only, do not constitute investment advice and are subject to correction, completion and amendment without notice. Further, nothing herein constitutes legal or tax advice. Prior to making any investment, an investor should consult with its own investment, accounting, legal and tax advisers to independently evaluate the risks, consequences and suitability of that investment. LaSalle has taken reasonable care to ensure that the information contained in this publication is accurate and has been obtained from reliable sources. Any opinions, forecasts, projections or other statements that are made in this publication are forward-looking statements. Although LaSalle believes that the expectations reflected in such forward-looking statements are reasonable, they do involve a number of assumptions, risks and uncertainties. Accordingly, LaSalle does not make any express or implied representation or warranty and no responsibility is accepted with respect to the adequacy, accuracy, completeness or reasonableness of the facts, opinions, estimates, forecasts, or other information set out in this publication or any further information, written or oral notice, or other document at any time supplied in connection with this publication. LaSalle does not undertake and is under no obligation to update or keep current the information or content contained in this publication for future events. LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication and nothing contained herein shall be relied upon as a promise or guarantee regarding any future events or performance. By accepting receipt of this publication, the recipient agrees not to distribute, offer or sell this publication or copies of it and agrees not to make use of the publication other than for its own general information purposes.
Copyright © LaSalle Investment Management 2025. All rights reserved. No part of this document may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of LaSalle Investment Management.
JLL (NYSE: JLL) has been recognized by Ethisphere, a global leader in defining and advancing the standards of ethical business practices, as one of the 2025 World’s Most Ethical Companies. For the 18th consecutive year, JLL has been honored for demonstrating exceptional leadership and a commitment to business integrity through best-in-class ethics, compliance and governance practices.
In 2025, 136 honorees were recognized spanning 19 countries and 44 industries.
LaSalle is a wholly owned subsidiary of JLL and is proud to share in this achievement.
Katie Smith is LaSalle’s Global Head of Performance, based in London, where she leads the firm’s performance measurement, reporting and forecasting processes. In her role, Katie partners with stakeholders across the business to bring greater clarity to performance measurement activities and investment decisions, ensuring LaSalle has a global approach to performance reporting and forecasting.
Katie Joined LaSalle in January 2025. Previously, Katie worked for CBRE IM, where most recently she was Global Head of Analytics. Prior to joining CBRE IM, Katie spent two years working in the Analytics team at Man Group, a global hedge fund, and prior to that was Head of Performance at M&G (formally PRUPIM). Katie was Chair of the INREV Performance Measurement Committee during her time at CBRE IM.
Katie holds a Bachelors of Science Degree in Financial Economics from the University of Birkbeck
Global Head of Marketing and Communications
Global Chief Financial Officer
Head of Legal and Compliance, Europe
Portfolio Controller
Global Head of LaSalle Technology
Americas General Counsel and Chief Legal Officer, Securities
Chief Financial Officer
Head of the Americas
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Managing Director, Investor Accounting and Finance
Head of LaSalle Global Solutions
Global Chief Operating Officer
Chief Operating Officer, Europe
Head of Corporate Finance, Asia Pacific
Head of Debt Capital Markets, Americas
Corporate Financial Director, LaSalle Global Solutions
Senior Portfolio Accountant
Head of Americas Investor and Consultant Relations
Chief Operating and Financial Officer, Americas
European Head of Compliance
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This article first appeared in a Real Estate Debt special report in the February 2025 issue of Private Debt Investor (subscription required to read the full issue).
LaSalle’s David White and Craig Oram provide insights on navigating the evolving real estate debt markets in the US and Europe. They discuss the risk-adjusted returns that debt investments offer compared to equity, emphasizing steady returns and favorable lending conditions driven by recent market changes. They also share LaSalle’s strategic focus on scalable opportunities and underutilized assets, with a significant emphasis on the for-rent residential sector in the US.
Anna Simpson is LaSalle’s Global Funds Counsel, a position she assumed in December 2024. She leads the Global Funds Team responsible for all legal aspects of the fund-raising life cycle, including product development, fund structuring, marketing, fund documentation, and investor onboarding. The Global Funds Team supports existing and new commingled funds and structured separate accounts across LaSalle’s global platform available for client investment and employee co-investment. Anna joined LaSalle in 2022 as the General Counsel for the Employee Co-Investment program.
Anna has been a general counsel or practicing corporate real estate attorney since 2007. Prior to LaSalle, she spent 10 years with Sterling Bay, a vertically integrated national real estate investment and development company, overseeing all legal matters, including sponsored private equity funds, corporate M&A, financial transactions, tax structuring, regulatory compliance, and commercial real estate. She began her practice at Jones Day, a leading global law firm, counseling public and private companies, private equity funds, major banks, and commercial borrowers on diverse transactions, including private equity fund formation, real estate transactions, debt financing, and joint ventures.
Anna received her Juris Doctor from Indiana University in Bloomington, Indiana and her Bachelor of Arts from Tufts University in Medford, Massachusetts. Anna clerked for Justice Susan W. Calkins of the Maine Supreme Judicial Court, 2006 – 2007. She is licensed to practice law in Illinois and Massachusetts.
Global Head of Marketing and Communications
Global Chief Financial Officer
Head of Legal and Compliance, Europe
Portfolio Controller
Global Head of LaSalle Technology
Americas General Counsel and Chief Legal Officer, Securities
Chief Financial Officer
Head of the Americas
Co-Head of Luxembourg and Head of Legal, France and Luxembourg
Managing Director, Investor Accounting and Finance
Head of LaSalle Global Solutions
Global Chief Operating Officer
Chief Operating Officer, Europe
Head of Corporate Finance, Asia Pacific
Head of Debt Capital Markets, Americas
Corporate Financial Director, LaSalle Global Solutions
Senior Portfolio Accountant
Head of Americas Investor and Consultant Relations
Chief Operating and Financial Officer, Americas
European Head of Compliance
Global Head of Investor Accounting and Finance
Senior Finance Director, Sustainability
Head of Finance, European Debt and Value-add Strategies
Head of Europe
Chief Operating Officer, Asia Pacific
Global Head of Tax
General Counsel
Global Head of Human Resources
Chief Financial Officer, Europe
Global Head of Performance
President and Chief Executive Officer, JLL Income Property Trust
Co-Head of Luxembourg and Head of Investor Accounting and Finance, Luxembourg
Director of Finance, Continental Europe
Singapore (December 12, 2024) – Asia Pacific macroeconomies and real estate markets are showing signs of potential structural changes and unique cyclical patterns, setting the region apart from global trends.
This is the thrust of the Asia Pacific chapter of ISA Outlook 2025 report just released by LaSalle Investment Management (“LaSalle”). Published every year since 1993, LaSalle’s ISA Outlook is designed to help the real estate industry navigate the year ahead.
This year’s key findings include:
Where favorable macroeconomic conditions present themselves and as global investment appetite returns, the diversity of Asia Pacific markets and sectors within the region will offer discerning investors a variety of opportunities with a wide range of risk-return profiles.
Five strategic themes are highlighted in the Asia Pacific ISA Outlook 2025:
The multi-family sector in Asia Pacific is undergoing structural changes, driven primarily by demographic shifts and government policies, with significant potential for institutionalization. This sector offers a range of investment opportunities in a basket of markets except China, although it would take time to fully unlock value in this nascent sector outside of Japan due to unproven liquidity.
Office market performance across Asia Pacific varies significantly. It is increasingly important to consider the timing of entry and exit as well as risk mitigation plans. South Korean, Japanese and Singaporean offices offer strategically selected investment opportunities for investors with different risk and return appetites.
The logistics sector shows dispersion in performance across markets, submarkets and sub-sectors. With relatively balanced supply-demand dynamics, Australia, Singapore and select Japanese markets offer investment opportunities, despite reducing return expectations.
We expect that well-managed retail assets that have adapted their tenant mixes and market positioning in response to changing consumption habits will outperform, adding to operational intensity. A granular, asset-level approach to investment is crucial, given the performance variations across markets and sub-sectors.
The Japanese hotel market is set to continue its growth trajectory, driven primarily by domestic demand and, to a lesser extent, inbound tourists. However, the performance is expected to vary across markets and segments, influenced by the operational capability to navigate challenges such as labor shortages and rising labor costs.
Looking ahead, investors in Asia Pacific real estate must navigate a complex environment marked by structural changes and atypical market cycles.
Elysia Tse, Asia Pacific Head of Research and Strategy at LaSalle, commented: “There are many unknowns in the current complex economic climate, compounded by impending changes in Trump 2.0, which will likely lead to periodic episodes of capital market volatility. Investment strategies that favor domestic tenant demand and domestic capital, as well as those that focus on operational intensity, such as deal execution and in-house leasing, are important for value creation and preservation. In the event of significant dislocation or capital market volatility, investors could seek attractive entry points or creative, structured solutions to address capital stack issues for some troubled property owners or developers.”
Brian Klinksiek, Global Head of Research and Strategy at LaSalle, added: “As we enter 2025, we’re seeing the dawn of a new real estate cycle. While challenges remain, particularly in resolving legacy capital stack issues, we’re observing improving capital market conditions and emerging opportunities across a wide range of sectors and geographies. Investors who recognize these shifts early and act with flexibility are likely to benefit from attractive risk-adjusted returns. However, it’s crucial to remain vigilant about risks on the horizon and avoid the expectation of a rapid return to ultra-low interest rates.”
Ends
About LaSalle Investment Management | Investing Today. For Tomorrow.
LaSalle Investment Management is one of the world’s leading real estate investment managers. On a global basis, LaSalle manages US$88.8 billion of assets in private and public real estate equity and debt investments as of Q3 2024. LaSalle’s diverse client base includes public and private pension funds, insurance companies, governments, corporations, endowments and private individuals from across the globe. LaSalle sponsors a complete range of investment vehicles, including separate accounts, open- and closed-end funds, public securities and entity-level investments.
For more information, please visit www.lasalle.com, and LinkedIn.
NOTE: This information discussed above is based on the market analysis and expectations of LaSalle and should not be relied upon by the reader as research or investment advice regarding LaSalle funds or any issuer or security in particular. The information presented herein is for illustrative and educational purposes and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy in any jurisdiction where prohibited by law or where contrary to local law or regulation. Any such offer to invest, if made, will only be made to certain qualified investors by means of a private placement memorandum or applicable offering document and in accordance with applicable laws and regulations. Past performance is not indicative of future results, nor should any statements herein be construed as a prediction or guarantee of future results.
Chicago (December 11, 2024) – LaSalle Investment Management (LaSalle) is pleased to announce it has been named a Best Place to Work in Money Management for 2024 by Pensions & Investments. This marks the ninth consecutive year LaSalle has received this prestigious recognition.
Presented by Pensions & Investments, the global news source of money management and institutional investing, the 13th annual survey and recognition program is dedicated to identifying and recognizing the best employers in the money management industry.
“Earning the ‘Best Place to Work’ recognition for the ninth time highlights what drives LaSalle’s success: our people and culture. This culture, shaped by every employee, fuels our client service, investment performance, and talent development. We’re proud that our commitment to an inspiring workplace continues to be recognized. Thank you to our employees for making LaSalle not just a great place to work, but a leader in investment management,” said Brad Gries, LaSalle Head of Americas.
“As their employees attest, the companies named to this year’s Best Places to Work list demonstrate a commitment to building and maintaining a strong workplace culture,’’ said P&I Editor-in-Chief Julie Tatge. “In doing so, they’re helping their employees, clients and their businesses succeed.’’
“Pensions & Investments is proud to honor the Best Places to Work in Money Management for the 13th year. A strong workplace culture that supports talent, advocates progress and drives innovation is paramount to driving the best outcomes and these asset managers demonstrate that. Congratulations to the 2024 honorees for their commitment to employee well-being, attractive incentive structures and talent development that demonstrate how investing in your employees can elevate our industry to greater heights,” said P&I President and Publisher Nikki Pirrello.
Pensions & Investments partnered with Workforce Research Group, a research firm specializing in identifying great places to work, to conduct a two-part survey process of employers and their employees.
The first part consisted of evaluating each nominated company’s workplace policies, practices, philosophy, systems and demographics. This part of the process was worth approximately 20% of the total evaluation. The second part consisted of an employee survey to measure the employee experience. This part of the process was worth approximately 80% of the total evaluation. The combined scores determined the top companies.
For a complete list of the 2024 Pensions & Investments’ Best Places to Work in Money Management winners and profiles of the top firms across size categories, go to http://www.pionline.com/BPTW2024
End.
About LaSalle Investment Management | Investing Today. For Tomorrow.
LaSalle Investment Management is one of the world’s leading real estate investment managers. On a global basis, LaSalle manages US$88.2 billion of assets in private and public real estate equity and debt investments as of Q3 2024. LaSalle’s diverse client base includes public and private pension funds, insurance companies, governments, corporations, endowments and private individuals from across the globe. LaSalle sponsors a complete range of investment vehicles, including separate accounts, open- and closed-end funds, public securities and entity-level investments.
For more information, please visit www.lasalle.com, and LinkedIn.
About Pensions & Investments
Pensions & Investments, owned by Crain Communications Inc., is the 51-year-old global news source of money management and institutional investing. P&I is written for executives at defined benefit and defined contribution retirement plans, endowments, foundations, and sovereign wealth funds, as well as those at investment management and other investment-related firms. Pensions & Investments provides timely and incisive coverage of events affecting the money management and retirement businesses. Visit us at www.pionline.com.
Chicago (December 4, 2024) – US and Canadian real estate is on the verge of a new cycle in 2025, with interest rates down from peak levels and economic growth concerns fading, but also new risks on the horizon, according to the North America chapter of the ISA Outlook 2025 report published by global real estate investment manager LaSalle Investment Management (“LaSalle”).
The landscape for US and Canadian real estate has shifted since last year’s ISA Outlook 2024, which saw lower transaction volumes due to higher interest rates and challenging macroeconomic conditions. LaSalle sees considerable differences between this upcoming cycle and prior ones across both countries. Specifically, interest rates are expected to remain higher, which will lead to a more moderate pace of value recovery. And while the pace of capital flows to real estate is expected to pick-up in 2025, conditions across real estate sectors and markets will remain uneven.
These differences suggest that investing into the coming real estate cycle will not be a simple story of a “rising tide lifts all boats”; selectivity at the sector, market and sub-market level is likely to add value. LaSalle’s ISA Outlook 2025 follows several main themes that will influence real estate decision-making within the US and Canada, as well as sector by sector analysis of different property types:
Global and North American Property Sector Outlooks
The North America chapter of the ISA forms part of LaSalle’s Global ISA Outlook 2025, which analyzes real estate trends across geographies and sectors, and similarly finds the new cycle extends to global real estate markets.
Richard Kleinman, LaSalle’s Americas Head of Research and Strategy, said: “We are on the cusp of a new real estate cycle both globally and in the Americas specifically. That said, navigating the current environment will require selectivity at the sector, market, and submarket levels. The ISA Outlook 2025 research we’ve released today looks in depth at what is driving trends in North American real estate, and lays out our strategy for the year ahead.”
Chris Langstaff, Head of Research and Strategy for Canada at LaSalle, commented: “Our outlook for Canadian real estate next year resembles many of our global projections, with some important distinctions. Optimism is a bit more contained as economic performance has lagged and there’s been uncertainty around trade policies, but favourable demographics, healthy fundamentals in most sectors and forecasts for improved GDP and job growth in 2025 and 2026 will continue to drive opportunities across markets, including in specialty sectors.”
Brian Klinksiek, Global Head of Research and Strategy at LaSalle, added: “Global real estate sentiment is gradually improving following a long period of negativity and signs are pointing to the beginning of a new real estate cycle. History has shown that investing early in a cycle tends to lead to relatively strong performance. There are still risks on the horizon, however, and investors are advised to focus on diversified strategies that are flexible and broad enough to adapt to a complex and evolving relative value landscape. A comprehensive look at value across a wide range of sectors and markets will be required to build a well-positioned real estate portfolio.”
Ends
About LaSalle Investment Management | Investing Today. For Tomorrow.
LaSalle Investment Management is one of the world’s leading real estate investment managers. On a global basis, LaSalle manages US$88.2 billion of assets in private and public real estate equity and debt investments as of Q3 2024. LaSalle’s diverse client base includes public and private pension funds, insurance companies, governments, corporations, endowments and private individuals from across the globe. LaSalle sponsors a complete range of investment vehicles, including separate accounts, open- and closed-end funds, public securities and entity-level investments.
For more information, please visit www.lasalle.com, and LinkedIn.
NOTE: This information discussed above is based on the market analysis and expectations of LaSalle and should not be relied upon by the reader as research or investment advice regarding LaSalle funds or any issuer or security in particular. The information presented herein is for illustrative and educational purposes and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy in any jurisdiction where prohibited by law or where contrary to local law or regulation. Any such offer to invest, if made, will only be made to certain qualified investors by means of a private placement memorandum or applicable offering document and in accordance with applicable laws and regulations. Past performance is not indicative of future results, nor should any statements herein be construed as a prediction or guarantee of future results.
Chicago, London, Singapore (December 03, 2024) – LaSalle Investment Management (“LaSalle”), the global real estate investment manager, today announces its updated scores from the 2024 ‘Principles for Responsible Investment’ (“PRI”) Assessment Report, the world’s leading proponent of responsible investment.
LaSalle earned four stars across the assessment categories applicable to LaSalle, pertaining to Policy Governance and Strategy, Direct – Listed Equity – Active Fundamental, Confidence Building Measures, and Direct Real Estate, as well as rated at or above the peer median in three of the four categories. The results show improvement over last year’s assessment, in which LaSalle secured four stars in three categories.
LaSalle’s 2024 PRI Assessment Report results include:
Julie Manning, Global Head of Climate and Carbon at LaSalle, commented: “These latest PRI results underscore LaSalle’s deep commitment to advancing the sustainability priorities of our clients in ways that drive investment performance. We will continue our focus on incorporating sustainability efforts across our strategies over the next year as we build on our industry-leading position and trusted partnerships with our clients.”
ENDS
About LaSalle Investment Management | Investing Today. For Tomorrow.
LaSalle Investment Management is one of the world’s leading real estate investment managers. On a global basis, LaSalle manages $88.2 billion of assets in private and public real estate equity and debt investments as of Q3 2024. LaSalle’s diverse client base includes public and private pension funds, insurance companies, governments, corporations, endowments and private individuals from across the globe. LaSalle sponsors a complete range of investment vehicles, including separate accounts, open- and closed-end funds, public securities and entity-level investments.
For more information, please visit www.lasalle.com, and LinkedIn.
About the PRI
The PRI is the world’s leading proponent of responsible investment. It works to understand the investment implications of environmental, social and governance (ESG) factors and to support its international network of investor signatories in incorporating these factors into their investment and ownership decisions. The PRI acts in the long-term interests of its signatories, of the financial markets and economies in which they operate and ultimately of the environment and society as a whole. The PRI encourages investors to use responsible investment to enhance returns and better manage risks, but does not operate for its own profit; it engages with global policymakers but is not associated with any government; it is supported by, but not part of, the United Nations. For more information about UN PRI and its ESG benchmarking and reporting for real estate, please visit https://www.unpri.org/.
This article first appeared in the December 2024/January 2025 edition of PERE.
LaSalle’s Ryu Konishi and Julie Manning spoke to PERE about the growing importance of sustainability as part of investment decision-making and LaSalle’s approach to creating a global real estate net zero carbon pathway strategy.
A 360-degree approach to decarbonization
The importance of sustainability as part of investment decision-making in the real estate space has been on the rise for quite some time. In fact, the various physical risks associated with climate change, and the regulatory imperative of transitioning to net zero, are now so significant that these factors are gradually filtering through in the form of real-world valuation impacts.
For real estate investors, this raises both risks and opportunities. LaSalle Investment Management is one firm that was early to recognize this, having set up a global sustainability committee back in 2008. More recently, it has worked with the Urban Land Institute to develop a decision-making framework for assessing physical climate risk in relation to its real estate investments.
According to Julie Manning, global head of climate and carbon, and Ryu Konishi, fund manager of Lp3F (LaSalle’s global real estate net-zero strategy), this kind of approach to risk analysis – both broad and deep – is essential. So, where should investors start? And what might a determined decarbonization program in real estate look like?
London (November 27, 2024) –Europe’s real estate cycle has reached a new dawn, following a deep capital market correction over recent years, according to the European chapter of the ISA Outlook 2025 report published by global real estate investment manager LaSalle Investment Management (“LaSalle”).
Last year’s ISA Outlook described the beginning of adjustment to the new reality of higher interest rates and challenging macroeconomic conditions. As we approach a new year, the latest ISA Outlook describes how market evidence is crossing thresholds that point to a new cycle. For example, data tracked by LaSalle’s asset managers show, from January 2024 to date, rents for new commercial leases across LaSalle’s European portfolio grew 2.7% relative to expiring passing rent, representing a return to an above-inflation pace.
LaSalle estimates that expected go-forward returns for the overall European property market are at their highest level in a decade. As capital slowly returns to the market and yield spreads exceed long-term averages, the real estate outlook has diverged from the region’s weak pace of economic growth due to a combination of supply barriers and asset quality polarisation.
This year’s report identifies strategic themes for investment in European real estate, which earn the region’s real estate assets an important place in investors’ property portfolios.
Beyond beds and sheds
A laser focus on “beds and sheds” has become a market consensus portfolio theme for many real estate investors, yet it is now becoming too simplistic to capture the more complex dynamics of the market.
Today’s ISA Outlook 2025 report uses fair value analysis to zero in on the best opportunities across a range of real estate capital and debt strategies and asset classes. These span all property types – not for the sake of diversification – but because we believe there are specific compelling opportunities that span across property types.
The European chapter of ISA Outlook 2025’s five strategic themes:
Global uncertainty but clear opportunities
The European ISA Outlook forms part of LaSalle’s Global ISA Outlook, which finds that the new dawn extends across real estate around the world.
Greater clarity on the direction of interest rates around the world should help drive healing of the capital markets in 2025, with hesitant sellers gaining confidence as pricing starts to come in closer to their expectations.
There have, of course, been significant political developments in the US in recent weeks. The Global ISA Outlook reflects on how the “Red Sweep” may affect the real estate investment outlook and the shape of the dawning cycle, with signals pointing towards marginally higher growth, inflation and rates, but no great change in the overall outlook. LaSalle expects that the US economy remains on track for a soft landing. Equally, the European ISA Outlook considers the potential impact of the US Election in Europe, recognising that a stronger dollar could result in a possible boost in student demand for housing and tourist demand for hotel rooms.
The Global ISA Outlook also identifies areas of concern, with China a significant ‘soft spot’ due to a combination of generationally low growth and liquidity alongside weak property fundamentals. The Chinese government has made significant interventions to shore up the economy, and in recent weeks further stimulus has been implemented to guard against the potential onset of US tariffs on Chinese goods. These factors mean that China is something of a unique case in the ISA Outlook, with less applicability of global trends. Similarly, the Japanese market is experiencing a different cycle to the rest of the world. Japan is in the process of exiting a long period of deflationary risk and rock-bottom rates, so unlike other countries, monetary policy in Japan has a modest tightening bias.
Dan Mahoney, Head of European Research and Strategy at LaSalle, said: “We are seeing a new cycle dawning for Europe’s real estate markets. Today’s Europe ISA Outlook delves into why we believe we are entering a new cycle, evidence of data thresholds crossed, and our strategy for the years ahead. These go beyond simple ‘beds and sheds’ – which is too simplistic to capture the complexity of European real estate today.”
Brian Klinksiek, Global Head of Research and Strategy at LaSalle, added: “Global real estate sentiment is gradually improving following a long period of negativity and signs are pointing to the beginning of a new real estate cycle. History has shown that investing early in a cycle tends to lead to relatively strong performance. There are, however, still risks on the horizon, and investors are advised to focus on diversified strategies that are flexible and broad enough to adapt to a complex and evolving relative value landscape. A comprehensive look at value across a wide range of sectors and markets will be required to build a well-positioned real estate portfolio.”
Ends
About LaSalle Investment Management | Investing Today. For Tomorrow.
LaSalle Investment Management is one of the world’s leading real estate investment managers. On a global basis, LaSalle manages US$88.2 billion of assets in private and public real estate equity and debt investments as of Q3 2024. LaSalle’s diverse client base includes public and private pension funds, insurance companies, governments, corporations, endowments and private individuals from across the globe. LaSalle sponsors a complete range of investment vehicles, including separate accounts, open- and closed-end funds, public securities and entity-level investments.
For more information, please visit www.lasalle.com, and LinkedIn.
NOTE: This information discussed above is based on the market analysis and expectations of LaSalle and should not be relied upon by the reader as research or investment advice regarding LaSalle funds or any issuer or security in particular. The information presented herein is for illustrative and educational purposes and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy in any jurisdiction where prohibited by law or where contrary to local law or regulation. Any such offer to invest, if made, will only be made to certain qualified investors by means of a private placement memorandum or applicable offering document and in accordance with applicable laws and regulations. Past performance is not indicative of future results, nor should any statements herein be construed as a prediction or guarantee of future results.
Almost three years after interest rates began to spike leading into the Great Tightening Cycle, the first light of a new real estate cycle is clearly visible on the horizon. As with the start of every new day, however, opportunities and challenges lie ahead. LaSalle’s Research and Strategy team will examine both throughout the course of November and December, as we publish four separate chapters, one covering our global outlook, and three deep-dives covering the outlook for Europe, North America and Asia Pacific. Each chapter can be found alongside an accompanying video conversations with lead authors on the links below.
In the Global chapter of ISA Outlook 2025, we look at how to make the most of this new dawn and the opportunities it may present, but with a watchful eye on ways the new day could go off track. We examine these through four broad themes in this year’s report: the morning sky, the capital stack hangover, the breakfast menu, and the early bird.
We examine each of these concepts in turn, and ask what each means for real estate and they intersect with one another and other key trends.
Global Head of Research and Strategy
Managing Director, Global Research and Strategy
While dawn is universal, across Europe it can appear different from each location and every angle. European real estate is transiting inflection points following a deep capital market correction. The INREV ODCE index shifted in the latest quarter from declines to positive after seven down quarters.
Against this backdrop, we share our Impressions of a Rising Cycle in Europe, with a focus on what makes the region different from others across the globe. We also share our five key strategy themes for investors in European real estate for the year ahead.
Europe Head of Research and Strategy
Europe Head of Core and Core-plus Research and Strategy
Europe Head of Debt and Value-add Capital Research and Strategy
The summer and autumn of 2024 saw growing optimism among real estate investors. The belief that the dawn of 2025 would open with sunny skies for the real estate market was driven by falls in interest rates from peak levels, fading economic growth concerns and real estate valuations now more aligned with market transactions.
But with more uncertainty creeping into the picture in late 2024, especially around longer-term interest rates, what we see could be described as a “partly cloudy sunrise.”
Americas Head of Research and Strategy
Canada Head of Research and Strategy
The current real estate cycle in Asia Pacific is not a simple repetition of a typical cycle. While Asia Pacific economies have not been immune to supply chain disruptions and elevated inflation, interest rates and construction costs, real estate capital market liquidity in the region (with the exception of China and Hong Kong) has fared much better than in other parts of the world.
In our view, the varying and sometimes contrasting cyclical patterns among major real estate sectors within each country set the region apart from global trends.
Vice President, Strategist
China Head of Research and Strategy
Published every year since 1993, LaSalle’s annual ISA Outlook is designed to help our clients and partners navigate the year ahead. It brings together smart perspectives and investment ideas from our teams around the world, based on what we see across our more than 1,200 assets that span geographies, property types and risk profiles.
As always, we welcome your feedback. If you have any questions, comments or would like to learn more,
please get in touch by using our Contact Us page.
On November 19, 2024, LaSalle hosted a client webinar to discuss the outlook for listed real estate. LaSalle Global Solutions Chief Investment Officer Matt Sgrizzi offered a recap of our recent ISA Briefing: A new “golden era” for REITs and real estate? and took questions from clients in attendance.
This publication does not constitute an offer to sell, or the solicitation of an offer to buy, any securities or any interests in any investment products advised by, or the advisory services of, LaSalle Investment Management (together with its global investment advisory affiliates, “LaSalle”). This publication has been prepared without regard to the specific investment objectives, financial situation or particular needs of recipients and under no circumstances is this publication on its own intended to be, or serve as, investment advice. The discussions set forth in this publication are intended for informational purposes only, do not constitute investment advice and are subject to correction, completion and amendment without notice. Further, nothing herein constitutes legal or tax advice. Prior to making any investment, an investor should consult with its own investment, accounting, legal and tax advisers to independently evaluate the risks, consequences and suitability of that investment.
LaSalle has taken reasonable care to ensure that the information contained in this publication is accurate and has been obtained from reliable sources. Any opinions, forecasts, projections or other statements that are made in this publication are forward-looking statements. Although LaSalle believes that the expectations reflected in such forward-looking statements are reasonable, they do involve a number of assumptions, risks and uncertainties. Accordingly, LaSalle does not make any express or implied representation or warranty, and no responsibility is accepted with respect to the adequacy, accuracy, completeness or reasonableness of the facts, opinions, estimates, forecasts, or other information set out in this publication or any further information, written or oral notice, or other document at any time supplied in connection with this publication. LaSalle does not undertake and is under no obligation to update or keep current the information or content contained in this publication for future events. LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication and nothing contained herein shall be relied upon as a promise or guarantee regarding any future events or performance.
By accepting receipt of this publication, the recipient agrees not to distribute, offer or sell this publication or copies of it and agrees not to make use of the publication other than for its own general information purposes.
Copyright © LaSalle Investment Management 2024. All rights reserved. No part of this document may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of LaSalle Investment Management.
This article first appeared in the Fall 2024 edition of PREA Quarterly
Chris Battista, Senior Product Manager at LaSalle Global Solutions, and Brian Klinksiek, Global Head of Research and Strategy, discuss the value of publicly traded real estate investments.
Investors should consider a holistic approach to the real estate asset class across the “four quadrants.” This means considering opportunities spanning both equity and debt positions on one dimension and both private and public market executions on the other (Exhibit 1). Doing so captures the full gross capitalization of real estate, enhances diversification, and opens opportunities to capture the best relative value. We call this being “quadrant smart” in LaSalle’s recently released ISA Portfolio View 2024, an annual report on portfolio construction.
Allocating between real estate debt and equity investing should be driven by risk appetite, views of relative pricing, and an investor’s broader portfolio considerations. Although debt investing has been quite topical over the past two years and covered by multiple investment managers, including LaSalle (see ISA Focus: Investing in Real Estate Debt), this article discusses the relationship between the public and private avenues to real estate equity investment.
Institutional investors tend to be well versed in private equity real estate investing but less consistent in their approach to the publicly traded side of real estate—even though the public side offers similar characteristics, a broad opportunity set, and often leading signals on the broader market’s direction. This article focuses on how to think about using both sides of the equity real estate investing coin, public and private, to maximize access and potentially improve the overall risk-adjusted return profile.
Want to read more?
London (November 13, 2024) – LaSalle Investment Management (“LaSalle”), the global real estate investment manager, today announces that after almost 13 years of service and a career spanning more than 40 years, Jon Zehner, Vice Chairman, will retire from the firm effective 31 December 2024.
Jon joined LaSalle in 2012 as Global Head of LaSalle’s Investor Relations team. He assumed responsibility for LaSalle Global Partner Solutions at the end of 2019 and headed the business until it merged with LaSalle Securities, to form LaSalle Global Solutions, in 2023. Since early 2023, Jon has been Vice Chairman of LaSalle. Throughout his time at the firm, he has been a member of the Global Management Committee.
Jon’s career in real estate began in 1981 at JPMorgan, where he spent 28 years in a variety of corporate finance roles including Global Head of Real Estate Investment Banking and Head of sub-Saharan Africa before joining AREA Property Partners (now ARES) as a Senior Director in 2009.
Jon has been an influential leader in the real estate industry, having co-founded the European Public Real Estate Association (EPRA), the Urban Land Institute (ULI) in Europe and the University of Cambridge’s MPhil programme in Real Estate Finance. He remains Chair of the University of Cambridge’s Land Economy Advisory Board and as a Trustee of the Urban Land Institute, where he served as a recent European Chair and Member of the Global Board of Directors. He is an Independent Non-Executive Director of Vukile Property Fund, a Johannesburg Stock Exchange listed REIT and a member of the Executive Council of King’s College London where he Chairs the Estates Strategy Committee. He also serves as Chair of African Parks UK and a Member of the Board of Governors of Arnold House School in St. John’s Wood, London.
Mark Gabbay, Global Chief Executive Officer of LaSalle, said: “We are truly grateful for Jon’s extraordinary service and commitment to LaSalle over almost 13 years in which he made countless contributions to the business as it evolved, and to the wider industry. As Jon enters this new chapter, we wish him the very best in his well-deserved retirement and all his future endeavors.”
Jon Zehner, retiring Vice Chairman of LaSalle, said: “I am grateful for the experiences and relationships I’ve gained in my time at LaSalle. It has been a pleasure to work alongside such talented people around the world. I have learned a great deal during my time here and hope that I have contributed something in return. As I graduate to this next chapter of my life, I have no doubt that LaSalle will continue to be focused on building relationships of trust with our investor clients while working hard to deliver strong investment performance.”
About LaSalle Investment Management | Investing Today. For Tomorrow
LaSalle Investment Management is one of the world’s leading real estate investment managers. On a global basis, LaSalle manages US$84.8 billion of assets in private and public real estate equity and debt investments as of Q2 2024. LaSalle’s diverse client base includes public and private pension funds, insurance companies, governments, corporations, endowments and private individuals from across the globe. LaSalle sponsors a complete range of investment vehicles, including separate accounts, open- and closed-end funds, public securities and entity-level investments.
For more information, please visit www.lasalle.com, and LinkedIn.
Want to read more?
The impacts of US presidential elections on financial markets and especially real estate are often overstated, as we have pointed out previously (see our ISA Briefing, “Elections everywhere, all at once”). An excessive focus on the news cycle can distract from important ongoing trends that are not ‘new news’, such as a broad global trend toward cooling inflation. Headlines also tend to accentuate differences, rather than commonalities, between outcomes. For example, regardless of the election result, trends favored greater nearshoring, and both US political parties are hawkish on China.
That said, last week’s initial reaction to the election result by the media and markets was significant. Looking beyond near-term noise and volatility, we offer our perspective on what it might mean for real estate over medium- and long-term timescales. This is based on our own analysis, the views of third-party providers,[1] and discussions across our research, investment and leadership teams. We recommend investors keep in mind four observations when considering the election result:
Legislative obstacles exist to enacting full campaign-trail rhetoric. The almost certain ‘red sweep’ outcome (Republican control of the White House, Senate and House of Representatives) should make it easier to pass legislation than under the anticipated divided government scenario.[2] The Republican victory has been labelled a ‘mandate’ by the media, but legislatively, it is not a blank check. The Republican majority in the House will be razor-thin and that means that legislation must be agreed by the full spectrum of Republican legislators, which is not uniformly aligned with campaign promises. This will likely exert a moderating force on what the next Trump administration can do, especially around policies that increase the budget deficit. Republicans will also lack a filibuster-proof majority in the Senate and face likely unified resistance from Democrats in that chamber, limiting probable action on many types of legislation.[3]
A shift toward a higher path of growth, inflation and interest rates is possible, but mostly on the margins. Beyond the moderating impacts of the political process, one reason the delta may not be large is that there are likely offsetting impacts. Commentary has focused on Trump policies that potentially boost the prospects for economic growth, including reduced regulation by federal agencies and tax cuts (e.g., fully extending the expiring TCJA[4] and cutting corporate tax rates). But they may exist alongside policies that could be negatives for growth, such as a reduction of net migration to close to zero, which would stifle household formation. Similarly, there are potential Trump policies that may boost inflation, as well as those that could reduce it. Tariffs, fiscal loosening and reduced availability of low-wage immigrant labor would likely be inflationary. But greater domestic US fossil fuel production may be a counterbalancing deflationary force.
Where does all this leave the path of interest rates, which for the first time in two years have been on a clear easing path? The markets’ reaction to the election is instructive. When the scale of Trump’s victory became clear, the 10-year Treasury yield spiked, but it later eased and ended the week lower than it started. Corporate bond yields, our preferred building block for real estate pricing, felt some upward pressure, but also benefitted from narrowing risk spreads.
Meanwhile, the US Federal Reserve and the Bank of England stayed on course, going ahead with policy rate cuts as expected. This suggests there is no likely near-term change of course by monetary policymakers, and the overall bias towards gradually easing interest rates likely remains intact. However, depending on the net impact to growth and inflation, the decline in rates may be a little less steep and they may settle at a slightly higher level than previously expected. However, the change is not enough to prompt a wholesale change in the outlook.
Real estate sectors are likely to see a complex, sometimes offsetting, mix of impacts. For example, the multi-family sector in the US may face a weaker demand outlook if household formation is lower due to sharply reduced immigration. However, it may also experience less new supply if the construction labor force is constrained. There is similar variation in potential impacts for logistics markets. Trade barriers may lead to more regionalized production, which at the margin could lead to established and emerging manufacturing nodes seeing more demand. Meanwhile, import/export-related locations, such as submarkets near ports and airports, may see less demand. There are also potential, if uncertain, impacts that shape the outlook for entire property types. For example, replicating supply chains across borders could represent a net positive for global logistics demand, even if doing so is economically inefficient.[5]
Net impacts to ex-US real estate are also complex. Geopolitical implications, such as those concerning Israel-Gaza and Ukraine, are difficult to predict and do not likely have major implications for the real estate markets where we invest. Regarding trade,tariff proposals are probably best seen as an opening for negotiation.[6] Europe may face minimal new tariffs if its governments agree to spend more on defense, a key ask of President-Elect Trump. But the outcome of any upcoming negotiations is a guessing game at best, and there is a wide spread of views on the probable impact to Europe of US tariffs.[7] Finally, it is worth analyzing potentially differential impacts across global markets. For example, services are not as likely to be subject to tariffs, reducing the impact of trade barriers on services and consumption-oriented economies like the United Kingdom or Spain, versus goods export-heavy Germany.
Variable impacts on specific markets aside, in our view the case for global real estate investment remains intact. In part, this is because the broader trend toward protectionism, potentially accelerated by Trump’s tariff proposals, could lead to decreased return correlations across countries. National markets may begin to align less with global and more with regionalized or country-specific cyclical patterns. This could increase the potential diversification benefits of global real estate investment, the existing case for which we highlighted in our ISA Portfolio View 2024.
Sitting between equities and fixed income, real estate is a hybrid asset class that combines sensitivity to growth with sensitivity to interest rates. Different scenarios for growth and inflation should be considered in the context of varying sensitivities to each across real estate sectors. In the global chapter of our forthcoming ISA Outlook 2025, we will introduce our new Portfolio Balance framework, which does just that.
The net impact of the US election result on specific real estate markets and sectors depends on a complex interaction of multiple incremental factors, some of them offsetting. The regional chapters of the upcoming ISA Outlook 2025 will provide a more detailed discussion of potential sector- and country-specific election impacts across the markets where we invest. Please have a read!
Footnotes
1 These include Oxford Economics, Capital Economics, Piper Sandler, Signum Global Advisors and Green Street Advisors, among others.
2 Going into election day, major models such as those maintained by the New York Times and Nate Silver pegged the presidential candidates’ chances as a ‘coin toss‘ (50%/50%), but with a high degree of probability of a divided control of government (up to 80%). Divided government is typically characterized by policy stability due to difficulties passing new legislation, limiting the degree of likely policy change. It would have likely reduced the expected delta between a Trump and Harris presidency.
3 US senate rules allow for only certain types of legislation, notably certain types of budget bills under the “reconciliation” process, to be passed without a 60-seat supermajority.
4 The Tax Cuts and Jobs Act was a major tax reform bill passed by the Trump administration in 2017, with many of its provisions sunsetting in 2025.
5 Operations theory suggests that splitting one inventory pool into multiple, regionalized pools would increase the aggregate level of inventory required to achieve the ‘optimal’ safety stock that balances the costs of ‘stock outs’ against the cost of carrying inventory. More manufacturing/production space would probably also be required.
6 This statement and others in this paragraph are based on analysis by Signum Global Advisors, the Economist, the Financial Times, Oxford Economics and Capital Economics.
7 Capital Economics expects just a -0.2% Eurozone GDP drag from new tariffs, while many investment banks say tariffs, if enacted, could represent a -1.5% hit to European GDP growth.
This publication does not constitute an offer to sell, or the solicitation of an offer to buy, any securities or any interests in any investment products advised by, or the advisory services of, LaSalle Investment Management (together with its global investment advisory affiliates, “LaSalle”). This publication has been prepared without regard to the specific investment objectives, financial situation or particular needs of recipients and under no circumstances is this publication on its own intended to be, or serve as, investment advice. The discussions set forth in this publication are intended for informational purposes only, do not constitute investment advice and are subject to correction, completion and amendment without notice. Further, nothing herein constitutes legal or tax advice. Prior to making any investment, an investor should consult with its own investment, accounting, legal and tax advisers to independently evaluate the risks, consequences and suitability of that investment.
LaSalle has taken reasonable care to ensure that the information contained in this publication is accurate and has been obtained from reliable sources. Any opinions, forecasts, projections or other statements that are made in this publication are forward-looking statements. Although LaSalle believes that the expectations reflected in such forward-looking statements are reasonable, they do involve a number of assumptions, risks and uncertainties. Accordingly, LaSalle does not make any express or implied representation or warranty, and no responsibility is accepted with respect to the adequacy, accuracy, completeness or reasonableness of the facts, opinions, estimates, forecasts, or other information set out in this publication or any further information, written or oral notice, or other document at any time supplied in connection with this publication. LaSalle does not undertake and is under no obligation to update or keep current the information or content contained in this publication for future events. LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication and nothing contained herein shall be relied upon as a promise or guarantee regarding any future events or performance.
By accepting receipt of this publication, the recipient agrees not to distribute, offer or sell this publication or copies of it and agrees not to make use of the publication other than for its own general information purposes.
Copyright © LaSalle Investment Management 2024. All rights reserved. No part of this document may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of LaSalle Investment Management.
In a world overflowing with technology-driven business solutions, companies need to be more strategic than ever to choose the technology that can drive the most value for their clients, industry, and people.
What’s LaSalle’s big IDEA?
At LaSalle, our technology strategy is driven by IDEAS – Invest, Data, Efficiency, AI and Sales.
The five components of our IDEAS framework are designed to guide our internal teams to ensure they are deriving maximum benefit from new technologies:
The framework ensures LaSalle’s teams stay ahead; always ready to adopt innovative new capabilities that can transform the way we work.
Our vision of data and technology
It’s our ambition at LaSalle to move toward capturing global data. But it’s not just about data collection. It’s also about ensuring data is reliable and leveraging technology to make all relevant data easy to access for employees and investors.
While we’re aiming to create a simple, clean experience for end users, the process to get there is detailed and complex.
Our Global Data Strategy Team is responsible for delivering on a comprehensive plan to reimagine our existing data structure in a more modern, more efficient way. And their work is already underway.
One single source of truth
Our Global Data Strategy Team is developing a systematic approach to organizing and categorizing all data across LaSalle. Their focus is first on maintaining data integrity – not only categorizing all the data, but also ensuring the data within each category is reliable.
One of their goals is to move away from prioritizing data quantity over quality, which can raise questions about reliability and lead to hesitation to fully utilize collected information.
Andrew Muscat, Global Head of Investor Accounting and Finance and leader of the Global Data Strategy Team, explains more:
“Our initiative aims to guide all parts of the business in refining their data strategies. We are enforcing a ‘one data point – one source’ rule to eliminate duplication of data sources, which leads to discrepancies in reported data. The goal is to instill confidence in our teams, encouraging them to leverage our data resources to their full potential.”
Once this foundational work is completed and a single source of truth for each data point is in place, the work begins on user experience. Leveraging technology is a priority in this phase. By having cutting-edge GPT technology in place, it empowers employees and investors to use the system as needed.
“There is a lot of data across different categories, so it’s important to leverage technology to make our data as accessible as possible, to support the ability for users to find what they need. We want their experience to be one of getting reliable data easily, at any time they need, through a free-form chat GPT style question box,” Muscat explains.
Data governance in a modern world
Having a technology-forward interface that makes data access easy and quick also brings forward other important considerations, like data governance.
While LaSalle already has established strong data governance practices, exercises like this provide good reason to review practices and refresh any requirements that can leverage more recent or more modern information.
“We are in the process of augmenting our data governance framework. Our focus is first on data quality, and governance comes in the form of ensuring we document processes, business checks, controls, and oversight in a way that is tailored to each data category,” said Muscat.
Governance approaches will also leverage automated data quality checks wherever possible.
Other focus areas for governance include ensuring proper data architecture, security and privacy checks are in place and up to date.
By working on our data strategy, LaSalle is poised to unlock the full potential of technology and data, creating a future that we hope will revolutionize how we work.
LaSalle has taken reasonable care to ensure that the information contained in this publication is accurate and has been obtained from reliable sources. Any opinions, forecasts, projections or other statements that are made in this publication are forward-looking statements. Although LaSalle believes that the expectations reflected in such forward-looking statements are reasonable, they do involve a number of assumptions, risks and uncertainties. Accordingly, LaSalle does not make any express or implied representation or warranty, and no responsibility is accepted with respect to the adequacy, accuracy, completeness or reasonableness of the facts, opinions, estimates, forecasts, or other information set out in this publication or any further information, written or oral notice, or other document at any time supplied in connection with this publication. LaSalle does not undertake and is under no obligation to update or keep current the information or content contained in this publication for future events. LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication and nothing contained herein shall be relied upon as a promise or guarantee regarding any future events or performance.
By accepting receipt of this publication, the recipient agrees not to distribute, offer or sell this publication or copies of it and agrees not to make use of the publication other than for its own general information purposes.
Copyright © LaSalle Investment Management 2024. All rights reserved. No part of this document may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of LaSalle Investment Management.
This article first appeared in the November 2024 edition of IREI Americas (subscription required).
Senior real estate credit specialists from LaSalle discuss the rising significance of senior real estate mortgage credit in investment portfolios with Institutional Real Estate Investor. They explore its ability to provide steady income and downside protection, the growing role of alternative lenders, and the current market opportunity. The article examines how this strategy offers attractive risk-adjusted returns, portfolio diversification, and enhanced resilience in today’s dynamic economic environment.
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We regularly receive questions about past property market dislocations and what they might tell us about today, such as: Is office the new retail?, Will the 7+ years it took retail to rebalance be a template for office? and Should we be worried about the wave of supply in US apartments?
In our latest ISA Focus report, Rebalancing past and present, we engage in patten recognition across a range of historical episodes of occupier market challenges. We present a framework for how these imbalances tend to be resolved, and discuss the range of structural and cyclical factors that drive rebalancing. We also present a selection of historical case studies from around the world, highlighting the complex nature of the rebalancing process and how it can occur not only at different speeds, but also with “bumps in the road” for investors.
We conclude the report with a refresh of our ISA Focus: Revisiting the future of office, noting in particular that there will be specific investment opportunities that arise as the current rebalancing cycle plays out.
Important notice and disclaimer
This publication does not constitute an offer to sell, or the solicitation of an offer to buy, any securities or any interests in any investment products advised by, or the advisory services of, LaSalle Investment Management (together with its global investment advisory affiliates, “LaSalle”). This publication has been prepared without regard to the specific investment objectives, financial situation or particular needs of recipients and under no circumstances is this publication on its own intended to be, or serve as, investment advice. The discussions set forth in this publication are intended for informational purposes only, do not constitute investment advice and are subject to correction, completion and amendment without notice. Further, nothing herein constitutes legal or tax advice. Prior to making any investment, an investor should consult with its own investment, accounting, legal and tax advisers to independently evaluate the risks, consequences and suitability of that investment.
LaSalle has taken reasonable care to ensure that the information contained in this publication is accurate and has been obtained from reliable sources. Any opinions, forecasts, projections or other statements that are made in this publication are forward-looking statements. Although LaSalle believes that the expectations reflected in such forward-looking statements are reasonable, they do involve a number of assumptions, risks and uncertainties. Accordingly, LaSalle does not make any express or implied representation or warranty, and no responsibility is accepted with respect to the adequacy, accuracy, completeness or reasonableness of the facts, opinions, estimates, forecasts, or other information set out in this publication or any further information, written or oral notice, or other document at any time supplied in connection with this publication. LaSalle does not undertake and is under no obligation to update or keep current the information or content contained in this publication for future events. LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication and nothing contained herein shall be relied upon as a promise or guarantee regarding any future events or performance.
By accepting receipt of this publication, the recipient agrees not to distribute, offer or sell this publication or copies of it and agrees not to make use of the publication other than for its own general information purposes.
Copyright © LaSalle Investment Management 2024. All rights reserved. No part of this document may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of LaSalle Investment Management.
Chicago, London, Singapore (October 21, 2024) – LaSalle Investment Management (“LaSalle”), the global real estate investment manager, today announces its results from the 2024 GRESB assessment, an industry-recognized global Environmental, Social and Governance (ESG) benchmark for asset managers.
Eighteen of the firm’s funds and separate accounts, domiciled across Europe, North America, and the Asia-Pacific region, participated in the 2024 assessment, of which seven achieved a 5-star rating and five achieved a 4-star rating. Six of the firm’s funds ranked in the top three within their sector peer groups, with both LaSalle Canada Property Fund and LaSalle China Logistics Venture earning first place within their respective sector peer groups.
Those LaSalle funds that achieved a 4 or 5-star rating in the 2024 GRESB assessment are listed below:
Julie Manning, Global Head of Climate and Carbon, LaSalle commented: “LaSalle is committed to delivering upon our clients’ sustainability goals in ways that also drive investment performance, and these impressive results reflect this effort. As performance drivers, sustainability factors are key to our corporate strategy in addition to being a focus throughout our investment process. As such, we will continue to embed sustainability further into each function across our operations and maintain our position as a leader in the industry.”
ENDS
About LaSalle Investment Management | Investing Today. For Tomorrow.
LaSalle Investment Management is one of the world’s leading real estate investment managers. On a global basis, LaSalle manages US$84.8 billion of assets in private and public real estate equity and debt investments as of Q2 2024. LaSalle’s diverse client base includes public and private pension funds, insurance companies, governments, corporations, endowments and private individuals from across the globe. LaSalle sponsors a complete range of investment vehicles, including separate accounts, open- and closed-end funds, public securities and entity-level investments.
For more information, please visit www.lasalle.com, and LinkedIn.
This article first appeared in IREI Newsline.
As traditional lenders step back, the real estate debt market is opening up new avenues for institutional investors. In a recent Q&A with IREI, LaSalle’s Jen Wichmann, Senior Strategist and SVP of Research and Strategy, discusses the evolving landscape of real estate debt investments. From long-term trends and current market opportunities to the benefits of stable cash flow and downside protection, Wichmann provides insights into the sector.
One of the most important factors we consider when deciding where to invest capital is the transparency of a real estate market. This encompasses the transparency of market fundamentals and investment performance, as well as:
During times of heightened uncertainty, transparency is more important than ever as a foundation that allows real estate occupiers, investors and lenders to operate and make decisions with confidence.
Our latest ISA Focus report, Transparency and Strategy, explores these factors and their implications for real estate investors. We release this report alongside the Global Real Estate Transparency Index (GRETI) for 2024. GRETI is a joint publication between LaSalle and our parent company, JLL, which is based on a global survey of our extensive network of real estate market experts.
Important notice and disclaimer
This publication does not constitute an offer to sell, or the solicitation of an offer to buy, any securities or any interests in any investment products advised by, or the advisory services of, LaSalle Investment Management (together with its global investment advisory affiliates, “LaSalle”). This publication has been prepared without regard to the specific investment objectives, financial situation or particular needs of recipients and under no circumstances is this publication on its own intended to be, or serve as, investment advice. The discussions set forth in this publication are intended for informational purposes only, do not constitute investment advice and are subject to correction, completion and amendment without notice. Further, nothing herein constitutes legal or tax advice. Prior to making any investment, an investor should consult with its own investment, accounting, legal and tax advisers to independently evaluate the risks, consequences and suitability of that investment.
LaSalle has taken reasonable care to ensure that the information contained in this publication is accurate and has been obtained from reliable sources. Any opinions, forecasts, projections or other statements that are made in this publication are forward-looking statements. Although LaSalle believes that the expectations reflected in such forward-looking statements are reasonable, they do involve a number of assumptions, risks and uncertainties. Accordingly, LaSalle does not make any express or implied representation or warranty, and no responsibility is accepted with respect to the adequacy, accuracy, completeness or reasonableness of the facts, opinions, estimates, forecasts, or other information set out in this publication or any further information, written or oral notice, or other document at any time supplied in connection with this publication. LaSalle does not undertake and is under no obligation to update or keep current the information or content contained in this publication for future events. LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication and nothing contained herein shall be relied upon as a promise or guarantee regarding any future events or performance.
By accepting receipt of this publication, the recipient agrees not to distribute, offer or sell this publication or copies of it and agrees not to make use of the publication other than for its own general information purposes.
Copyright © LaSalle Investment Management 2024. All rights reserved. No part of this document may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of LaSalle Investment Management.
Last year, we released the inaugural edition of LaSalle’s ISA Portfolio View, where we discussed the art and science of portfolio construction and why it matters most when market conditions change suddenly. That was certainly true at the time of last year’s release and remains so today.
In this year’s edition, we cover the five foundational concepts of portfolio management below, and how they should be considered alongside an investor’s objectives and values to devise a strategy for their portfolio.
Why real estate lays out the case for property exposure in a multi-asset context? 
Why global considers the benefits of expanding horizons beyond an investor’s domestic market? 
Why be sector smart tries to make sense of the recent changes in relative sector performance with an eye to building resilient portfolios? 
Why be quadrant smart addresses the interplay among the “four quadrants” of real estate? 
Why manage risk explores the importance of—and our approach to—managing investment risk? For 2024, we have also updated ISA Portfolio View to include the most recent available data, and added new sections on:
The speed and unpredictability of market changes over the last few years highlights the importance of not only planning ahead by thinking carefully about how to create real estate portfolios that can be expected to be resilient, but also working with an asset-class expert who understands the nuances presented by real estate.
Important Notice and Disclaimer
This publication does not constitute an offer to sell, or the solicitation of an offer to buy, any securities or any interests in any investment products advised by, or the advisory services of, LaSalle Investment Management (together with its global investment advisory affiliates, “LaSalle”). This publication has been prepared without regard to the specific investment objectives, financial situation or particular needs of recipients and under no circumstances is this publication on its own intended to be, or serve as, investment advice. The discussions set forth in this publication are intended for informational purposes only, do not constitute investment advice and are subject to correction, completion and amendment without notice. Further, nothing herein constitutes legal or tax advice. Prior to making any investment, an investor should consult with its own investment, accounting, legal and tax advisers to independently evaluate the risks, consequences and suitability of that investment.
LaSalle has taken reasonable care to ensure that the information contained in this publication is accurate and has been obtained from reliable sources. Any opinions, forecasts, projections or other statements that are made in this publication are forward-looking statements. Although LaSalle believes that the expectations reflected in such forward-looking statements are reasonable, they do involve a number of assumptions, risks and uncertainties. Accordingly, LaSalle does not make any express or implied representation or warranty, and no responsibility is accepted with respect to the adequacy, accuracy, completeness or reasonableness of the facts, opinions, estimates, forecasts, or other information set out in this publication or any further information, written or oral notice, or other document at any time supplied in connection with this publication. LaSalle does not undertake and is under no obligation to update or keep current the information or content contained in this publication for future events. LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication and nothing contained herein shall be relied upon as a promise or guarantee regarding any future events or performance.
By accepting receipt of this publication, the recipient agrees not to distribute, offer or sell this publication or copies of it and agrees not to make use of the publication other than for its own general information purposes.
Copyright © LaSalle Investment Management 2024. All rights reserved. No part of this document may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of LaSalle Investment Management.
PropertyEU spoke with LaSalle’s Ryu Konishi and Adam Donohue about the drivers of and challenges to sustainable investments around the world at Expo Real 2024.
Learn more about how LaSalle is building pathways to a more sustainable future below.
In a world overflowing with technology-driven business solutions, companies need to be more strategic than ever to choose the technology that can drive the most value for their clients, industry, and people.
What’s LaSalle’s big IDEA?
At LaSalle, our technology strategy is driven by IDEAS – Invest, Data, Efficiency, AI and Sales.
The five components of our IDEAS framework are designed to guide our internal teams to ensure they are deriving maximum benefit from new technologies:
The framework ensures LaSalle’s teams stay ahead; always ready to adopt innovative new capabilities that can transform the way we work.
LaSalle Intelligent Automation: In Theory
Leveraging technology for efficiency is a necessity in today’s business world. Companies that adopt new technology and automation not only improve current processes but also ensure they are future-ready for inevitable advancements.
At LaSalle, efficiency and automation are intertwined. Through our global strategy, LaSalle Intelligent Automation, LIA for short, LaSalle has created a space where automation and efficiency are available to our different business processes and teams.
Although LIA appears as an adorably small robot in presentations, its structure and workflow process are far more robust than meets the eye.
LaSalle Intelligent Automation: In Action
Through LIA, LaSalle has invested in a suite of technology solutions to replace manual tasks, making work easier and faster, and reducing the potential for errors. LIA focuses on automating processes that are historically tracked via email, Excel, Outlook, or shared drives. Sofia Vujatov, Global Head of LGS Applications and the LIA strategy, explains more.
“Any person across the business can submit a request to our team through LIA. When we receive a request, we discuss their process in detail, to gauge where we can add value before reviewing our different automation and efficiency tools and solutions to find the most appropriate tool for the case.”
The LaSalle Americas Accounting team is the perfect example of LIA. Prior to LIA, the team logged performance asset and fund data into their Returns system manually, requiring days and even weeks of work. They requested the help of the LIA team, who were able to develop a bot to key in this data automatically instead.
“Today, the Accounting team simply submits a form that includes their data to the bot and the bot takes over, saving the team a huge amount of time,” shared Vujatov.
LIA’s impact is also evident within LaSalle’s technology team. The team successfully migrated data from 36,000 legacy reports into a new, organized system. This task, which would have taken years manually, was completed in mere days using a bot developed under the LIA program.
LaSalle Intelligent Automation: In Impact
In addition to improved efficiency and speed, LIA’s technology solutions offer equally significant advantages in workplace culture.
“The LIA program is really about freeing up time for people to be more strategic, instead of spending the bulk of their time on manual tasks,” Vujatov explains. “This makes work more rewarding and interesting, which in turn boosts employee morale and retention.”
And through LIA, there is a lot more impactful work to be done.
“There’s so much more potential for improvement,” said Vujatov. “We want everyone in the business to ask us, ‘What can your team do for us, and how can we leverage you?’ so we can continue to drive meaningful change across the firm.”
LaSalle has taken reasonable care to ensure that the information contained in this publication is accurate and has been obtained from reliable sources. Any opinions, forecasts, projections or other statements that are made in this publication are forward-looking statements. Although LaSalle believes that the expectations reflected in such forward-looking statements are reasonable, they do involve a number of assumptions, risks and uncertainties. Accordingly, LaSalle does not make any express or implied representation or warranty, and no responsibility is accepted with respect to the adequacy, accuracy, completeness or reasonableness of the facts, opinions, estimates, forecasts, or other information set out in this publication or any further information, written or oral notice, or other document at any time supplied in connection with this publication. LaSalle does not undertake and is under no obligation to update or keep current the information or content contained in this publication for future events. LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication and nothing contained herein shall be relied upon as a promise or guarantee regarding any future events or performance.
By accepting receipt of this publication, the recipient agrees not to distribute, offer or sell this publication or copies of it and agrees not to make use of the publication other than for its own general information purposes.
Copyright © LaSalle Investment Management 2024. All rights reserved. No part of this document may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of LaSalle Investment Management.
This article first appeared in the Fall 2024 edition of NAREIM Dialogues.
LaSalle’s Julie Manning writes about our latest report with ULI that provides an industry-wide framework for commercial real estate to address how physical climate risk data can be used in decision-making and supporting investment performance.
Using data to evaluate physical climate risk
Measuring physical climate risk is of growing importance to institutional real estate managers and their investors, at both the individual property and portfolio levels. Of the $850 billion of commercial real estate assets tracked by NPI, LaSalle estimates $285 billion, or 34%, is situated in high and medium-high climate risk zones in the US.
Increasingly, being able to assess an asset’s risk exposure, and knowing how to price that risk into management strategies, are essential parts of operating a portfolio. While data is key to this assessment, understanding how to leverage the right data is even more important. With so much climate risk data available in the market, how can organizations manage and find data that gives them manageable, impactful and usable insights? And more importantly, what should managers do with these insights?
Real estate investors have a meaningful opportunity as the world transitions to a more decarbonized economy. In the video below, Sustainability experts from LaSalle, alongside JLL’s Global Head of Sustainability Services discuss this transition, and the actions that LaSalle is taking today.
Real estate investors have a meaningful opportunity as the world transitions to a more decarbonized economy. Energy-related performance and investment returns are becoming increasingly correlated, and we aim to stay ahead of the curve and capitalize on this long-term trend by decarbonizing the built environment as a means of delivering accretive outperformance.
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Listed real estate investment trusts (REITs) have faced a tough two and a half years, driven by the rapid tightening of financial conditions (see LaSalle Macro Quarterly, or LMQ, pg. 13). Sentiment towards REITs has been weighed down not only by the higher interest rate environment, but also by constrained bank lending, a barrage of negative headlines about commercial real estate and REIT underperformance relative to the broader equity market. But, as the saying goes, it’s often darkest before the dawn.
The modern REIT period has seen three “golden eras” of REIT investing (see chart below).1 These have been characterized by either a dramatic growth in the REIT market or outsized investment returns versus other asset classes, or both. The Savings and Loan (S&L) crisis spurred what is often considered the birth of the modern REIT era in the mid-1990s. During this period, the number of REITs increased by nearly 50%, while the market cap of that group grew nearly seven-fold. Following the Dot-com bubble, a period where REITs had been significantly out of favor, the REIT market endured a multi-year run of strong absolute performance in which it cumulatively outperformed broader equity markets by more than 300%. The period following the Global Financial Crisis (GFC) saw the rise of dynamic new property sectors in the public market, and another period of outperformance in which REITs led broader equities by 50%.
While each golden era was unique, our analysis finds that each period was preceded by challenging circumstances with four common elements (see LMQ pg. 14). These are:
Recent history, marked by a post-pandemic recovery followed swiftly by the Great Tightening Cycle (GTC), presents important similarities to these historical periods of severe market challenges. For instance, real estate bank lending is dislocated. An AI-driven tech frenzy and fears of a generalized “commercial” real estate malaise mean REITs have underperformed compared to equities (see LMQ pg. 22). Meanwhile, signs of an easing or stabilization in financial conditions and a potential global monetary easing cycle are becoming more apparent (see LMQ pgs. 9, 10 and 30).
While history does not repeat itself, it does often rhyme. The presence of those elements in today’s market environment, and the potential for those concerns to flip to opportunities, may foretell the next REIT golden era. We discuss each of these factors in turn.
Challenged real estate lending represents an opportunity for REITs. The past two to three years have been characterized by a significant retrenchment in bank lending to real estate. According to the US Senior Loan Officer Survey (see LMQ pg. 16), the net balance between demand for loans and banks’ willingness to lend points to the widest undersupply of credit in the past ten years, except for during the depths of COVID-19. The shortage is evident in all styles of borrowing, from riskier construction loans to mortgages backed by traditional, defensive apartment assets.
This circumstance presents an opportunity for REITs given their strong financial positions and access to the capital markets. Having learned a painful lesson from the GFC, global REITs went into the GTC with their lowest leverage levels on record (see LMQ pg. 16), and nearly 90% of their debt on fixed rates and an average remaining term of seven years.2 Looking specifically at the US market, the overwhelming majority of REIT borrowing – nearly 80% – is from the unsecured market, at rates that are today almost 100 bps lower than a traditional mortgage. This relative advantage in both access and cost of capital positions REITs to potentially play the role of aggregator and to take market share.
“Commercial” real estate negativity is office-focused, but all real estate is not office. Headlines proclaiming the demise of commercial real estate usually involve a misleading generalization. Professionally managed, income-producing real estate generally should not be conflated with office specifically. It is well known that hybrid work and other factors have harmed office values. Office fundamentals are expected to remain relatively weak,3 with the sector’s growth outlook trailing nearly all other REITs globally. Office landlords will likely need to invest capital aggressively to maintain competitiveness.
These challenging office sector dynamics have unfairly cast a shadow over the broader real estate and REIT universe. In reality, office has over time become a smaller portion of the real estate landscape, especially in the public market; as of the date of this paper, only about 6% of global REITs by market capitalization are office focused (see LMQ pg. 20).4 The public market now offers a diverse sector menu comprising a wide range of dynamic sectors. These include industrial and logistics; forms of rental residential including multi- and single-family rental, manufactured housing and student housing; various formats of healthcare property; and exposure to tech-related real estate in the form of data centers and cell towers. Sectors other than office comprise the overwhelming majority of the public REIT market,5 and many of those sectors have growth outlooks that are forecast to produce earnings growth that is in line with or better than broader equities.6 That growth outlook is underpinned by a combination of secular demand drivers and declining supply levels, the other side of the higher interest rate coin.7
Media coverage naturally tends to focus on the national and trans-national arenas, but local political developments can be especially impactful for real estate investments. Such issues can fly under the radar, especially given many of the most relevant ones are only of interest to a specialist audience. For example, changes in policy around topics like the planning process, property taxes and transfer taxes (a.k.a. stamp duty) can have direct, measurable and immediate impacts on property cash flows and thus values. The distraction of the bright shiny lights of global geopolitics should not be allowed to excessively overshadow the critical local issues that impact real estate.
Underperformance may set the stage for a return to outperformance. The negativity around lending or financing concerns and the “death of office” have weighed on both the absolute and relative performance of REITs. The chart below shows the rolling one-year relative performance differential between REITs and equities; it indicates that REIT underperformance has reached its typical peak historical level before starting to reverse. Periods of underperformance have historically tended to reverse, and this instance is likely no different; indeed, the performance gap is already narrowing.
The start of a global monetary easing cycle. Real estate is a capital-intensive business that exhibits significant sensitivity to changes in financial conditions, an observation that holds for both directions of interest rate change. The downside of this dynamic was evident for much of 2022 and 2023, but the upside is likely coming into play. A global monetary easing cycle is now decidedly underway, heralded by the Fed’s 50 bps rate cut on September 18 (see LMQ pg. 31). REITs have generally performed well in periods leading up to and following a central bank easing cycle, as the chart below shows.
Over the past 25 years, REITs have produced total returns of 8% per annum, with 4-5 percentage points of that return coming from income. LaSalle’s base case underwriting for the next three years is for the REIT market to produce total returns of 9%, slightly above historical averages, with roughly four percentage points of that coming from income. That base case forecast incorporates today’s fundamental outlook and interest rate levels. Should any further easing in financial conditions occur, even only in the amount of 50 bps or 100 bps, those return expectations increase to 13% and 18% per annum, respectively, in line with previous “golden eras.”
Footnotes
1 This analysis based on LaSalle Securities analysis of historical macroeconomic, capital market and listed market trends. Source for the REIT performance data cited below are the FTSE Nareit indices.
2 Source for debt pricing comments in this paragraph: S&P Global Market Intelligence, Green Street Advisors, company financial releases, company research and market analysis conducted by LaSalle Securities.
3 There is considerable global variation in office performance, and there are certainly exceptions to this generalization, especially in select Asia-Pacific markets and the higher end of the European office quality spectrum. For more discussion of global office trends, see our ISA Outlook 2024 Mid-Year Update.
4 Source: LaSalle Securities. Percent of companies classified as office focused within the global listed universe defined as the constituents of the S&P Developed REIT, FTSE EPRA Nareit Developed and Nareit All Equity Indices. Sector classifications determined by LaSalle Securities.
5 As measured by market capitalization. Source: LaSalle Securities. Global listed universe defined by the constituents of the S&P Developed REIT, FTSE EPRA Nareit Developed and Nareit All Equity Indices. Sector classifications determined by LaSalle Securities.
6 As based on LaSalle Securities proprietary modelling and consensus earnings forecasts for the Bloomberg World Index, a proxy for broader equity markets.
7 Higher interest rates mean development proformas use higher exit yield assumptions and more expensive development finance. When interest rates are high, all else being equal, the rents required to justify development are higher.
8 Based on proprietary internal LaSalle Investment Management modeling of securities returns. There is no guarantee that such forecasted returns, or any other returns referred afterwards, will materialize.
This publication does not constitute an offer to sell, or the solicitation of an offer to buy, any securities or any interests in any investment products advised by, or the advisory services of, LaSalle Investment Management (together with its global investment advisory affiliates, “LaSalle”). This publication has been prepared without regard to the specific investment objectives, financial situation or particular needs of recipients and under no circumstances is this publication on its own intended to be, or serve as, investment advice. The discussions set forth in this publication are intended for informational purposes only, do not constitute investment advice and are subject to correction, completion and amendment without notice. Further, nothing herein constitutes legal or tax advice. Prior to making any investment, an investor should consult with its own investment, accounting, legal and tax advisers to independently evaluate the risks, consequences and suitability of that investment.
LaSalle has taken reasonable care to ensure that the information contained in this publication is accurate and has been obtained from reliable sources. Any opinions, forecasts, projections or other statements that are made in this publication are forward-looking statements. Although LaSalle believes that the expectations reflected in such forward-looking statements are reasonable, they do involve a number of assumptions, risks and uncertainties. Accordingly, LaSalle does not make any express or implied representation or warranty, and no responsibility is accepted with respect to the adequacy, accuracy, completeness or reasonableness of the facts, opinions, estimates, forecasts, or other information set out in this publication or any further information, written or oral notice, or other document at any time supplied in connection with this publication. LaSalle does not undertake and is under no obligation to update or keep current the information or content contained in this publication for future events. LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication and nothing contained herein shall be relied upon as a promise or guarantee regarding any future events or performance.
By accepting receipt of this publication, the recipient agrees not to distribute, offer or sell this publication or copies of it and agrees not to make use of the publication other than for its own general information purposes.
Copyright © LaSalle Investment Management 2024. All rights reserved. No part of this document may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of LaSalle Investment Management.
CHICAGO (September 17, 2024) – Elena Alschuler, LaSalle’s Americas Head of Sustainability has been recognized with the Nareit 2024 Sustainable Leadership Award on behalf of JLL Income Property Trust.
Nareit presented the inaugural Sustainability Impact Awards at its REITworks: 2024 Sustainability & Social Responsibility Conference in McLean, VA. The awards recognize REITs for implementing sustainable practices that demonstrate leadership, ingenuity, and environmental impact in the commercial real estate industry.
Elena was recognized for her leadership in sustainability in the built environment, and her collaboration with industry peers to share knowledge and develop best practices. This is exemplified in Elena’s recent role as chair for the CRREM North America Working Group which is working to develop decarbonization pathways to benchmark transition risk.
Nareit Senior Vice President of Environmental Stewardship & Sustainability, Jessica Long said: “We are excited to highlight Elena and JLL Income Property Trust who are raising the bar for advancing sustainability practices in their operations, buildings, communities, and across the broader REIT and commercial real estate industry.”
LaSalle Global Head of Climate and Carbon, Julie Manning said: “This award is a well-deserved recognition of Elena’s exceptional contributions to sustainable real estate practices. Her innovative strategies and tireless efforts have not only elevated LaSalle’s program but are also working to set new benchmarks for the entire industry. Elena’s work exemplifies our commitment to exploring sustainable solutions that can drive investment performance.”
JLL Income Property Trust, President and CEO, Allan Swaringen said: “At JLL Income Property Trust, we believe sustainability initiatives can drive value and mitigate risk. We integrate these sustainability principles in our portfolio construction, acquisitions and asset management activities, resulting in a tailored approach to each property in our portfolio. Elena has been at the forefront of driving these efforts, and this recognition by Nareit is a testament to her commitment.”
ENDS
About LaSalle Investment Management | Investing Today. For Tomorrow.
LaSalle Investment Management is one of the world’s leading real estate investment managers. On a global basis, LaSalle manages US$84.8 billion of assets in private and public real estate equity and debt investments as of Q2 2024. LaSalle’s diverse client base includes public and private pension funds, insurance companies, governments, corporations, endowments and private individuals from across the globe. LaSalle sponsors a complete range of investment vehicles, including separate accounts, open- and closed-end funds, public securities and entity-level investments.
For more information, please visit www.lasalle.com, and LinkedIn.
About JLL Income Property Trust, Inc. (NASDAQ: ZIPTAX; ZIPTMX; ZIPIAX; ZIPIMX)
JLL Income Property Trust, Inc. (NASDAQ: ZIPTAX; ZIPTMX; ZIPIAX; ZIPIMX), is a daily NAV REIT that owns and manages a diversified portfolio of high quality, income-producing apartment, industrial, grocery-anchored retail, healthcare and office properties located in the United States. JLL Income Property Trust expects to further diversify its real estate portfolio over time, including on a global basis.
About Nareit
Nareit serves as the worldwide representative voice for REITs and publicly traded real estate companies with an interest in U.S. real estate. Nareit’s members are REITs and other real estate companies throughout the world that own, operate, and finance income-producing real estate, as well as those firms and individuals who advise, study, and service those businesses. Nareit’s focus is to broaden and deepen REIT ownership to help a growing set of everyday American investors enjoy the benefits of holding real estate in a well-diversified portfolio, while increasing capital sources that invest in America’s future. Nareit is the exclusive registered trademark of the National Association of Real Estate Investment Trusts, Inc.®, 1875 I St., NW, Suite 500, Washington, DC 20006-5413. Follow us on REIT.com. Copyright© 2024 by Nareit®. All rights reserved.
A prudent person sees trouble coming and ducks.
A simpleton walks in blindly and is clobbered.
— Proverbs 22:3
King Solomon’s words of wisdom have been passed down to us for 3,000 years. They still resonate, especially in this modern translation,1 even though the “trouble” is no longer invading Assyrians or Babylonians but the type of danger we bring on ourselves through an all-too-human combination of ingenuity, hubris and ignorance.
Watch any movie from the 1930s to the 1960s and you will see actors inhaling tobacco smoke with abandon. We know better now. Like the generational awareness of the harm caused by tobacco products, real estate owners have gradually become aware of the dangers lurking in certain building materials and contaminated soil. Starting in the 1960s, societies have spent fortunes cleaning up “miracle products.” Asbestos, PCBs, dry cleaning solvents, herbicides and lead pipes were all considered state-of-the-art technologies at various points in human history. None of these inventions were designed with the intention of killing people. They all started with a noble purpose – whether suppressing catastrophic fires, insulating transformers, cleaning wool suits or producing a pleasing nicotine buzz that also curbed the appetite. The “externalities” associated with societal damage from the use of these products took decades to discover and billions to eradicate.
Greenhouse gas emissions share a common ancestry with these miracle products. Heating buildings with diesel fuels, running gas lines through city streets, producing electricity with coal-fired plants—these were all logical, economical, and sensible solutions to the problem of bringing energy to homes, businesses and buildings of all types. The industrial revolution accelerated the growth of cities and raised the quality of life for millions of people by dragging them out of rural poverty. As we now know, society’s dependence on fossil fuels creates new problems which must be dealt with.
The recognition that miracle products can carry hidden (or not so hidden) dangers follows a predictable pattern. Here is what the step-by-step process often looks like:
Evidence and awareness. An environmental problem often requires decades of scientific study and mountains of evidence to convince people that a change is necessary. Even as this evidence accumulates, vested interests organize counterattacks to convince society that the problem is non-existent or over-stated. Eventually the harm to human life becomes so obvious that denial becomes a “fringe position.”
Market demand. In many cases, the process of partial “market adjustment” can begin ahead of government action. Voluntary data collection and industry-led reforms start the slow process of change. In the case of greenhouse gases, the marginal contribution of each emitter is so small, and so embedded in society, that government interventions sometimes lag market-led shifts (e.g., the adoption of LED lighting or heat pumps).
Regulatory response. Yet, government interventions are almost always needed to accelerate and complete behavioral change to truly eliminate harm to the environment and to human life created by “externalities.” These regulations and policy responses often get pushback as competing outcomes are debated in the political arena. Economists agree that putting a price on carbon would be the most efficient and effective solution, but a market mechanism for carbon pricing requires government intervention — in the form of a carbon “tax” or to set up an emissions trading scheme.
Benchmarks and best practices. Eventually, the rise of data benchmarks and peer group comparisons begins to shed light on who, where and how successful “treatments” are applied to any environmental problem. Engineering and laboratory science helps inform this stage of the process, as does public health or industry group data. Integration with market investment processes and decisions leads to a focus on reversing years of damage to the environment and compliance with new regulations and guidelines. At this stage, market-driven and regulatory-driven changes start to converge.
Price integration. Feedback loops are established where type 1 errors (false positives) and type 2 errors (false negative—or overlooked problems) are exposed.2 In loosely regulated situations like climate change, the efficient market hypothesis (EMH) takes hold as the change process gets partially or fully priced by consumers and producers. Economists and policy analysts favor the practice of placing a “price” on an externality to compensate society for the harm. In practice, though, compensatory payments to offset environmental damage are often decided through the courts and litigation.
Continued market and regulatory evolution. The enforcement of tighter regulations also follows its own trajectory depending on the governance structure of a particular country or urban jurisdiction and the toxicity of the problem. The discipline of epidemiology, using population data and public health analysis, is especially helpful at this stage of refining the policy solutions.
The Transition from “Data” to “Wisdom”
For the de-carbonization of buildings, various markets and countries are well into Step 3 (Regulatory Response) and Step 4 (Benchmarks and Best Practices). In Europe the “theory of change” is focused more on EU-wide or national policies to promote energy disclosures through top-down regulatory solutions. In the United States, the emphasis is based more on voluntary pledges, market solutions and regulations that are based on specific local jurisdictions. In most developed countries, steps 5 (Price Integration) and 6 (Market and Regulatory Evolution) are underway, but both have a long way to go.
The rise of real estate sustainability benchmarks (like GRESB) has accelerated in recent years. In many cases, they have expanded to include social factors and tenant well-being alongside environmental metrics. The next hurdle, though, is to establish materiality tests that infuse meaning, and determine financial impacts based on the volumes of reporting that the industry has started to produce and disclose.
Reading through ESG reports often reveals the triumph of reporting and public relations over salience or relevance. The conjoint challenges of reducing building emissions alongside improving the well-being of building users and the surrounding communities can be obscured by data denominated in less familiar metrics like tons of CO2 or Kilowatt hours. In time, and with experience, the emphasis will shift to what truly moves the needle on all elements of the “sustainable investing” paradigm—and which metrics give off misleading or meaningless “virtue” signals.
Financial metrics align most closely with the “fiduciary duty” of an investor. Moreover, stakeholders have decades of experience analyzing and interpreting financial data. It will take additional time and effort to convert environmental data into financial terms or to simply raise the consciousness of how to interpret energy and emission data in its own right. (LaSalle’s work on the “Value of Green” synthesizes studies of the evidence linking sustainability metrics and financial outcomes. An update on this work is below.)
In writing Proverbs, King Solomon gathered centuries of wisdom based on experience. In the modern world, we often believe that the steps to wisdom are built on a foundation of knowledge, information, and data. The famous “DIKW” hierarchy has been a mainstay of information sciences since the 1930s. Sustainability wisdom is still in the process of being formulated and likely requires more time to make progress. Fortunately, the foundations of this wisdom are already being put in place—first through data (the modern way to refer to many, many experiences), then information (organized and analyzed data), eventually leading to knowledge (patterns are identified and the “what” and “why” questions are answered) and finally reaching the status of accumulated wisdom (how to respond). This is a path that humans have traveled before. More lives are at stake this time around and the wisdom may not be easily agreed upon by all industries, countries and stakeholders. Nevertheless, the search for sustainability wisdom must continue and time is of the essence.
Revisiting LaSalle’s “Value of Green”
In September 2023, LaSalle published our ISA Focus report What is the value of green? Looking at the evidence linking sustainability and real estate outcomes. The report presents a framework on how sustainable attributes of properties can be viewed as both as drivers and protectors of value, along with showcasing findings from the broader literature. We continue to maintain a Value of Green tracker, monitoring research on this subject as it is produced. Some of the findings that have surfaced since the release of our initial report are worth highlighting:
Beyond the direct links between sustainability and historical investment performance in terms of return, rent and value premiums, more signals are emerging as available data on the topic grows, and becomes increasingly forward looking:
Beyond results based on backward-looking data, detailed case studies of investments into sustainable initiatives are being published. The JLL report “Future-Proof Your Investments“ showcased opportunities for sustainable New York offices; another example is CBRE’s report “The impact of on-site rooftop solar on logistics property values.”
Tobias Lindqvist
Strategist, Climate and Carbon Lead, London
Sources:
CBRE (March 2024) UK Sustainability Index Results to Q4 2023. CBRE
P. Torres, G. Bolino, P. Stepan (2024) The Green Tipping Point. JLL
T.Leahy (2022) London and Paris Offices: Green Premium Emerges. MSCI
P. Torres, J. del Alamo (July 2024) Future-proof your investments. JLL
D. Marina, J. Tromp, T. Vezyridis, O. Bruusgaard (July 2023) The impact of on-site rooftop solar PV on logistics property values. CBRE
O. Muir, Y. Chen, T. Metcalf et.al (Dec 2023) Green premium: Study of New York and London Real Estate finds strong evidence for a ‘green premium’. UBS
What can we learn from simulations?
The de-carbonization of buildings is taking place in a complex and ever-changing environment. It is a multi-dimensional problem replete with uncertain outcomes, regulatory change, shifting societal norms and markets, and the politicization of sensitive issues.
At the June 2024 MIT World Real Estate Forum, Professor Roberto Rigobon unveiled a “sustainability simulation” game patterned on his pathbreaking work on social preferences for the European Commission. The technique shows how the traditional economic conceit that we make “resource trade-offs” does not accurately capture how humans make decisions when faced with multi-dimensional choices.
In the simulation, the audience was given nine choices for different retrofit projects for a commercial building. Each choice resulted in simultaneous movement across three metrics that the audience had already established that they cared about — changes in NOI (profitability), CO2 emissions, and tenant satisfaction/well-being. The cost of the projects was amortized into the NOI calculations and the other metrics were also calibrated based on actual data from the US.
The simulation showed that a knowledgeable real estate audience rarely solves just for “pure profits” at the expense of tenant well-being or CO2 emissions. The simulation also mimicked reality—where sometimes profitability moves in synch with reduced CO2 emissions and other times it moves it moves in the opposite direction. The simulation was designed to show how the co-movement depends on the local market and the type of de-carbonization project. Tenant well-being and CO2 emissions could be implicitly linked to revenue when and if participants believe that occupancy, rents and capital raising are all interconnected.
Through their choices, the audience tried to optimize across all three priorities at once — leading to an interesting result that revealed their average willingness to “pay” to reduce a ton of CO2 emissions of about $200 ton. Yet, if asked directly how much they would pay to reduce a ton of greenhouse gas coming from a building, it seems unlikely that many would have volunteered to pay that much. This finding also shows how the language of profitability and returns is much more advanced than the metrics and concepts associated with either decarbonization or tenant satisfaction. And that all these metrics are linked, but not fully integrated in the minds of real estate professionals.
Only a few participants in the game focused only on reducing CO2 (at the expense of decent profits). And just a few focused exclusively on profitability at the expense of tenant satisfaction or CO2 emissions. This seems like a reasonable facsimile of what enlightened investors will do — especially when they know that their actions are being disclosed. As we learn more from these simulations, it is possible that policy makers will be able to refine the mix of incentives and regulations that govern the real estate industry.
Jacques Gordon
Cambridge, Massachusetts
LOOKING AHEAD >
Footnotes
1 The Message, translated from the Hebrew scriptures by Eugene Peterson (1993-2002).
2 These are all part of the learning that occurs with any “treatment hypothesis.” The science of public health provides solid evidence to weigh whether the “treatment” is helping, hurting or having no impact on the eradication of the underlying disease. In real estate, a good example of this is the gradual discovery that with certain types of asbestos, it is more dangerous to remove it than to “encapsulate” it in an existing structure. The science of “decarbonization” is still being established to determine whether, for example, the mass production of lithium batteries does as much harm as the burning of fossil fuels. For real estate and climate change, the “treatment” will likely focus on energy efficiency/ decarbonization interventions that are a combination of government penalties/incentives and voluntary actions. The effectiveness of these treatments will depend on compliance, market response, and how well interventions find acceptance through the political process.
Important Notice and Disclaimer
This publication does not constitute an offer to sell, or the solicitation of an offer to buy, any securities or any interests in any investment products advised by, or the advisory services of, LaSalle Investment Management (together with its global investment advisory affiliates, “LaSalle”). This publication has been prepared without regard to the specific investment objectives, financial situation or particular needs of recipients and under no circumstances is this publication on its own intended to be, or serve as, investment advice. The discussions set forth in this publication are intended for informational purposes only, do not constitute investment advice and are subject to correction, completion and amendment without notice. Further, nothing herein constitutes legal or tax advice. Prior to making any investment, an investor should consult with its own investment, accounting, legal and tax advisers to independently evaluate the risks, consequences and suitability of that investment.
LaSalle has taken reasonable care to ensure that the information contained in this publication is accurate and has been obtained from reliable sources. Any opinions, forecasts, projections or other statements that are made in this publication are forward-looking statements. Although LaSalle believes that the expectations reflected in such forward-looking statements are reasonable, they do involve a number of assumptions, risks and uncertainties. Accordingly, LaSalle does not make any express or implied representation or warranty, and no responsibility is accepted with respect to the adequacy, accuracy, completeness or reasonableness of the facts, opinions, estimates, forecasts, or other information set out in this publication or any further information, written or oral notice, or other document at any time supplied in connection with this publication. LaSalle does not undertake and is under no obligation to update or keep current the information or content contained in this publication for future events. LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication and nothing contained herein shall be relied upon as a promise or guarantee regarding any future events or performance.
By accepting receipt of this publication, the recipient agrees not to distribute, offer or sell this publication or copies of it and agrees not to make use of the publication other than for its own general information purposes.
Copyright © LaSalle Investment Management 2024. All rights reserved. No part of this document may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of LaSalle Investment Management.
This article first appeared in the Summer 2024 edition of PREA Quarterly
LaSalle’s Global Head of Research and Strategy, Brian Klinksiek, discusses how ex-US investors are viewing the US real estate market.
Foreign investors are an important—if far from dominant—source of capital for US commercial real estate. Since 2010, foreign investors have made up around 12% of total US investment activity, compared with the 30%–60% range for most other major developed markets, according to MSCI Real Capital Analytics (Exhibit 1). However, foreign investors also play a meaningful role as limited partners in funds. According to the PREA Investor Composition Survey, investors from outside the US in 2022 held nearly 18% of the NCREIF Fund Index—Open End Diversified Core Equity (NFI-ODCE) net asset value, a share that has risen steadily from less than 5% in 2012. Moreover, in some phases of the market, offshore capital has acted as the marginal buyer of certain types of real estate, giving an outsize impact on pricing.
Investors broaden their real estate holdings outside their home countries for many reasons, including to diversify, expand the opportunity set, and avoid crowded capital markets at home. The drive to expand globally is especially strong for investors in countries with excess savings in the form of well-funded defined benefit pension systems (e.g., Northern Europe), mandatory retirement savings programs (superannuation in Australia), or sovereign wealth funds (many energy exporters). LaSalle has long been an advocate of “going global”; while not the focus of this article, LaSalle covers the case for global investing in its ISA Portfolio View report.
Want to read more?
While traditional banks’ appetite for providing commercial real estate loans has declined, other lenders (including investment management firms such as LaSalle) have moved in to fill the funding gap. As a result, we have recently seen increasing interest from institutional investors in real estate debt.
But what is it about real estate debt that makes it a compelling investment? As the second largest of the “four quadrants” of real estate, it has a value in the US and Europe alone of approximately US $4.5 trillion, representing an enormous opportunity. Real estate debt historically has produced competitive risk-adjusted returns in addition to showing low correlation to other assets.
In our latest research, we examine the three-part case for investment, including:
Important notice and disclaimer
This publication does not constitute an offer to sell, or the solicitation of an offer to buy, any securities or any interests in any investment products advised by, or the advisory services of, LaSalle Investment Management (together with its global investment advisory affiliates, “LaSalle”). This publication has been prepared without regard to the specific investment objectives, financial situation or particular needs of recipients and under no circumstances is this publication on its own intended to be, or serve as, investment advice. The discussions set forth in this publication are intended for informational purposes only, do not constitute investment advice and are subject to correction, completion and amendment without notice. Further, nothing herein constitutes legal or tax advice. Prior to making any investment, an investor should consult with its own investment, accounting, legal and tax advisers to independently evaluate the risks, consequences and suitability of that investment.
LaSalle has taken reasonable care to ensure that the information contained in this publication is accurate and has been obtained from reliable sources. Any opinions, forecasts, projections or other statements that are made in this publication are forward-looking statements. Although LaSalle believes that the expectations reflected in such forward-looking statements are reasonable, they do involve a number of assumptions, risks and uncertainties. Accordingly, LaSalle does not make any express or implied representation or warranty, and no responsibility is accepted with respect to the adequacy, accuracy, completeness or reasonableness of the facts, opinions, estimates, forecasts, or other information set out in this publication or any further information, written or oral notice, or other document at any time supplied in connection with this publication. LaSalle does not undertake and is under no obligation to update or keep current the information or content contained in this publication for future events. LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication and nothing contained herein shall be relied upon as a promise or guarantee regarding any future events or performance.
By accepting receipt of this publication, the recipient agrees not to distribute, offer or sell this publication or copies of it and agrees not to make use of the publication other than for its own general information purposes.
Copyright © LaSalle Investment Management 2024. All rights reserved. No part of this document may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of LaSalle Investment Management.
The arrival of artificial intelligence (AI) is a watershed moment for the entire world, and our industry is no different.
AI is already transforming how real estate investment operates, as managers use the technology to streamline operations. Generative AI is being used to automate time-consuming tasks, like investor due diligence, data analysis, and the processing of contractual documents. But this is only the tip of the iceberg of AI’s untapped potential in our industry. Used right, the technology can deliver real value for us and our clients.
At LaSalle, we are constantly adapting to the ever-changing technological landscape. By embracing new opportunities, we can reap the substantial benefits of technological innovations as they transform the world around us, rather than watch them pass us by.
LaSalle’s technology strategy is setting an industry-leading example of how companies can invest in the right technologies, execute the right strategies, and drive the value of new technologies for clients, industry, and people.
What is LaSalle’s technology strategy?
At LaSalle, our technology strategy is driven by IDEAS – Invest, Data, Efficiency, AI and Sales.
The five components of our IDEAS framework are designed to guide our company’s decisions on technological investments to ensure we are deriving maximum benefit in priority areas:
The framework ensures LaSalle’s teams stay ahead; always ready to adopt innovative new capabilities that can transform the way we work.
How does AI fit into LaSalle’s technology strategy?
We have made AI one of the central components of our IDEAS framework.
As an entity of JLL, LaSalle has access to JLL GPT – the world’s first large language model built by and for the commercial real estate industry. This is a competitive advantage that we leverage to stay ahead. JLL GPT uses JLL’s own extensive commercial real estate data, and external data sources, employing AI to expedite and simplify workflows. JLL GPT has allowed LaSalle teams across the business to drive better working processes internally, enhance efficiency, and ultimately deliver results to our clients.
We spoke to LaSalle teams to find out how they are embracing AI to support their everyday work.
Using JLL GPT to unlock resources
Nicole Creguer, Associate Vice President of Operations, has been guiding the US Asset Management team on using JLL GPT to free up time for more strategic thinking, by taking on manual and administrative tasks.
Creguer is part of the Americas Generative AI Innovation Forum at LaSalle, a group which brings together representatives from LaSalle’s US teams to discuss and drive the latest AI solutions.
Creguer has brought many practical use cases back to her team, including using JLL GPT to analyze meeting transcripts, summarize notes, and finesse communications, ensuring the top-quality output of work.
“JLL GPT saves us huge time on administrative tasks, so we can focus on creating better analysis and adding more strategic value in our work,” Creguer explained.
Using JLL GPT for underwriting models
Matthew Sweiss, Associate Vice President, and Peter Passalino, Associate, are using JLL GPT to drive efficiency within LaSalle’s US Transactions team by streamlining the handling of large amounts of underwriting data.
“We were looking to use JLL GPT to build functionality into our portfolio underwriting models via Excel macros,” said Sweiss. “We wanted to enhance our ability and efficiency in underwriting very large commercial portfolio transactions – the goal being to create a seamless transition between our reporting software and underwriting Excel models.”
Sweiss and Passalino used JLL GPT to develop a macro, test it, and provide feedback to the AI tool. With the feedback inputted, JLL GPT was able to enhance the macro formula, until an ideal solution was provided.
“You would think it might take a while to develop a solution, but the process of inputting the original request, iterating with GPT on it, going through trial-and-error, and landing on a final version, took about a day,” explained Passalino.
“We’ve happily adopted this new solution, and we hope other teams use this to replicate the process as needed going forward,” says Sweiss.
Across the global business, LaSalle is following this example and embracing AI and JLL GPT to simplify work, drive efficiency, and excel productivity. JLL GPT holds immense potential to drive efficiency and value, fostering a commitment from LaSalle to push the boundaries of exploration, through IDEAS.
How does AI fit into LaSalle’s investments?
The IDEAS framework is intended to guide LaSalle’s internal technology strategy. But it is ultimately a reflection of the appetite for embracing innovation running through LaSalle.
This is an appetite that we bring not only to improving our internal business processes, but also to our external investment decisions.
At LaSalle, we are always considering opportunities to partner with others on pioneering solutions to the greatest challenges the real estate industry is facing today.
In partnership with JLL Property & Asset Management, LaSalle selected HANK to run a pilot scheme to test the use of AI powered technology in one of LaSalle’s client offices at 240 Blackfriars, London in 2022.
HANK integrates with the existing building management systems to monitor and ‘learn’ how the existing heating, ventilation and air conditioning (HVAC) system operates. Using AI, energy models and other data inputs, HANK makes real-time micro-adjustments to optimise the operation of the HVAC equipment continuously.
“Using HANK has resulted in efficiencies across the board for 240 Blackfriars, including energy savings, cost savings, reduced carbon, and a positive working environment for tenants. This is an initiative born out of LaSalle’s openness to leverage new technologies. I look forward to exploring more ways for us to use innovation to deliver tangible benefits for our tenants and commercial clients.” – Brett Ormrod, Net Zero Carbon Lead, Europe
It might not yet be clear how transformational the arrival of AI will be for the real estate industry, but we can be certain it will be significant.
There is no doubt vast untapped potential for AI in our industry. LaSalle’s IDEAS framework is a gold-standard example of how real estate investment managers can invest in the right technologies and execute the right strategies to see the most benefit from technological innovations, like AI.
LaSalle has taken reasonable care to ensure that the information contained in this publication is accurate and has been obtained from reliable sources. Any opinions, forecasts, projections or other statements that are made in this publication are forward-looking statements. Although LaSalle believes that the expectations reflected in such forward-looking statements are reasonable, they do involve a number of assumptions, risks and uncertainties. Accordingly, LaSalle does not make any express or implied representation or warranty, and no responsibility is accepted with respect to the adequacy, accuracy, completeness or reasonableness of the facts, opinions, estimates, forecasts, or other information set out in this publication or any further information, written or oral notice, or other document at any time supplied in connection with this publication. LaSalle does not undertake and is under no obligation to update or keep current the information or content contained in this publication for future events. LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication and nothing contained herein shall be relied upon as a promise or guarantee regarding any future events or performance.
By accepting receipt of this publication, the recipient agrees not to distribute, offer or sell this publication or copies of it and agrees not to make use of the publication other than for its own general information purposes.
Copyright © LaSalle Investment Management 2024. All rights reserved. No part of this document may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of LaSalle Investment Management.
“You take the blue pill—the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill… all I’m offering is the truth.”
– Morpheus to Neo, The Matrix (1999)
We published the global chapter of the ISA Outlook 2024 on November 14, 2023, just before euphoria about a potential ‘V’-shaped property market turnaround emerged. Interest rates fell quickly as financial markets priced in several US Federal Reserve (Fed) rate cuts in 2024. For a time, it looked as though our prediction that it would take a little longer for markets to digest a renewed spike in rates would not age well.
In this Mid-Year Update, however, we look back to find an outlook with an uncanny resemblance to that of six months ago. This is not because nothing has changed, but because the mood has gone full circle. The landscape remains characterized by interest rate volatility, soft fundamentals in some markets, and gaping quality divides, but also by pockets of considerable strength. Another factor that has not changed is that financial conditions (i.e., interest rates) remain the dominant driver of the market, and that political and geopolitical uncertainties are in focus in many countries (see LaSalle Macro Quarterly, or LMQ, pages 4-6).1
In this report, we discuss five themes we see driving real estate markets for the rest of 2024 and beyond. At our European Investor Summit in May, our colleague Dan Mahoney argued that—like Neo in the Matrix—we should take the red pill and endeavor to see the market as it is, not as we’d like it to be. Taking the red pill requires a realistic view on property values. It reveals as unlikely a return to an environment of ultra-low interest rates or uniformly benign fundamentals in the “winning” sectors.
But it does not mean that there will not be attractive investment opportunities. Unlike the bleak dystopia of The Matrix, there are many reasons for optimism, as well as signs that the coming months will come to be seen as a favorable investment vintage. That said, investing successfully will require a balance of big-picture perspective and granular discernment, and a mix of patience and willingness to take risk.
Over the past year, we likened the interest rate path in most markets to a strenuous mountain trek: the relentless climb (2022), the range-bound altitude of an alpine ridge line (H1 2023), the unexpected upward turn in the trail (Q3 2023), and the mountain meadow of cooling inflation and expected rate cuts (Q1 2024). More recently, there have been upward turns in the interest rates trail whenever there have been signs of sticky inflation in the US and other key countries.
One thing is for sure: No map exists for this trail. While interest rates have big consequences for real estate capital markets, they are extremely difficult to predict. We continue to caution investors against overconfidence in their ability to forecast the path of long-term interest rates.
Mercifully, falling rates are not a necessary condition for a robust recovery in real estate transaction activity. Despite interest rates remaining elevated, property markets are already showing signs of finding their footing, such as renewed US CMBS issuance and resilient deal volumes in many markets and sectors.2 A key reason for this is that wherever interest rates have spiked over the past two and half years, especially Europe and North America,3 real estate prices have by now adjusted downward significantly. The relativities between expected returns for real estate and those for other asset classes now look more appropriate than they have in many months; in other words, more of the market is at or near fair value.4
That said, while lower rates are not necessary for real estate capital market normalization, greater stability in rates than we have been seeing would no doubt help. Interest rate volatility is the enemy of a smoothly functioning private real estate transaction market. Excessive movement in borrowing costs during due diligence periods can lead to dropped deals and re-trades. Moreover, when rates are volatile, the conclusions of fair value models are also volatile, impacting both buyers’ and sellers’ assessments of appropriate pricing. Looking at recent trends in the MOVE index,5,6 interest rate volatility appears to be gradually easing but is still elevated relative to recent history (see LMQ page 13).
Increasing stability in rates is welcome, but for now it is reasonable to expect continued strains in real estate capital markets that create both challenges and opportunities. Such conditions can represent favorable entry points for debt investors (lenders), distressed equity players and core investors seeking entry points below replacement
Over the past half-year, interest rates have been increasingly influenced by widening divergences between near-term growth, inflation and monetary and fiscal policy outlooks. Most notably, the bond yield gap between the US and other markets, especially the eurozone, has widened. US growth and inflation have surprised on the upside, in the face of softening or stability elsewhere. Markets currently expect only one Fed rate cut in 2024, down from up to four earlier in the year.7 Meanwhile, in early June the Bank of Canada became the first G7 central bank to cut rates since the great tightening cycle began, with the European Central Bank (ECB) following shortly after (see LMQ page 7).
Regional groupings can obscure divergences within them. The key driver of eurozone softness is Germany (see LMQ page 23), owing to its reliance on manufacturing exports and past dependance on Russian energy. Meanwhile, the Spanish economy remains strong due to healthy consumption and tourism. Within North America, Canada’s economy is underperforming the US because the structure of its residential mortgage market makes it more exposed to higher rates.8 These intra-regional variations may have a range of impacts on property markets, for example by shifting the relative short-term prospects for demand and value.
Japan and China represent long-standing divergences that persist.9 In China, a loosening bias remains in effect as inflation hovers at around 0%.10 In Japan, monetary policy is gradually normalizing, but so far without triggering a big increase in interest rates (at least compared to elsewhere). In March, the Bank of Japan (BOJ) abandoned negative interest rates and ended most unorthodox monetary policies, though it has since held policy interest rates at around zero. Japan’s economy becoming more “normal” is generally a positive, but interest rate differentials have pushed the yen to a 34-year low against the US dollar (see LMQ page 14), creating upside risks to inflation.11 But notably, Japan remains the one major global market in which real estate leverage remains broadly accretive to going-in yields.
Aside from reinforcing the potential benefits of diversification, what do these divergences mean for investors? Mechanically, any unexpected relative softening of interest rates should, all else equal, be beneficial for relative value assessments of real estate in that market. But firmer rates in the US have predictably come alongside a stronger US dollar. This points to practical limits to global monetary policy divergences; central bankers are keenly aware that weaker currencies come with inflationary risks. Moreover, it is worth asking how persistent macro divergences will be; current divergences are rooted in timing differences of expected rate cuts, rather than an anticipated permanent disconnect.
For several years, secular themes and structural shocks have dominated the trajectories of global property markets. But there is a clear cyclical pattern reemerging in the form of a pronounced upswing in vacancy across global logistics markets, and in US apartments. The return of cyclicality in those favored sectors is having significant impacts on their near-term prospects.
The softening trend is not new. In the ISA Outlook 2024, we identified hot sectors “coming off the boil.” Part of this was down to normalizing demand levels, but elevated new supply was also a key driver. As expected, the softening we observed has continued to deepen, leading to outright rent declines in certain markets, especially for apartments in US sunbelt metros.
Softening fundamentals are not to be ignored, but we recommend investors to have the conviction to “ride the wave” of excess supply. Wide variation in supply levels at the market and submarket level means that investors with granular market data and the discipline to incorporate it into their market targeting processes should be positioned to select the most attractive markets and submarkets.
Moreover, the forces that create cycles sow the seeds of their own reversal; we expect the current supply wave to moderate soon, as evidenced by sharply falling construction starts (see LMQ page 25). Many of the projects being completed today broke ground when credible exit cap rate assumptions were several hundred basis points lower than today. Higher interest rates upended development economics; far fewer new developments can now be justified on today’s mix of land prices, construction costs and financial conditions.
Finally, investors should be prepared to think about cash flows in both real and nominal terms. When cooling nominal rental growth comes alongside cooling inflation, as it does today, it is possible for that to be consistent with solid real rental growth, depending on the relative magnitude of each.
Beyond the reassertion of supply cycles in some markets, there is an evolving mix of secular stories that deserve attention. Some of these are so long-standing that they could almost be considered constants. These include structural shortages of housing in most of Europe, Canada and Australia, as well as the widespread changing definition of core real estate in favor of more operational niche sectors and sub-types.12 We continue to be strong advocates for investment in undersupplied living sectors, and for participating in the institutionalization and growth of niche sub-sectors such as single-family rental (SFR) and industrial outdoor storage (IOS).
More dynamic themes that deserve a closer look include the stabilization of retail real estate and divergent office investment prospects:
Other key secular themes driving investment opportunities today include the implications of artificial intelligence (AI) adoption for data center demand, student mobility for student accommodation in Europe and Australia and aging for senior housing.
Past experience of real estate cycles suggests that the best investment opportunities tend to arise in periods marked by significant uncertainty, volatility and pessimism, but also when early signs of improvement and stabilization are present—in other words, moments similar to today’s environment. Experience also reinforces that it is nearly impossible to time the market, so it is best to be selectively active throughout the cycle. By the time the “all clear” signal is sounded after a market crisis, it is too late to achieve the best risk-adjusted returns.
That said, “red pill” thinking means we must recognize that the coming capital market rebound is unlikely to be as sharp as it was after the Global Financial Crisis (GFC), given that central banks are unlikely to usher in ultra-loose policy. Seeing the market as it is requires accepting the likelihood that interest rates could remain sticky, and a realistic view of near-term fundamentals as a wave of supply impacts some sectors.
Footnotes
1 Also see our ISA Briefing, “Elections everywhere, all at once: Geopolitics and risk”, April 2024. In that note, we highlighted the various sources of political uncertainty this year and outlined how we recommend investors consider these risks. At the time of writing, political developments are particularly salient for short-term movements markets in France and the UK, given elections that have been called in those countries.
2 Source: MSCI Real Capital Analytics and Trepp
3 Japan and China are key exceptions that we cover in greater depth under the “deciphering divergence” header.
4 Of course, there is considerable variation embedded in this and any assessment of fair value. As always, the devil is in the detail on the assumptions that go into expected and required returns; at LaSalle, specific fair value inputs and conclusions remain a proprietary output.
5 The Merrill Lynch Option Volatility Estimate (MOVE) is a market-implied measure of volatility in the market for US Treasuries. It calculates options prices to reflect the expectations of market participants on future volatility. Observation made as of June 24, 2024.
6 Source: Bloomberg as of June 26, 2024.
7 For more discussion of the Canada-US divergence and the consequences of mortgage rate resets, see our ISA Briefing, ”The impact of residential mortgage resets”.
8 For more detailed discussion of the unique factors in the Japanese and Chinese macro environment, see our ISA Briefing, “Key economic questions for China and Japan”.
9 Source: Oxford Economics; Gavekal Dragonomics as of June 26, 2024.
10 Economic theory suggest that weak currency may contribute to inflationary forces because it pushes up the cost of imported goods.
11 See our PREA Quarterly article on “The Changing Definition of Core Real Estate” for a discussion of how the characteristics considered desirable in core properties is moving from traditional metrics like lease length, to observed qualities like the stability of cash flows. This shift elevates the appeal of niche sectors sub-sectors versus traditional sectors such as conventional office.
12 See our ISA Focus report “Revisiting the future of office”, published March 2023.
Important notice and disclaimer
This publication does not constitute an offer to sell, or the solicitation of an offer to buy, any securities or any interests in any investment products advised by, or the advisory services of, LaSalle Investment Management (together with its global investment advisory affiliates, “LaSalle”). This publication has been prepared without regard to the specific investment objectives, financial situation or particular needs of recipients and under no circumstances is this publication on its own intended to be, or serve as, investment advice. The discussions set forth in this publication are intended for informational purposes only, do not constitute investment advice and are subject to correction, completion and amendment without notice. Further, nothing herein constitutes legal or tax advice. Prior to making any investment, an investor should consult with its own investment, accounting, legal and tax advisers to independently evaluate the risks, consequences and suitability of that investment.
LaSalle has taken reasonable care to ensure that the information contained in this publication is accurate and has been obtained from reliable sources. Any opinions, forecasts, projections or other statements that are made in this publication are forward-looking statements. Although LaSalle believes that the expectations reflected in such forward-looking statements are reasonable, they do involve a number of assumptions, risks and uncertainties. Accordingly, LaSalle does not make any express or implied representation or warranty, and no responsibility is accepted with respect to the adequacy, accuracy, completeness or reasonableness of the facts, opinions, estimates, forecasts, or other information set out in this publication or any further information, written or oral notice, or other document at any time supplied in connection with this publication. LaSalle does not undertake and is under no obligation to update or keep current the information or content contained in this publication for future events. LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication and nothing contained herein shall be relied upon as a promise or guarantee regarding any future events or performance.
By accepting receipt of this publication, the recipient agrees not to distribute, offer or sell this publication or copies of it and agrees not to make use of the publication other than for its own general information purposes.
Copyright © LaSalle Investment Management 2024. All rights reserved. No part of this document may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of LaSalle Investment Management.
LaSalle is renewing their pledge to PREA Foundation, to help develop more diverse talent and provide them accessibility to the real estate industry globally.
LaSalle has pledged a donation of US $50,000 each year, over the next five years to PREA Foundation, which gives LaSalle the status of a Benefactor Donor. This is the second time LaSalle has pledged, the first being from 2017 to 2022. LaSalle and PREA Foundation have had a long-standing relationship, with many LaSalle employees participating in PREA Foundation events, panels and discussions over the last few years.
The Foundation’s mission is to further the interests and values of the institutional real estate investment community by advancing industry-wide diversity and inclusion. The Foundation, in partnership with donors, is working on developing the largest and most comprehensive talent pipeline for the industry.
Partnerships with donor organizations help PREA Foundation achieve their mission. PREA Foundation funds the creation of career development programs to help underserved youth access life-changing careers in the vast real estate industry. These career development programs include job training and workforce development. Some of the non-profits the Foundation works with include Toigo and Girls Who Invest. Donor organizations can access resources through PREA Foundation which makes it easier for them to recruit diverse talent from these programs.
Donations also fund the creation of career development programs to help underserved youth access careers and opportunities in real estate. These career development programs include job training, workforce development, and skill development.
Additionally, donations fund a variety of educational resources including webinars and seminars open to all in the industry. These educational programs help address long standing DEI challenges in real estate, through providing best practice workshops.
LaSalle’s donation allows them to join respected industry leaders whose contributions create opportunities for the next generation.
Over the last several years, we have seen an increase in the number of institutional investors around the world interested in adding real estate debt to their portfolios.1 In some instances, this is to replace an allocation to traditional fixed income, while in others it is both an enhancement and a way to further diversify their current level of real estate holdings.
Real estate debt versus traditional fixed income
Real estate debt differs from traditional fixed income investments in a variety of ways, primarily through collateralization, income generation, differing risk factors, the potential for securitization and its direct relationship to underlying real estate assets. In the same way that investors looking for reliable income streams and relative stability across a number of fixed income products such as government bonds or corporate credit, they can also turn to real estate debt investments.
One key differentiator for the asset class is that it is typically secured by tangible collateral in the form of real estate. Further, real estate credit investments benefit from attractive positions within a capital structure, benefitting from a subordinated first-loss position from equity, and also from negative control structures which give lenders an ability to proactively protect capital in a downside scenario. In contrast, traditional fixed income investments such as corporate or government bonds are usually unsecured and rely solely on the creditworthiness of the issuer.
For many institutional investors, income generation is a key objective and something that real estate debt investments can generate primarily through interest payments on the loan. These interest payments are often higher than on traditional fixed income investments such as sovereign or investment-grade corporate bonds. Additionally, real estate debt may also offer the potential for additional income through loan origination and exit fees, or in some instances, profit participation. Like other investments in any asset class, real estate assets are subject to market fluctuations and economic cycles. There are, however, additional property-specific risks that investors should take into consideration. These include factors such as underlying occupancy and cash-flow drivers as well as capital markets. Investors should also consider the wider macroeconomic and credit-risk considerations that investors in listed fixed income must factor into their decision making. Lending against property embeds the possibility of active takeovers, also known as workouts, requiring hands-on asset management expertise.
In some instances, real estate debt can be securitized, meaning loans are packaged together and sold as securities in the market. This allows investors to gain exposure to real estate debt through mortgage-backed securities (MBS) or collateralized debt obligations (CDOs). Traditional fixed income investments, on the other hand, are typically traded as individual bonds or included in bond funds.
Lastly, real estate debt investments are directly tied to specific properties or real estate platforms. The performance of the underlying property and its cash flows can impact the value of the debt, along with a borrower’s ability to repay it. Traditional fixed income investments are generally linked to the creditworthiness and financial health of the issuer, without a direct connection to specific underlying assets.
So why should institutional investors consider real estate debt?
As with any other asset class, real estate debt has its own unique set of attributes which, as part of a diversified, risk-adjusted portfolio, may provide investors with compelling reasons to include it within their overall strategy.
Key benefits may include:
As always, it’s important that real estate debt, like any other asset class, is considered as a component part of an overall portfolio of investments constructed with the underlying objectives of the investor in mind. When properly integrated into a portfolio, real estate debt investments have the potential to offer institutional investors the opportunity to generate stable income, diversify their portfolios, align their investments with long-term liabilities, protect against inflation, target attractive risk-adjusted returns and, in some cases, adhere to regulatory requirements.
Understanding the capital structure
The term “capital structure” in real estate investment is used to represent layers of debt and equity within an investment structure, each with its own risk-return profile and repayment priority. Investors choose a position in the structure based on risk appetite, desired returns and level of control or ownership in the investment. LaSalle invests across all layers of the capital structure.
Common equity represents an ownership stake of the property. These investors bear the highest risk but also have the potential for the highest returns. They participate in the property’s cash flows and profit distributions only after others have been paid. They have the greatest exposure to the property’s performance and value appreciation but also face the greatest risk during market downturns or property underperformance.
Preferred equity represents a hybrid investment between debt and equity. These investors provide capital to the project but have a higher claim on profits and cash flows than common equity holders. They enjoy a priority in distribution but still hold a subordinate position to debt holders. They often receive a fixed return, similar to interest on debt, and may also have upside potential linked to a property’s appreciation in value.
Mezzanine debt sits between senior debt and equity in the capital structure. Mezzanine lenders provide loans that have secondary priority in terms of repayment but carry a higher risk profile compared to senior debt. As a result, they tend to offer higher interest rates or additional equity-like features to compensate for the increased risk.
Senior debt occupies the most senior position in the capital structure and has the highest priority for repayment in case of default or enforcement. Lenders providing senior loans hold the first lien on the property, meaning they have the first claim to cash flows and proceeds in the event of liquidation and are usually secured by asset level security. Typically, senior debt offers lower yields compared to other subordinated positions within the capital structure due to its lower risk profile.
1 INREV Investment Intentions Survey, 2017 – 2024
This publication does not constitute an offer to sell, or the solicitation of an offer to buy, any securities or any interests in any investment products advised by, or the advisory services of, LaSalle Investment Management (together with its global investment advisory affiliates, “LaSalle”). This publication has been prepared without regard to the specific investment objectives, financial situation or particular needs of recipients and under no circumstances is this publication on its own intended to be, or serve as, investment advice. The discussions set forth in this publication are intended for informational purposes only, do not constitute investment advice and are subject to correction, completion and amendment without notice. Further, nothing herein constitutes legal or tax advice. Prior to making any investment, an investor should consult with its own investment, accounting, legal and tax advisers to independently evaluate the risks, consequences and suitability of that investment. LaSalle has taken reasonable care to ensure that the information contained in this publication is accurate and has been obtained from reliable sources. Any opinions, forecasts, projections or other statements that are made in this publication are forward-looking statements. Although LaSalle believes that the expectations reflected in such forward-looking statements are reasonable, they do involve a number of assumptions, risks and uncertainties. Accordingly, LaSalle does not make any express or implied representation or warranty and no responsibility is accepted with respect to the adequacy, accuracy, completeness or reasonableness of the facts, opinions, estimates, forecasts, or other information set out in this publication or any further information, written or oral notice, or other document at any time supplied in connection with this publication. LaSalle does not undertake and is under no obligation to update or keep current the information or content contained in this publication for future events. LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication and nothing contained herein shall be relied upon as a promise or guarantee regarding any future events or performance. By accepting receipt of this publication, the recipient agrees not to distribute, offer or sell this publication or copies of it and agrees not to make use of the publication other than for its own general information purposes.
Copyright © LaSalle Investment Management 2024. All rights reserved. No part of this document may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of LaSalle Investment Management. GL001731MAY25
This article first appeared in the Spring 2024 edition of PREA Quarterly
LaSalle’s Global Head of Research and Strategy, Brian Klinksiek, discusses how the definition of core real estate is changing for investors, and what that could mean for their strategies.
A surprising standout as the most conversation-provoking exhibit from LaSalle’s ISA Outlook 2024 is titled “LaSalle’s Changing Definition of Core.” The simple table, reproduced for this article, contrasts a traditional core mind-set against an emerging “new” core mind-set. The former is focused on classic real estate metrics, such as credit quality and lease length, and flatters the property types that tend to score well against them, such as office. The latter is a more evidence-based approach focused on predictability and growth of actual cash flows, a lens that tends to favor the living sectors and niche property types and subtypes, such as medical office.
Taking a step back, the definition of core can be framed in various ways. It may be cast in relation to the other main “styles” of real estate investment—value-added and opportunistic—in that core is supposed to offer lower but safer and more predictable returns than either of those. Defining this with specificity might involve formal labels and thresholds, such as maximum leverage levels and property type characterizations. Assets and portfolios on the correct side of such definitions would be considered core and those beyond them would not be. Of course, financial theory suggests that the fundamental value of an asset should derive from the characteristics of its cash flows, not its conformance with metrics, criteria, and labels. Given that core portfolios are meant to deliver more reliable returns than non-core ones, an understanding of their sensitivity to factors such as economic growth and inflation and their vulnerability to operational challenges should be more important than how they align with some prescribed taxonomy. In this article, I take each of the classic metrics covered in the LaSalle chart and address why a change of mind-set may lead to better core portfolios.
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Isabelle Brennan rejoined LaSalle as a Senior Managing Director in 2024, having previously worked within the Investor Relations team between 2015 and 2017. As Product Specialist – Credit and Global Solutions, she works with clients on a global basis to drive capital raising efforts in these verticals, as well as ensuring that LaSalle’s strategies meet investor needs. She is a member of the Investor Relations Management Board.
Prior to joining LaSalle, Isabelle held similar roles across the Credit and Indirect platforms at CBRE IM and M&G Investments, with responsibility for capital raising and investor relations across these channels globally. Earlier in her career, Isabelle worked within the Indirect and Fund of Funds Investment teams at Henderson Global Investors, now Nuveen (EMEA) and Prupim, now M&G Real Estate (Global), underwriting, investing and managing multi-manager investments on behalf of global clients.
Isabelle received her Bachelor’s degree from Monash University, Melbourne, and holds an Master of Science in Real Estate from Cass Business School, London. She also holds UK qualifications in Psychology and Law. She is active across industry organizations, sitting on the INREV debt working group, and as Treasurer of the Cambridge Land Economy Advisory Board (CLEAB).
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Louis Bowers is the Global Chief Financial Officer of LaSalle. His duties include financial reporting, planning and forecasting, and helping drive the firm’s strategic priorities together with the other members of the Global Management Committee.
Prior to his current role, Louis was JLL’s Global Head of Financial Planning and Analysis, where he helped lead JLL’s efforts to pivot its reporting segments to global business lines and implement a new globally standardized cost allocation methodology as well as a new global planning / forecasting platform. He was also responsible for JLL’s budgeting and forecasting processes, periodic financial reporting to senior leadership and the Board of Directors and providing ongoing support for quarterly earnings. He also served as JLL’s Global Controller and Principal Accounting Officer from August 2015 until December 2021. Prior to joining JLL, Louis served in various positions at Retail Properties of Americas, Inc, a multi-tenant retail REIT, as well as a member of KPMG’s audit practice.
Louis is a graduate of the University of Illinois Urbana-Champaign.
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Recognition has grown substantially in recent years that climate risk can shape real estate investment outcomes. This owes to an increasing frequency and severity of loss events,1 surging insurance premiums,2 improving data availability and a mounting reporting burden driven by regulations.3 Investors have had to move quickly from acquiring basic climate risk literacy, to sourcing good quality climate risk data, to most recently, leveraging that data into improved investment decisions. There is a clear and rising likelihood that investors on the lagging edge of this process may underperform.
At LaSalle, we have sought to share insights from our own climate risk journey, combining that with broader analysis of our industry’s climate risk challenges and opportunities. In 2022, we partnered with the Urban Land Institute (ULI) on a report, How to choose, use, and better understand climate-risk analytics, which addressed the difficulties in selecting and evaluating climate data from an ever-changing and increasingly crowded—and sometimes contradictory—data provider landscape. In April, we released a new report with ULI, Physical Climate Risks and Underwriting Practices in Assets in Portfolios, which looks at how investors are taking these data and seeking to make better-informed buying, selling and portfolio construction decisions based on them.
While the joint ULI report takes an industry-wide view, this ISA Briefing looks at the topic through the lens of LaSalle’s own investment process. We present three case studies of our evaluation of climate risk on a regional, market and asset-level scale. These examples – one each from each of our global investment regions – illuminate how we are taking account of climate risk and lay out our views on issues investors should be thinking about.
In 2023, the US recorded 28 weather/climate disaster events for which losses exceeded $1 billion, the highest recorded number of distinct events exceeding that threshold.4 But of course, these events were not uniformly distributed across the country. To better understand the geographic predisposition of parts of the country to these hazards, LaSalle’s US Research and Strategy team developed two separate climate risk indexes, evaluating current and future climate risk. The indexes encompass a range of climate hazards, such as heatwaves, floods and wildfires, with earthquakes added as a non-climate threat. The current climate risk index harnesses machine learning to scrutinize hyper-local data from the Federal Emergency Management Agency (FEMA). Meanwhile, the future climate risk projections rely on data from the Rhodium Group data set, as analyzed by ProPublica and assuming an RCP 8.5 scenario.5
Looking at climate risk at a regional scale has been useful in several ways. First, it can accelerate analysis of new opportunities by acting as a “yellow flag,” directing resources early in the underwriting process toward deeper analysis into asset-specific climate risk issues that may turn out to be red flags. Second, regional climate risk can be integrated into market-targeting tools, weighing it alongside other factors that influence real estate performance (for example, demographic variables such as population growth and real estate variables like the prospects for rental growth). To this end, LaSalle has embedded these climate risks scores into our proprietary Target Market Analyses (TMAs). Thirdly, it can help frame inquiry into how metro-level performance factors, such as migration patterns, can interact with climate risk over time.
On that last point, the map appears to beg a question about recent migration trends that have favored the Sunbelt.6 Are people disproportionally moving to at-risk places, and if so, why? An important follow-on question that is germane for investment strategy is whether climate change may eventually cause a reversal of recently observed migration patterns. Indeed, we do observe a discernible, moderately positive correlation7 (+29%) between climate risk exposure and increased migration over the past five years. This pattern holds, and even intensifies, when considering population growth projections for the next five years (+47% correlation).8
The implication is that regions facing severe climate challenges continue to draw new residents. This suggests that environmental risks may not yet be so widely recognized as to shape behavior. That said, a mere 8% of market value within the NCREIF Property Index’s (NPI) apartment asset base is situated in markets we classify as high-risk.9 This suggests the impact in the near-term on institutional real estate investors will be limited, at least until climate change is severe enough to routinely impact markets in the next less risky band, which encompasses 16% of total NPI apartment value.10 Either way, investors looking to the long-term would be wise to consider how people will respond to growing climate hazards in high-risk markets. If a major reaction is that Sunbelt denizens relocate back to the Rustbelt, that could have significant implications for regional economic growth and real estate market prospects.
Below the regional level, it is at the scale of an individual metro area where different degrees of exposure to climate risk can be evaluated with more granularity. It is often at this level where both in-place and planned efforts to mitigate the potential impacts of climate hazards can be identified. As we discussed in our 2022 ULI report, such measures can confound traditional climate risk data if they ignore its impact.
For example, when overlaying LaSalle’s global portfolio with raw data from our climate risk providers, Amsterdam and its broader ‘Randstad’ region stand out as especially exposed to sea-level rise. Not considering any protective infrastructure, we estimate that 52% of Amsterdam and 38% of Rotterdam commercial property would have a significant exposure to severe flood.11
Thankfully, the Dutch have been building dams and levees to protect their low landmass from flooding for centuries.12 Modern infrastructure investment accelerated in the wake of the 1953 North Sea flood – a combination of a severe European windstorm and high spring tide that caused the sea to flood land up to 5.6 meters above mean sea level.13 The ‘Deltawerken’ (Delta Works), now complete, consists of a set of storm surge barriers, locks and dams mainly located in the south of the country. But the Dutch flood defense program extends beyond the Delta Works,14 encompassing almost 1,500 constructed barriers, including more than 20,000 kilometers of dikes, enough to encircle the country over 15 times. In fact, the Delta Works program has evolved into the Delta Programme, a continuous project that take future effects of climate change into account, with a target of 100% of the Dutch population protected by floods not exceeding a 1 in 100,000-year event by 2050.15
The presence of these flood defense programs is of imperative importance when considering the Dutch markets for investments. We find that many climate risk data providers do not adjust for the Netherlands’ formidable stock of anti-flood infrastructure investment which mitigates much of the risk. Investors who act as uncritical “takers” of unadjusted climate risk stats may thus excessively underweight the Dutch market.
Below the regional and market level, the asset level is where the outcomes of climate hazards have the most direct impact on a building’s structural integrity or the ability to access and operate a property. An asset manager’s actions can directly influence a building’s capacity to withstand climate-related hazards. This tends to be the most impactful when such interventions are made during the design phase of the development.
For example, take the case of a LaSalle logistics development in Osaka, Japan, a city that has historically been vulnerable to flooding due to its geographical location, with much of the urban area made up of flat lowlands that make natural drainage a challenge in the event of tsunamis and heavy rainfall.16 The local city planning assesses the maximum level water could rise above sea level by submarket in the event of a flood. The flood height varies by location while considering additional factors such as the city’s infrastructure (i.e., floodgates and seawalls) and the overall elevation of the submarket. In the case of one of LaSalle’s Osaka Bay logistics developments, the subject warehouse is at a site where water levels could rise to three meters above sea level in the case of a flood.17
Seawalls, ranging in height from 5.7-7.2 meters protect the asset from extreme floods coming from the sea. To further mitigate the flood risk in the case of extreme rainfall or failure of the sea walls, the warehouse is designed with an elevated floor plate that puts the ground level 1.4 meters above mean sea level, and places key building equipment on the second floor, minimizing potential damage to the asset in the event of flood. This effort resulted in a 4.4 meter clearance above sea level (i.e., sea level + 1.4 meter buffer + 3 meters = 4.4 meters), which is above the required 3.5 meters above sea level (i.e., sea level + 1.4 meter buffer + 2.05 meters = 3.45 meters) for the location. In addition, the property management team has been trained and equipped to minimize flood damage on the first floor by closing the doors and shutters and placing sandbags in any gaps. By incorporating considerations to mitigate flood risk when designing the warehouse, the asset is well positioned to support tenants’ business continuity plans in the event of a flood.
Footnotes
1 Source: National Centres for Environmental Information of the National Oceanic and Atmospheric Administration (NOAA). See Billion Dollar Weather and Climate Disasters
2 Source: The Climbing Costs to Insure US Commercial Real Estate, MSCI, November, 29 2023
3 The TCFD framework which has now been absorbed by IFRS’ ISSB, serves as the framework with which other international reporting standards setters seek to align such as the US SEC who voted in favour of The enhancement and standardization of climate-related disclosure, or the UK Government and the Sustainability Standards Board of Japan who will align its disclosure standards with ISSB.
4 According to the National Centers for Environment Information (NCEI). $1 billion threshold adjusted for inflation in historical periods. See https://www.ncei.noaa.gov/access/billions/.
5 RCP refers to Representative Concentration Pathway, a standard for modeling future climate scenarios of greenhouse gas concentration in the atmosphere. RCP 8.5 represents an extreme case scenario. See this Intergovernmental Panel on Climate Change (IPCC) glossary for more detail.
6 For more discussion on this trend, see our recent ISA Briefing, US migration trends and (U)rbanization.
7 Cross-sectional correlation between the LaSalle current climate risk index and the population change in the top 45 US metro areas between December 2018 and December 2023.
8 Cross-sectional correlation between the LaSalle future climate risk index and population change in the top 45 US metro areas between December 2023 and December 2028 based on Moody’s forecast as of February 2024.
9 Source: LaSalle analysis of data from NCREIF, FEMA.
10 Source: LaSalle analysis of data from NCREIF, FEMA.
11 Source: LaSalle analysis of MSCI data.
12 Source: The Dutch experience in flood management: A history of institutional learning
13 Source: The devastating storm of 1953, The History Press
14 Source: Dutch primary flood defenses, Nationaal Georegister
15 See Delta Programme 2024
16 See Osaka city – Flood disaster prevention map outline from the Osaka City Office of Emergency Management.
17 Estimates of maximum flood depth are based on historical records of natural disasters such as earthquakes, river floods and tsunamis that have occurred as reported by Japan’s Ministry of Land, Infrastructure and Tourism.
18 A superficial view of markets is that transactions are based on agreement on value. More accurately, buyers and sellers agree on a price, but their willingness to transact is based on disagreement on value. A seller, for example, may have a less bullish view on NOI growth prospects than a buyer. We expect the same disagreement on climate-related risk/reward trade-offs to be increasingly important.
This publication does not constitute an offer to sell, or the solicitation of an offer to buy, any securities or any interests in any investment products advised by, or the advisory services of, LaSalle Investment Management (together with its global investment advisory affiliates, “LaSalle”). This publication has been prepared without regard to the specific investment objectives, financial situation or particular needs of recipients and under no circumstances is this publication on its own intended to be, or serve as, investment advice. The discussions set forth in this publication are intended for informational purposes only, do not constitute investment advice and are subject to correction, completion and amendment without notice. Further, nothing herein constitutes legal or tax advice. Prior to making any investment, an investor should consult with its own investment, accounting, legal and tax advisers to independently evaluate the risks, consequences and suitability of that investment.
LaSalle has taken reasonable care to ensure that the information contained in this publication is accurate and has been obtained from reliable sources. Any opinions, forecasts, projections or other statements that are made in this publication are forward-looking statements. Although LaSalle believes that the expectations reflected in such forward-looking statements are reasonable, they do involve a number of assumptions, risks and uncertainties. Accordingly, LaSalle does not make any express or implied representation or warranty, and no responsibility is accepted with respect to the adequacy, accuracy, completeness or reasonableness of the facts, opinions, estimates, forecasts, or other information set out in this publication or any further information, written or oral notice, or other document at any time supplied in connection with this publication. LaSalle does not undertake and is under no obligation to update or keep current the information or content contained in this publication for future events. LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication and nothing contained herein shall be relied upon as a promise or guarantee regarding any future events or performance.
By accepting receipt of this publication, the recipient agrees not to distribute, offer or sell this publication or copies of it and agrees not to make use of the publication other than for its own general information purposes.
Copyright © LaSalle Investment Management 2024. All rights reserved. No part of this document may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of LaSalle Investment Management.
Report Summary: Physical climate risk data can be a powerful tool for managing asset and portfolio risk and returns. Learn what strategies leading firms are using to manage physical climate risks and navigate market challenges. The latest report from the Urban Land Institute and LaSalle Investment Management builds on their previous report, How to Choose, Use, and Better Understand Climate Risk Analytics, to describe how leading firms are leveraging physical climate-risk data in underwriting practices. With insight into asset- and portfolio-level risk becoming increasingly easy to obtain, new challenges lie in effective interpretation and integration of information into investment practices. Relying on research and interviews with industry leaders, this report provides a nuanced exploration of this emergent issue.
Physical Climate Risks and Underwriting Practices in Assets and Portfolios is structured into three sections, each addressing different aspects of the industry’s response to climate-risk data:
Section 1. Explore the current state of the industry, finding that:
• Leading firms actively coach their teams on physical risk.
• Regulatory trends affect, but do not motivate physical risk assessment.
• Different geographies approach physical with their own level of urgency.
• Investment managers tend to focus on fund risk, capital providers on portfolio risk.
• Tools to understand and price physical risk are still in a nascent stage of development.
Section 2. Examines the application of climate data in decision making. Key findings include:
• Aggregate physical risk is a screening tool; individual hazard risk is actionable information.
• Climate value at risk remains opaque; the utility of the single number offers value but needs increased transparency.
• Atypical hazard risk (e.g., flood in a desert) merits increased attention.
• External consultants can frequently fill skill gaps, especially for firms with less in-house expertise.
• While no predominant timeframe or Representative Concentration Pathway (RCP) emerged as industry standard, the 2030 and 2050 benchmarks were the most commonly referenced time horizon.
Section 3. Assess the impact of physical climate risk on acquisition, underwriting, and disposition practices; finding that:
• Leading firms start with a top-down assessment of physical risk.
• Market concentration of physical risk is analogous to other concentration risks—a nuanced analysis is required.
• Capital expenditure for resilience projections is a key forecast but rife with uncertainty.
• Local-market climate mitigation measures are important to understand but difficult to forecast.
• Exit cap rate discount for estimated physical risk is an increasingly commonly used tool, frequently 25 to 50 basis points.
• Firms infrequently disclose physical risk but the market needs increased transparency.
Important Notice and Disclaimer
This publication does not constitute an offer to sell, or the solicitation of an offer to buy, any securities or any interests in any investment products advised by, or the advisory services of, LaSalle Investment Management (together with its global investment advisory affiliates, “LaSalle”). This publication has been prepared without regard to the specific investment objectives, financial situation or particular needs of recipients and under no circumstances is this publication on its own intended to be, or serve as, investment advice. The discussions set forth in this publication are intended for informational purposes only, do not constitute investment advice and are subject to correction, completion and amendment without notice. Further, nothing herein constitutes legal or tax advice. Prior to making any investment, an investor should consult with its own investment, accounting, legal and tax advisers to independently evaluate the risks, consequences and suitability of that investment.
LaSalle has taken reasonable care to ensure that the information contained in this publication is accurate and has been obtained from reliable sources. Any opinions, forecasts, projections or other statements that are made in this publication are forward-looking statements. Although LaSalle believes that the expectations reflected in such forward-looking statements are reasonable, they do involve a number of assumptions, risks and uncertainties. Accordingly, LaSalle does not make any express or implied representation or warranty, and no responsibility is accepted with respect to the adequacy, accuracy, completeness or reasonableness of the facts, opinions, estimates, forecasts, or other information set out in this publication or any further information, written or oral notice, or other document at any time supplied in connection with this publication. LaSalle does not undertake and is under no obligation to update or keep current the information or content contained in this publication for future events. LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication and nothing contained herein shall be relied upon as a promise or guarantee regarding any future events or performance.
By accepting receipt of this publication, the recipient agrees not to distribute, offer or sell this publication or copies of it and agrees not to make use of the publication other than for its own general information purposes.
Copyright © LaSalle Investment Management 2024. All rights reserved. No part of this document may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of LaSalle Investment Management.
Washington / New York (April 11, 2024) – A new global report from the Urban Land Institute (ULI) and LaSalle Investment Management (LaSalle), a leading real estate investment management firm, offers a new framework to help the real estate industry act on climate risk disclosure data. Across the real estate industry, practitioners understand physical climate risk to assets and portfolios poses a financial risk, but there are still many challenges to enacting on the data being collected and disclosed.
This new framework is the latest tool for real estate investors and other practitioners to evaluate the costs of action and inaction when it comes to investing in resilience. The report, Physical Climate Risks and Underwriting Practices in Assets and Portfolios, is the second in a series by ULI and LaSalle. Building on the first report that outlined how to source and interpret reliable climate risk data, the second provides a market overview, adaptable framework, and recommendations based on emerging best practices for incorporating physical climate risk in the underwriting process.
“Physical climate risk data collection and disclosure is the first step the real estate industry can take to further invest in and build resilient infrastructure,” said Lindsay Brugger, head of Urban Resilience at ULI. “Data drives action and doing nothing incurs deeper costs — from higher insurance premiums to asset repair or replacement. Focusing on the underwriting process, the framework offers investment managers a methodology for developing risk-adjusted returns so deals can be adapted in alignment with a firm’s fund or portfolio objectives.”
“Of the $850 billion of commercial real estate tracked by NPI, LaSalle estimates $285 billion, or 34% is situated in high and medium-high climate risk zones in the US,” said Julie Manning, Global Head of Climate and Carbon at LaSalle Investment Management. “This report helps provide guidance that investment managers can follow to factor the climate risk data they have available to them and improve outcomes at the asset and portfolio level. We want to lead the conversation across the industry and collaborating with ULI is a great conduit to amplify the discussion that will ultimately benefit investors of all kinds with more resilient real estate portfolios.”
The framework is broken down into three steps for decision making based on individual asset risks, local market risks, and ongoing risk mitigation efforts:
1. Evaluate the level of exposure to physical climate risk and financial implications;
2. Identify hazard mitigation strategies and estimate associated costs; and
3. Determine risk-adjusted return and whether or not that return meets firm objectives
The redevelopment will also look to meet future tenant requirements and evolving work trends with high-quality amenities to promote in-person interaction and facilitate a hybrid working, including an auditorium, business centre, bars and restaurants, event spaces and a media broadcast studio.
As climate impacts continue to influence real estate markets around the world, improving understanding of physical climate risk and adjusting pricing to reflect risk are growing imperatives. Firms can better navigate the complexities of physical climate risk and capitalize on emerging opportunities by leveraging this new report’s insights and guidance. Prioritizing knowledge diffusion and empowering informed decision-making processes is key to effectively managing and mitigating incoming climate risks in the evolving real estate industry, whether at a community or individual building scale.
The full report and downloadable framework can be found on ULI’s Knowledge Finder.
REPORTERS AND EDITORS: For more information, please contact:
ULI
LaSalle
Drew McNeill
About the Urban Land Institute
The Urban Land Institute is a non-profit education and research institute supported by its members. Its mission is to shape the future of the built environment for transformative impact in communities worldwide. Established in 1936, the institute has more than 48,000 members worldwide representing all aspects of land use and development disciplines. For more information on ULI, please visit uli.org, or follow us on Twitter, Facebook, LinkedIn, and Instagram.
About LaSalle Investment Management
LaSalle Investment Management is one of the world’s leading real estate investment managers. On a global basis, LaSalle manages over US $89 billion of assets in private and public real estate equity and debt investments as of Q4 2023. LaSalle’s diverse client base includes public and private pension funds, insurance companies, governments, corporations, endowments and private individuals from across the globe. LaSalle sponsors a complete range of investment vehicles including separate accounts, open- and closed-end funds, public securities and entity-level investments. For more information please visit www.lasalle.com, and LinkedIn.
Simone Caschili serves as a Senior Analytics Strategist on LaSalle’s Research and Strategy team, spearheading the analytics initiatives in North America, with keen focus on investment performance and supporting the deployment of investment strategies.
Prior to joining LaSalle in 2014, Simone held an Associate Research position at University College London, applying complex network analysis to international trade and maritime industry studies. He began his career in Sardinia, Italy, as a consultant at the Regional Urban Planning Office.
Simone holds a PhD in Environmental and Urban Planning from University of Cagliari, Italy. He is an active contributor to the NCREIF Information Management Committee and invited speaker at conferences and webinars.
Europe Head of Core and Core-plus Research and Strategy
Senior Research Analyst
Head of Investment Risk Strategy and Management
Senior Research Analyst
Vice President, Strategist
Managing Director, Global Research and Strategy
Senior Strategist, Americas Research and Strategy
Americas Head of Research and Strategy
Global Head of Research and Strategy
Canada Head of Research and Strategy
Strategist, Climate and Carbon Lead
Europe Head of Research and Strategy
Global Strategist (senior advisor)
Senior Strategist, European Research and Strategy
Vice President, Strategist
Europe Head of Debt and Value-add Capital Research and Strategy
China Head of Research and Strategy
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Senior Research Analyst
Roughly 60% of the world’s population lives in countries facing major elections in 2024, markets representing 65% of the institutional investable real estate universe.1 Elections are, of course, the cornerstone of the democratic process, which in turn underpins the appeal of the most transparent, investable markets; that said, elections come with the possibility of policy changes that may impact returns. Today’s geopolitical risks, whether they be this continuing election super-cycle (see LaSalle Macro Quarterly, or LMQ, page 4), or the various ongoing conflicts and trade disruptions, prompt important questions about how to manage investment risks related to these themes.
One of the protagonists in the Oscar-winning film Everything Everywhere All at Once says that being “’right’ is a small box invented by people who are afraid.” LaSalle’s risk management philosophy emphasizes optimizing risk/return trade-offs rather than minimizing risk-taking, while recognizing the limitations of point-estimate predictions and base-case scenarios — that is, attempts at “being right.” Today’s geopolitical events are especially likely to confound any forecaster seeking to be exactly right.
How should an investor manage their assets in the context of “unknowables” about which engaging in guesswork is tempting, but being “right” is elusive? What frameworks do we have to mitigate geopolitical risks? We propose six recommendations to keep in mind for investors taking stock of the many elections, and several conflicts, that may impact markets in 2024.
There are many examples of ex ante predictions of elections’ investment implications having been overstated. For instance, leading up to the 2016 US presidential election, there were widespread predictions that the US economy would be significantly negatively impacted by Donald Trump’s anti-immigration and protectionist stance were he elected.2 In the event, equity markets rebounded strongly after a short-lived hit and the US economy proved resilient to the changes in rhetoric and policy that came with a new president.3
Looking ahead to the US elections later this year, almost certainly a rematch between Biden and Trump, coverage of the candidates’ differences should be accompanied by awareness of their similarities. Both candidates seek to prioritize domestic production, which could lead to greater levels of on- or near-shoring of supply chains.4 Moreover, election prediction odds (see LMQ page 6) suggest divided control of the two houses of Congress and the presidency is likely; divided government has typically been associated with relative stability in domestic policy, which is generally positive for markets.5 Both of these factors — at least in isolation — point to the potential for news cycle hype to overstate long-term market impacts of this particular election.
Financial theory tells us that systematic risks are undiversifiable.6 Systematic factors are those with significant, far-reaching implications that affect the price of all assets. But financial theory also entertains that different assets may have different sensitivities to the same set of factors; an asset’s “beta” signifies the responsiveness of its price to a given factor. This is a useful way to think about an investment’s sensitivity to political and geopolitical events. For example, a property in a metro area whose economy is heavily driven by government spending would likely have a high sensitivity to political changes. Another example could be that a property located in the Baltic States, ex-Soviet countries on the border with Russia, is likely to be especially sensitive to developments concerning relations between Russia and the West. Investors should be mindful of assets’ expected sensitivities to geopolitics, whether assessed empirically or, as is more often the case given a lack of data, estimated through intuition.
Systemic risks go beyond systematic factors; they involve severe shocks that have the potential to re-align entire markets in unpredictable ways. An example of such an extreme event is the remote but non-negligible potential that today’s so-called “proxy wars”7 escalate into a broader active conflict between great powers.8 The challenge of incorporating such eventualities into investment decision making is not only estimating appropriate probabilities that such events may occur, but establishing ideal strategic responses should they do so. Catastrophic shocks are exceedingly rare and have the potential to create winners and losers in asset markets that are difficult or impossible to predict.9 It may be more fruitful for investors to focus on more incremental — and more likely — eventualities that have the added benefit of being easier to model.
Media coverage naturally tends to focus on the national and trans-national arenas, but local political developments can be especially impactful for real estate investments. Such issues can fly under the radar, especially given many of the most relevant ones are only of interest to a specialist audience. For example, changes in policy around topics like the planning process, property taxes and transfer taxes (a.k.a. stamp duty) can have direct, measurable and immediate impacts on property cash flows and thus values. The distraction of the bright shiny lights of global geopolitics should not be allowed to excessively overshadow the critical local issues that impact real estate.
To a certain extent, political risks can be managed through diversification. This is especially true when they involve isolated events that impact one country or subnational division such as a specific city, province or state. But often political events are part of a broader arc with potentially far-reaching consequences. A smattering of small seeds can grow from obscurity into a thicket. Nothing illustrates this better than the rise of populism, nationalism and protectionism around the world, themes set to dominate elections this year and beyond. The very notion of “globalized nationalism” may sound like an oxymoron, but it has become a fact.10 While diversification is an essential portfolio construction concept that helps manage many types of risk, including political risk, care must be taken to recognize when what may appear to be “specific” risks are part of a broader pattern that is difficult to “diversify away.”
Geopolitical and political risks are difficult to incorporate into traditional financial analysis. We find that thinking through scenarios can be helpful in identifying investment themes that may emerge from geopolitical trends. These can point to strategies to avoid — as well as potential new ones to pursue. The “Looking Ahead” section of this note expands on some of the key themes we have been tracking.
As geopolitical events are difficult to control and plan for, one may conclude, similarly to that same protagonist in the Everything Everywhere film, that “nothing matters.” But uncertainty is no excuse for ignoring geopolitical risks. We do stop short of directly feeding geopolitical themes into our formal risk management program, where the focus is on the specific risks that can actively be managed for our clients.11 However, it remains important to observe and understand macro conditions from a holistic perspective. The work done in our regional research teams — particularly that focused on capital markets, the signals that foreshadow potential inflection points and the local political themes that impact real estate — is critical to this effort.
We have argued that political and geopolitical risks are difficult to incorporate into investment processes, but that considering “what ifs” can be useful in uncovering relevant investment themes. Below are three potential real estate implications of the current geopolitical backdrop that we are monitoring today:
Footnotes
1 LaSalle analysis of data from Time and our proprietary investable universe estimates. See LMQ page 5 for more detail.
2 Sources: “What do financial markets think of the 2016 election?” Brookings Institution paper, Wolfers and Zitzewitz, 2016. The article predicted that “a Trump victory would trigger an 8-10% sell-off”. See also “The Consequences of a Trump Shock,” a Project Syndicate article by Simon Johnson, 2016. He predicted Trump’s election would “likely cause the stock market to crash and plunge the world into recession.”
3 On the news of the 2016 election result, Standard & Poor’s 500-stock index initially fell 5% but ended the day up more than 1%, according to Refinitiv. The US avoided a recession until the emergence of the COVID-19 pandemic, according to Oxford Economics.
4 Source: “Biden vs Trump: Key policy implications of either presidency,” Economist Intelligence Unit, 2023.
5 Sources: “What to Expect From Divided Government.” PIMCO article, Cantrill, 2022. According to the article, “the equity markets historically have tended to do well in years of split government.”
6 Source: The Handbook of Risk Management: Implementing a Post-Crisis Corporate Culture. P. Carrel, 2012. “Systematic or market risk refers to the inherent danger present throughout the entire market that cannot be mitigated by diversifying your portfolio. Broad market risks include recessions, periods of economic weakness, wars, rising or stagnating interest rates, fluctuations in currencies or commodity prices, and other ‘big-picture’ issues like climate change. Systematic risk is embedded in the market’s overall performance and cannot be eliminated simply by diversifying assets.”
7 According to the Oxford Dictionary, “proxy wars are the replacement for states and non-state actors seeking to further their own strategic goals yet at the same time avoid engaging in direct, costly, warfare.” Various observers have argued that the Russia-Ukraine and Israel-Gaza conflicts are proxy wars. For example, see “IKs the ware in Ukraine a proxy conflict?” Kings College London report, Hugues (2022).
8 According to a research brief by RAND: “Great power wars — conflicts that involve two or more of the most powerful states in the international system. These have historically been among the most consequential international events.”
9 Source: “What a third world war would mean for investors,” The Economist, 2023. The article highlights the virtual impossibility of positioning an investment portfolio to outperform through prior world wars, even if the investor had correctly predicted that these conflicts would occur.
10 For further discussion of the global spread of nationalism, see “How cynical leaders are whipping up nationalism to win and abuse power”, The Economist, 2023; “Demonizing nationalist parties has not stemmed their rise in Europe,” The Economist, 2022; “The new nationalism,” The Economist, 2016.
11 We do, however, utilize tools that correlate to geopolitical risk. For example, the JLL Global Real Estate Transparency Index (GRETI) supports our monitoring of evolving investment conditions around the globe. Whilst the model does not explicitly consider political risk, the two are inexplicably linked through the inclusion of a number of governance and regulation data points.
12 Source: “A global economic policy uncertainty index from principal component analysis,” Finance Research Letters, Peng-Fei Dai, 2019.
13 Source: “What are the impacts of the Red Sea shipping crisis,” J.P. Morgan, 2024.
14 Source: “The Great Rewiring: How Global Supply Chains Are Reacting to Today’s Geopolitics,” Center for Strategic & International Studies, 2022.
15 Sources: “The business costs of supply chain disruption,” Economist Intelligence Unit, 2021 and “Why Deglobalization Makes US Inflation Worse,” Project Syndicate, Moyo, 2022.
This publication does not constitute an offer to sell, or the solicitation of an offer to buy, any securities or any interests in any investment products advised by, or the advisory services of, LaSalle Investment Management (together with its global investment advisory affiliates, “LaSalle”). This publication has been prepared without regard to the specific investment objectives, financial situation or particular needs of recipients and under no circumstances is this publication on its own intended to be, or serve as, investment advice. The discussions set forth in this publication are intended for informational purposes only, do not constitute investment advice and are subject to correction, completion and amendment without notice. Further, nothing herein constitutes legal or tax advice. Prior to making any investment, an investor should consult with its own investment, accounting, legal and tax advisers to independently evaluate the risks, consequences and suitability of that investment.
LaSalle has taken reasonable care to ensure that the information contained in this publication is accurate and has been obtained from reliable sources. Any opinions, forecasts, projections or other statements that are made in this publication are forward-looking statements. Although LaSalle believes that the expectations reflected in such forward-looking statements are reasonable, they do involve a number of assumptions, risks and uncertainties. Accordingly, LaSalle does not make any express or implied representation or warranty, and no responsibility is accepted with respect to the adequacy, accuracy, completeness or reasonableness of the facts, opinions, estimates, forecasts, or other information set out in this publication or any further information, written or oral notice, or other document at any time supplied in connection with this publication. LaSalle does not undertake and is under no obligation to update or keep current the information or content contained in this publication for future events. LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication and nothing contained herein shall be relied upon as a promise or guarantee regarding any future events or performance.
By accepting receipt of this publication, the recipient agrees not to distribute, offer or sell this publication or copies of it and agrees not to make use of the publication other than for its own general information purposes.
Copyright © LaSalle Investment Management 2024. All rights reserved. No part of this document may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of LaSalle Investment Management.
Greg Miller, CFA, is a Managing Director with LaSalle Global Solutions and a Securities Global Portfolio Manager focusing on the global retail, triple net lease, and industrial sectors.
Greg joined LaSalle Securities in 2009. Over the course of his career with LaSalle, Greg analyzed a wide range of sectors and geographies.
He earned an Master of Business Administration from the University of Maryland and Bachelor of Arts in finance from The University of Oklahoma. Greg holds the Chartered Financial Analyst designation.
Senior Fund Manager
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Managing Director, LaSalle Global Solutions
Senior Vice President, LaSalle Global Solutions
Senior Product Manager, LaSalle Global Solutions
Deputy Global Portfolio Manager
Securities Global Portfolio Manager
Managing Director, Global Research and Strategy
Senior Associate, LaSalle Global Solutions
Head of Asia Pacific, LaSalle Global Solutions
Head of Sustainability, LaSalle Global Solutions
Head of LaSalle Global Solutions
Chief Investment Officer, Global Quantitative Strategy
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Managing Director, Portfolio Management, LaSalle Global Solutions
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Brenden Gannon, CFA, is a Managing Director with LaSalle Global Solutions and a Securities Global Portfolio Manager. His primary responsibility entails the portfolio analysis, construction and management of the office, life science and diversified sectors. Brenden serves on the Portfolio Management Oversight Committee of LaSalle Securities.
Brenden joined the firm in Baltimore during 2011 as a US securities research analyst. In 2017 he moved to The Netherlands, shifting his focus to the United Kingdom and Continental European securities markets. Brenden expanded his research coverage in 2020 to encompass the global office and diversified sectors. Since 2023 he has taken on global portfolio management responsibilities for these sectors.
Brenden earned his bachelor’s degree of Business Administration, majoring in Finance, from Loyola University Maryland and he is a CFA® charterholder.
Senior Fund Manager
Senior Product Manager, LaSalle Global Solutions
Senior Managing Director, Investor Relations
Managing Director, LaSalle Global Solutions
Senior Vice President, LaSalle Global Solutions
Senior Product Manager, LaSalle Global Solutions
Deputy Global Portfolio Manager
Managing Director, Global Research and Strategy
Senior Associate, LaSalle Global Solutions
Head of Asia Pacific, LaSalle Global Solutions
Head of Sustainability, LaSalle Global Solutions
Head of LaSalle Global Solutions
Chief Investment Officer, Global Quantitative Strategy
Corporate Financial Director, LaSalle Global Solutions
Director of Operations, LaSalle Global Solutions
Securities Global Portfolio Manager
Securities Global Portfolio Manager
Managing Director, Portfolio Management, LaSalle Global Solutions
Senior Fund Manager, LaSalle Global Solutions
Chief Investment Officer, LaSalle Global Solutions
Vice President, LaSalle Global Solutions
Chief Investment Officer, Structured Investments
Portfolio Associate, LaSalle Global Solutions
Purpose-built student accommodation (PBSA) in Europe ranks as one of our top-conviction sectors for investment in the coming years. No longer deserving of the “niche” label in the United Kingdom, it is already more institutional than any other type of living sectors property in the country and is rapidly maturing in Continental Europe as well. The rise of student accommodation on investors’ buy lists is for good reason. This ISA Briefing will set out why that is so and discuss how the sector stands out in Europe compared with student housing in the rest of the world.
After a brief, pandemic-induced interruption, in-person learning in Europe is back with more students enrolled than at any point in history. Higher education participation rates in the European Union have steadily risen across recent years, reaching an all-time high of 36% for 20-24 year-olds1 in 2021/22, with the same proportion recorded for the UK in 2023.2 A total of 18.5 million students were studying in the EU as of the 2021/22 academic year, with a further 2.9 million in the UK, having grown by 8% and 20%, respectively, over the previous five years.3
Demand for PBSA varies by profile of student. While domestic students are still crucial as a source of demand, particularly in markets where few students commute from home to study, international students are far more likely to reside in PBSA than domestic students (60% more likely to do so in the UK, as an example4). As shown in the chart below, international student mobility has been on a clear growth trend in recent years, with 2021/22 seeing a record number of foreign students in the EU and UK. European students studying outside their home countries elsewhere in Europe is a longstanding feature of the market, facilitated by freedom of movement within the EU, well-established student exchange programs, the rise of English-language courses and Europe’s dense geography.
A key driver of growth has been students from outside Europe. Europe has an outsized number of highly ranked universities relative to its size,5 a prevalence of English-language courses (which are increasingly no longer limited to the UK and Ireland) at a comparatively cheaper cost of tuition and living compared to North America.6 These attributes taken together can explain the sharp rise in non-EU students studying in the bloc, whose numbers have grown 31% since 2016.7 In the UK, the growth has been even faster, at 59% over the same period.8
That said, there are demand-side risks to be mindful of. The demographic outlook for Europe is mixed; forecasts for some countries such as the UK, Spain and Sweden show a demographic ‘bump,’ with the number of university-aged people growing ahead of national population levels. However, in other nations, numbers are forecast to be broadly flat (France) or negative (Germany and the Netherlands). This suggests uneven growth in demand for higher education going forward.9
This mixed demographic outlook will mean greater reliance on international student demand, but there are tentative signs that may also be facing some headwinds. A recent policy change in the UK has removed the right to visas for international students’ family members.10 For now, this change represents tinkering around the edges and is unlikely to have a major impact on demand. It does, however, indicate a directional change in policy aimed at restricting overseas student numbers, presumably in a bid to bring down immigration figures. Such policy changes may incrementally dissuade would-be foreign students from studying in the UK, though demand may shift elsewhere, potentially to the benefit of other European countries. Despite such risk factors, the overriding view is one of positivity for higher education demand in Europe and therefore PBSA.
European student housing should be viewed within the wider context of the region’s housing market. Europe is currently facing a long-term, persistent housing shortage. Housing scarcity is not limited to major gateway cities, but is also the reality within mid-sized cities and even smaller university towns. Since 2010, Europe has built homes at a rate only 40% below pre-GFC levels,11 contributing to rising rents, increasing house-price-to-income ratios and worsening access to suitable housing. Demand for rental housing in cities remains robust, supported by long-term trends of immigration, urbanization and declining home ownership rates; as such, the imbalance between supply and demand is now fully entrenched.12
Students are, like all participants in the housing market, at the mercy of housing supply and demand. Shortages have fed through to the student market, with students finding accommodation increasingly unaffordable. Over the past two years, this has led to sharp growth in PBSA rents, with several UK cities reporting year-over-year growth in the high teens for 2023, and other markets experiencing growth well ahead of previous levels.13 The lack of supply is also leading to students being housed increasingly in unsuitable conditions; stories from the UK of students living in hotels or in completely different cities over an hour travel from campus are a clear symptom of insufficient student housing stock.
New investment in the sector should contribute to resolving the imbalance, but it will be a major challenge to fully close the wide gap between supply and demand. While there are nuances between markets, rising construction and development financing costs are making the delivery of new schemes less economical, evidenced by a sharp decline in the number of residential permits issued in several countries over the past year.14 Furthermore, restrictive planning laws and burdensome safety regulations are lengthening the time it takes for projects to be realized.
These factors inform our positive outlook on the rental housing market in Europe, which carries over into PBSA. The imbalance between supply and demand will likely persist and even worsen, driving very low vacancy and supporting strong rental growth for owners of residential and student housing real estate, or those who can deliver new schemes in those sectors.
Regulations in Europe can act as a handbrake for residential rents, as we set out in our ISA Briefing, Controlling Interest: Keeping tabs on residential regulations. In nearly all continental European rental markets, rents cannot be increased annually at the landlord’s discretion, with rental levels for in-place tenants typically linked to a backward-looking index. During the recent ‘great reflation’ period, this has meant income from many rented residential properties did not keep pace with inflation. But student housing stands out from more traditional rental housing investments as having a cash flow profile far less impacted by the growth-muting tendencies of regulation.
In part, this is because PBSA often faces less regulation or stands outside of regulatory systems altogether. Students’ nature as transient, temporary residents means that their needs are rarely prioritized by local politicians, particularly compared to those of permanent residents. They typically only stay in a city for a few years, do not have dependents and their rental obligations often come with implicit or explicit parental guarantees. This means that PBSA is targeted for rent controls far less often than the wider rental market. Moreover, zoning and classifications for student accommodation are often distinct from standard rental housing, exempting it from regulations that limit absolute rent levels or restrict annual rental increases. Moreover, regulatory requirements on minimum unit sizes or lease lengths usually do not apply.
Even where regulated, PBSA benefits from its relatively short duration of tenancy. Given the vast majority of students study for 3-4 years, there is far greater annual turnover of tenants compared with the wider residential market. Faster turnover allows for landlords to more effectively mark rents to market levels. This means PBSA rents may better keep pace with inflation, even in jurisdictions where regulations do apply to the sector.
The increased maturity of student accommodation is another factor in its favor. The UK is clearly ahead of the rest of Europe in this regard, with a deep, liquid investment market, publicly traded REITs and a large number of established specialist operators. The sector’s wide acceptance from both tenants and investors means that we would consider it a ‘Core’ sector on our ‘going mainstream’ framework, as detailed in our ISA Portfolio View. Elsewhere in Europe the sector is considered more niche, but its growing acceptance means we would consider it ‘Near-Core’ on the same framework. Investment figures support the observation of a varying level of maturity for the sector—UK PBSA has made up 66% of investment volumes annual on average since 2014, despite the EU having 6.4 times the number of students.15
Over time, we expect this to change; the opportunity for investors to take advantage of the structural trends outlined above is likely to drive increased investment in the sector. Countries like as Spain or Italy have PBSA provision rates16 of below 10%, compared to more than 30% in some major UK markets,17 suggesting there is significant scope for delivery of new supply. Cities such as Milan, Madrid and Barcelona all have student populations of over 100,000 and multiple well-ranked institutions, giving them diverse demand bases and making them likely to be key growth markets for the sector in the coming years.
As niche sectors mature, greater liquidity and investor acceptance tends to lead to any yield premium they offer versus traditional sectors narrowing, as investors require less compensation for liquidity and transparency risks; such a pattern has already been observed in UK PBSA. This potential narrowing of yields in European markets is another factor behind our conviction that the sector is likely to offer attractive returns.
Student accommodation in much of Asia Pacific is still in a nascent stage, with relatively limited PBSA stock, few specialized operators and comparatively little institutional investment. The major exception in the region is Australia, which has characteristics similar to those of the sector in Europe and the UK, but is a number of years behind in its evolution. This suggests a similar path to maturity may lie ahead. Like Europe, Australia benefits from English-language courses at comparatively lower tuition costs than the US, while also offering post-study work visas. As a result, it has an even higher proportion of international students than most major European countries.18 Still, the Australian PBSA sector remains in its infancy as an investable property type. Stock numbers are low even compared to the most immature countries in Europe, with a student-to-bed ratios of 16-to-119 and significantly higher than the UK where it is around 3-to-1.
Traditionally, international students in Australia tap into private rental housing for accommodation. Both the private rental market and the PBSA sector in Australia have experienced tight occupier market fundamentals and experienced double-digit rental growth over the past two years.20 The solid performance has been primarily driven by strong migrant inflows, including international students, as well as high interest rates that encourage Australians to rent rather than buy, and relatively limited existing stock and new supply of all types of housing.
The United States, by contrast, has a more established student housing sector, but our view of the property type there is less favorable as compared to other regions. For a start, the demographics are less favorable given the population of 18-to-24 year-olds in the US is forecast to decline through 203321 and enrollment rates at 4-year institutions have remained roughly flat since 2010.22
An additional point of difference between US and European universities is their locations. Many top-tier US universities are in small cities in which a single school dominates the population and economy. Student housing properties in these markets are dependent on a single source of demand that controls enrollment growth and housing policy. Additionally, barriers to new supply are generally lower compared to major European cities, which allows for more new development to come in and disrupt the market. Taken together, these factors mean rent trends in these markets can be volatile. While there are similar university-centric towns in Europe, our investment focus is on the larger markets, where housing markets are tightest and there is a diverse demand base from multiple universities.
Footnotes
1 Source: Eurostat
2 Source: Higher Education Statistics Agency (UK)
3 Source: Eurostat, Higher Education Statistics Agency (UK)
4 Source: Savills
5 The number of European universities in the top 2000 spots Center for World University Rankings (CWUR) league tables per capita is the highest of any world region, according to data from CWUR, Oxford Economics, and analysis by LaSalle.
6 Source: Educationdata.org
7 Source: Eurostat
8 Source: HESA
9 Assuming no change in the propensity of people in that age cohort to attend university.
10 UK Government introduced policy on January 1st 2024
11 Source: European Central Bank
12 For deeper analysis of European housing markets and the underlying supply imbalance see LaSalle’s ISA Outlook 2024.
13 Source: JLL
14 LaSalle analysis of data taken from the national statistics agencies of major European countries (Germany, UK, France, Spain, Sweden, Denmark, Finland, Italy, Portugal, Netherlands, Ireland)
15 Source: MSCI Real Capital Analytics
16 Metric defined as number of purpose-built student beds as a share of total enrolled population of students in higher education.
17 Source: JLL
18 Source: UNESCO
19 Source: CBRE
20 Source: SQM Research (for private rental market), as of November 2023; CBRE (for PBSA), as of August 2023
21 Source: Oxford Economics
22 Source: National Center for Education Statistics (US)
Important Notice and Disclaimer
This publication does not constitute an offer to sell, or the solicitation of an offer to buy, any securities or any interests in any investment products advised by, or the advisory services of, LaSalle Investment Management (together with its global investment advisory affiliates, “LaSalle”). This publication has been prepared without regard to the specific investment objectives, financial situation or particular needs of recipients and under no circumstances is this publication on its own intended to be, or serve as, investment advice. The discussions set forth in this publication are intended for informational purposes only, do not constitute investment advice and are subject to correction, completion and amendment without notice. Further, nothing herein constitutes legal or tax advice. Prior to making any investment, an investor should consult with its own investment, accounting, legal and tax advisers to independently evaluate the risks, consequences and suitability of that investment.
LaSalle has taken reasonable care to ensure that the information contained in this publication is accurate and has been obtained from reliable sources. Any opinions, forecasts, projections or other statements that are made in this publication are forward-looking statements. Although LaSalle believes that the expectations reflected in such forward-looking statements are reasonable, they do involve a number of assumptions, risks and uncertainties. Accordingly, LaSalle does not make any express or implied representation or warranty, and no responsibility is accepted with respect to the adequacy, accuracy, completeness or reasonableness of the facts, opinions, estimates, forecasts, or other information set out in this publication or any further information, written or oral notice, or other document at any time supplied in connection with this publication. LaSalle does not undertake and is under no obligation to update or keep current the information or content contained in this publication for future events. LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication and nothing contained herein shall be relied upon as a promise or guarantee regarding any future events or performance.
By accepting receipt of this publication, the recipient agrees not to distribute, offer or sell this publication or copies of it and agrees not to make use of the publication other than for its own general information purposes.
Copyright © LaSalle Investment Management 2024. All rights reserved. No part of this document may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of LaSalle Investment Management.
LaSalle’s Global CEO Mark Gabbay sat down with The Schwab Networks’ Oliver Renick to discuss the state of commercial real estate on the Friday, March 1 edition of Market on Close. He talks about regional banking and commercial real estate and goes over what potential Fed cuts mean for commercial real estate.
CHICAGO, LONDON, SINGAPORE (26 February 2024) – LaSalle Investment Management (“LaSalle”), the global real estate investment manager, has strengthened its global investor and client relations capabilities with the appointment of Isabelle Brennan, Senior Managing Director, Credit and Global Solutions Product Specialist. The newly created role underscores LaSalle’s commitment to strategic growth as it continues to focus on diversifying its investment products, and strengthening its client offering and coverage, to drive long-term growth.
Isabelle will rejoin LaSalle on 1 May 2024 from CBRE Investment Management, where she served as a Senior Director in the Client Solutions team. During her tenure she held a variety of roles, including supporting clients’ access to real estate credit investments across EMEA and the US, global Indirect solutions, and managing relationships with U.K. and Irish clients and consultants for their investments across the global suite of real estate and infrastructure solutions. Prior to this, she developed her expertise across real assets credit and client solutions as a Director at M&G Investments, overseeing global investor relationships on behalf of the Real Estate Finance platform.
Before joining M&G Investments, Isabelle was at LaSalle and held responsibilities across capital raising and relationship management for clients in the UK, Ireland and the Netherlands, in addition to being a Product Specialist for EMEA credit strategies.
In her new role, Isabelle will report into Samer Honein, Global Head of Investor Relations, partnering with the Investor Relations team to promote Credit and Global Solutions to existing and prospective clients around the world. She will also join the Investor Relations Management Board and will be based in London.
Samer Honein, Global Head of Investor Relations at LaSalle Investment Management, said: “Isabelle’s return to LaSalle will provide a significant boost to the Investor Relations team. She brings a wealth of credit and client solutions experience and is well-placed to provide deep-rooted insights to facilitate client access to real estate credit and indirect investments. We look forward to leveraging Isabelle’s expertise as we continue to build our client base and strengthen our offering.”
About LaSalle Investment Management | Investing Today. For Tomorrow.
LaSalle Investment Management is one of the world’s leading real estate investment managers. On a global basis, LaSalle manages approximately $89 billion of assets in private and public real estate equity and debt investments as of Q3 2023. LaSalle’s diverse client base includes public and private pension funds, insurance companies, governments, corporations, endowments and private individuals from across the globe. LaSalle sponsors a complete range of investment vehicles, including separate accounts, open- and closed-end funds, public securities and entity-level investments.
For more information, please visit www.lasalle.com, and LinkedIn.
NOTE: This information discussed above is based on the market analysis and expectations of LaSalle and should not be relied upon by the reader as research or investment advice regarding LaSalle funds or any issuer or security in particular. The information presented herein is for illustrative and educational purposes and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy in any jurisdiction where prohibited by law or where contrary to local law or regulation. Any such offer to invest, if made, will only be made to certain qualified investors by means of a private placement memorandum or applicable offering document and in accordance with applicable laws and regulations. Past performance is not indicative of future results, nor should any statements herein be construed as a prediction or guarantee of future results.
This article first appeared in Winter 2024 edition of PREA Quarterly
LaSalle’s Global Head of Research and Strategy, Brian Klinksiek, discusses why it’s important to go beyond heuristics to find relative value in global real estate.
Which global real estate markets are ahead and which are behind in the process of repricing?
This question, along with its many variations, has been by some margin the most frequent one asked of me when presenting LaSalle’s recently released ISA Outlook 2024. Investors understandably want to know where they can find value amid real estate capital markets that continue to adjust to higher interest rates. They want to focus their efforts on geographies and sectors for which the bulk of the price adjustment is in the rearview mirror instead of still lying ahead.
Attempts to answer this question with numbers often begin with simple comparisons of peak-to-current value declines. The implicit logic is that larger-measured todate declines for a market indicate that it is farther along in the repricing process or, simply, that it is cheaper and thus attractive. But these sorts of analyses are plagued by a range of measurement and interpretation issues that complicate comparisons. At best, they can lead to contradictory conclusions; at worst, they may contribute to missteps in investment strategy. Some of the key challenges are explored below.
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In the past decade, the urbanization narrative in the United States has shifted from the “rebirth of cities” to the “rise of the suburbs.”1 What are the drivers of this shift, and how does it impact real estate? In this ISA Briefing, we tackle these questions and share our outlook for how future dynamics could impact migration and urbanization trends.
Demographics is destiny
Demographic cohort effects are a key driver of the current shift. The generic, or median, location preferences of a cohort change as that cohort ages; as the relative growth of different age groups ebbs and flows it impacts the national trend towards urban and suburban location preference.
In the US, there are two outsized cohorts, the Baby Boomers and the Millennials, which as they age have a disproportionate impact on national averages (see chart below). In the early 2010s, the bulk of the Millennial cohort was in their 20s, and as young adults they had a preference for living in urban locations. In the present decade the same cohort is aging into their 30s and 40s, entering a life stage that tends to prefer living in suburban locations. Young families move to the suburbs to seek more space and because the local school funding system in the US tends to mean suburban schools are better funded. This shift began in the latter half of the 2010s as the older members of the cohort reached their mid-30s but was accelerated by the Covid-19 pandemic in 2020.
Sunbelt supremacy
Regional shifts also accelerated in the late 2010s as migration to the southern Sunbelt markets increased,2 driven in part by households moving in search of more affordable living and warmer weather compared to northern cities. While in-migration to high-cost metros slowed throughout the 2010s, and eventually turned negative, inflows to Sunbelt metros accelerated through 2016 before slowing because of lower international immigration. This also contributed to a national shift toward suburban living because Sunbelt metros such as Houston, Dallas, Atlanta and Phoenix lack the dominant central city with a strong central business district that is characteristic of older cities like New York, Boston, Chicago and Washington, DC.
As these Sunbelt metros grew faster, it led to a shift in the mix of apartments nationally towards suburban locations. This is shown in the NCREIF Property Index (NPI) data in the chart below. It shows that the NPI’s share of apartments in the south has increased since 2018; the same time when the share of suburban apartments started reversing the gains achieved in urban apartment share in the 2010s. (This analysis is done based on unit count, so is not driven by trends in relative values.)
Post-pandemic realities
The pandemic not only accelerated the urban and regional shifts already underway, but it set into motion a new set of forces that influence where households choose to live. The enduring popularity of remote work requires more space for a home office, which is cheaper in the suburbs, and commuting only a couple days per week makes living further from city centers more palatable. Owners of suburban apartments and shopping centers have benefitted as a result.
Conversely, having fewer downtown workers has hurt office values and urban retail, and the reduction in activity is a contributor to the increase in crime that has occurred in urban areas. Although violent crimes have come down after a pandemic-era spike, theft and property crimes increased in 2022 according to the FBI.3 Both types of crime remain significantly below the highs of the early 1990s, but public awareness seems elevated relative to the hard data. The crime issue extends into city neighborhoods as well, which can motivate some residents to move out of the city.
Evidence of an urban rebound
Despite the challenges, residents returned to urban areas as the pandemic receded. Chicago and San Francisco saw the number of occupied units in urban submarkets4 decline 4.0% and 7.4% from peak to trough during the early days of the pandemic.5 But they have since recovered; as of September 2023, Chicago had 6.6% more occupied units in urban submarkets compared to the prior peak and even hard-hit San Francisco had 1.9% more. The decline in urban renters was smaller in Sunbelt markets, with just a 1.2% and 1.4% decline in Dallas and Atlanta, respectively, and the rebound has been greater with 9.9% and 8.2% more occupied urban units compared to the previous peak.
At the same time, the relative affordability of the Sunbelt has declined. Home values have increased 47.8% in Dallas, 56.3% in Atlanta and 57.5% in Phoenix since 2019 as compared to 26.4% in New York, 36.0% in Boston and 21.3% in San Francisco.6 While major Sunbelt markets remain less expensive compared to Gateway cities, the narrowing of the relative affordability gap should, all else equal, reduce their draw.
Clarifying “urbanization” in DTU+E
As is typically the case, the “rise of the suburbs” narrative overstates the situation, but there are real dynamics behind the shift from urban growth to suburban growth that real estate investors need to pay attention to and build strategies around. At LaSalle, we have long sought to capture secular changes shaping real estate around the world through our Demographics, Technology, Urbanization and Environmental factors (DTU+E) framework. However, the term “urbanization” in this context is often misinterpreted as a one-direction shift towards urban places, when it is better understood as “urban and regional change,” which encompasses broader population shifts within and across metropolitan areas.
Indeed, it was with this lens that LaSalle Research and Strategy forecasted the suburban shift in the mid-2010s and redirected our apartment investment strategy from urban submarkets (what we labeled “Millennial Magnets” at the time) to suburban locations. In 2016, we recommended targeting apartments in the best school districts, which are mostly suburban. We continued to reinforce that focus as our internal target market recommendations shifted towards the suburbs and our risk assessments flagged the challenges facing urban markets. It is not sensible to assume “urbanization” is a one-way street, or that the direction of flow doesn’t change.
Globalizing the urban/suburban debate
To this point, our comments have applied to the US. Elsewhere in the globe, comparisons of suburban versus urban patterns can get tricky for a range of reasons. Even the terminology is challenging. In Australia, all neighborhoods other than CBDs are called “suburbs,” even if they are adjacent to the CBD. In Hong Kong, one might consider transit-centric high-rise New Towns to be “suburbs,” but they do not at all resemble American ones. At some point, the right question is simply: What locations are attracting people?
Looking at it this way requires a deeper dive into demographic, social and urban planning considerations that differ significantly from the US situation. For example, in Japan and Germany, declining rural populations is paired with migration into key cities. In Canada, very strong international in-migration combined with “greenbelts” that limit urban sprawl have led to an intensification of urban density. In the UK, which also has greenbelts, planning restrictions have had the unintended consequence of pushing demand for suburban living into rail-connected satellite cities that are discontinuous to the main built-up area of the metro. To dig into all these and other variations is beyond the scope of this ISA Briefing. However, applying the same lenses of demographic cohort effects, relative affordability and urban structure is a globally relevant approach.
LOOKING AHEAD
1 This is the US definition of a suburb. The concept of what is urban is both hard to define and varies in different markets around the world. In the US urban is generally understood as a dense area at the center of a metropolitan area. Suburbs are defined in contrast to that as being less dense areas that are still highly economically linked to the overall metropolitan area.
2 Commentary in this paragraph based on LaSalle analysis of Census Bureau data.
3 Federal Bureau of Investigation Crime Data Explorer, https://cde.ucr.cjis.gov/LATEST/webapp/#/pages/explorer/crime/crime-trend
4 Urban submarkets as defined by RealPage as the most densely populated submarket(s) in a given market based on a metro’s Central Business District, the highest concentration of the market’s tallest multifamily assets, and/or higher rent per square foot than the market average. This includes the following RealPage submarkets: The Loop, Streeterville/River North, and Lincoln Park/Lakeview in Chicago; Downtown and SoMa in San Francisco; Buckhead, Downtown, Midtown, and Northeast in Atlanta; and Oak Lawn/Park Cities and Intown in Dallas.
5 Data from RealPage as of September 2023
6 Zillow, as of September 2023
7 “Doom loop” refers to a situation in which cities get stuck in a self-reinforcing loop of lower tax revenues requiring cuts to city services that reduce the quality of life which cause residents to leave and further reductions in tax revenues and the loop repeats ad infinitum.
Important Notice and Disclaimer
This publication does not constitute an offer to sell, or the solicitation of an offer to buy, any securities or any interests in any investment products advised by, or the advisory services of, LaSalle Investment Management (together with its global investment advisory affiliates, “LaSalle”). This publication has been prepared without regard to the specific investment objectives, financial situation or particular needs of recipients and under no circumstances is this publication on its own intended to be, or serve as, investment advice. The discussions set forth in this publication are intended for informational purposes only, do not constitute investment advice and are subject to correction, completion and amendment without notice. Further, nothing herein constitutes legal or tax advice. Prior to making any investment, an investor should consult with its own investment, accounting, legal and tax advisers to independently evaluate the risks, consequences and suitability of that investment.
LaSalle has taken reasonable care to ensure that the information contained in this publication is accurate and has been obtained from reliable sources. Any opinions, forecasts, projections or other statements that are made in this publication are forward-looking statements. Although LaSalle believes that the expectations reflected in such forward-looking statements are reasonable, they do involve a number of assumptions, risks and uncertainties. Accordingly, LaSalle does not make any express or implied representation or warranty, and no responsibility is accepted with respect to the adequacy, accuracy, completeness or reasonableness of the facts, opinions, estimates, forecasts, or other information set out in this publication or any further information, written or oral notice, or other document at any time supplied in connection with this publication. LaSalle does not undertake and is under no obligation to update or keep current the information or content contained in this publication for future events. LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication and nothing contained herein shall be relied upon as a promise or guarantee regarding any future events or performance.
By accepting receipt of this publication, the recipient agrees not to distribute, offer or sell this publication or copies of it and agrees not to make use of the publication other than for its own general information purposes.
Copyright © LaSalle Investment Management 2024. All rights reserved. No part of this document may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of LaSalle Investment Management.
Sach Diwan is LaSalle’s Global Head of LaSalle Technology and is responsible for implementing new data and digital capabilities, business application support and driving the overall technology strategy. He joined LaSalle in March of 2022.
Previously, Sach was a Senior Vice President at Northern Trust Asset Servicing, where he held product leadership roles in investment data science and investment operations. He led numerous global implementations for investment operations outsourcing and outsourced trading for leading investment management clients of Northern Trust. Sach also worked as a Senior Project Manager at Wespath Investment Management, a leading faith-based institutional investor.
Sach holds a Master of Science in Computer Science from the University of Chicago and a Master of Health Services Administration from George Washington University.
Global Head of Marketing and Communications
Global Chief Financial Officer
Head of Legal and Compliance, Europe
Portfolio Controller
Americas General Counsel and Chief Legal Officer, Securities
Chief Financial Officer
Head of the Americas
Co-Head of Luxembourg and Head of Legal, France and Luxembourg
Managing Director, Investor Accounting and Finance
Head of LaSalle Global Solutions
Global Chief Operating Officer
Chief Operating Officer, Europe
Head of Corporate Finance, Asia Pacific
Head of Debt Capital Markets, Americas
Corporate Financial Director, LaSalle Global Solutions
Senior Portfolio Accountant
Head of Americas Investor and Consultant Relations
Chief Operating and Financial Officer, Americas
European Head of Compliance
Global Head of Investor Accounting and Finance
Senior Finance Director, Sustainability
Head of Finance, European Debt and Value-add Strategies
Head of Europe
Chief Operating Officer, Asia Pacific
Global Head of Tax
General Counsel
Global Head of Human Resources
Chief Financial Officer, Europe
Global Funds Counsel
Global Head of Performance
President and Chief Executive Officer, JLL Income Property Trust
Co-Head of Luxembourg and Head of Investor Accounting and Finance, Luxembourg
Director of Finance, Continental Europe
CHICAGO, LONDON, SINGAPORE (January 15, 2024) – LaSalle Investment Management (“LaSalle”), the global real estate investment manager, has recorded strong sustainability performance results in two industry-recognized global Environmental, Social and Governance (ESG) benchmarks for asset managers.
In the 2023 Global Real Estate Sustainability Benchmark (“GRESB”), 20 of the firm’s funds and separate accounts, domiciled across Europe, North America, and the Asia-Pacific region, have been recognized for their ESG standards. Across the 20 submissions, seven achieved a 5-star rating, up from four in 2022, nine achieved a 4-star rating, and four achieved a 3-star rating. LaSalle China Logistics Venture was ranked 1st place within its sector peer group, and the firm’s average score increased by nearly three points from 82.22 in 2022 to 85.15 in 2023.
LaSalle commingled products recognised within the 2023 GRESB include:
In addition, LaSalle has received updated scores for the 2023 ‘Principles for Responsible Investment’ (“PRI”) Assessment Report, securing four stars in the categories pertaining to Policy Governance and Strategy, Direct – Listed Equity – Active Fundamental, and Confidence Building Measures, as well as achieving three stars for Direct Real Estate.
LaSalle PRI Assessment Report results include:
Julie Manning, Global Head of Climate and Carbon at LaSalle, commented: “LaSalle is committed to improving and delivering upon our clients’ ESG goals in ways that also drive investment performance, and these impressive results reflect this effort. Sustainability factors are key to our corporate strategy in addition to being a focus throughout our investment process. In the year ahead, we will continue to embed sustainability further into each function across our operations and maintain our position as a leader in the industry.”
About GRESB
GRESB is an industry-driven organization transforming the way capital markets assess the environmental, social and governance (ESG) performance of real asset investments. More than 900 property companies and funds, jointly representing more than USD 3.6 trillion in assets under management, participated in the 2018 GRESB Real Estate Assessment. The Infrastructure Assessment covered 75 funds and 280 assets, and 25 portfolios completed the Debt Assessment. GRESB data and analytical tools are used by more than 75 institutional and retail investors, including pension funds and insurance companies, collectively representing over USD 18 trillion in institutional capital, to engage with investment managers to enhance and protect shareholder value. Greater transparency on ESG issues has become the norm, with GRESB widely recognized as the global ESG benchmark for real assets. For more information about GRESB and its ESG benchmarking and reporting for real estate, please visit https://gresb.com/gresb-real-estate-assessment/.
About the PRI
The PRI is the world’s leading proponent of responsible investment. It works to understand the investment implications of environmental, social and governance (ESG) factors and to support its international network of investor signatories in incorporating these factors into their investment and ownership decisions. The PRI acts in the long-term interests of its signatories, of the financial markets and economies in which they operate and ultimately of the environment and society as a whole. The PRI encourages investors to use responsible investment to enhance returns and better manage risks, but does not operate for its own profit; it engages with global policymakers but is not associated with any government; it is supported by, but not part of, the United Nations. For more information about UN PRI and its ESG benchmarking and reporting for real estate, please visit https://www.unpri.org/
About LaSalle Investment Management | Investing Today. For Tomorrow.
LaSalle Investment Management is one of the world’s leading real estate investment managers. On a global basis, LaSalle manages approximately $89 billion of assets in private and public real estate equity and debt investments as of Q3 2023. LaSalle’s diverse client base includes public and private pension funds, insurance companies, governments, corporations, endowments and private individuals from across the globe. LaSalle sponsors a complete range of investment vehicles, including separate accounts, open- and closed-end funds, public securities and entity-level investments.
For more information, please visit www.lasalle.com, and LinkedIn.
NOTE: This information discussed above is based on the market analysis and expectations of LaSalle and should not be relied upon by the reader as research or investment advice regarding LaSalle funds or any issuer or security in particular. The information presented herein is for illustrative and educational purposes and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy in any jurisdiction where prohibited by law or where contrary to local law or regulation. Any such offer to invest, if made, will only be made to certain qualified investors by means of a private placement memorandum or applicable offering document and in accordance with applicable laws and regulations. Past performance is not indicative of future results, nor should any statements herein be construed as a prediction or guarantee of future results.
CHICAGO (December 11, 2023) – LaSalle Investment Management (LaSalle) is pleased to announce it has been named a Best Place to Work in Money Management for 2023 by Pensions & Investments (P&I). This marks the eighth consecutive year LaSalle has received this prestigious recognition.
Presented by Pensions & Investments, the 12th annual survey and recognition program is dedicated to identifying and recognizing the best employers in the money management industry.
Kristy Heuberger, LaSalle Americas Co-Head, said: “Being honored as a ‘Best Place to Work’ for an eighth year is a testament to the foundational elements of LaSalle’s success: our people and our culture. We’re proud that the culture every employee at LaSalle works hard to foster continues to be recognized.”
Brad Gries, LaSalle Americas Co-Head, added: “Our culture is reflected in everything we do at LaSalle, whether it’s providing exceptional client service,driving investment performance, developing talent, growing careers, or simply making LaSalle a place that people enjoy coming to work. We thank our employees for continuing to make our firm a Best Place to Work in Money Management.”
P&I Chief Operating Officer Nikki Pirrello said: “A strong workplace culture that supports talent, advocates progress and drives innovation is paramount to driving the best outcomes and these asset managers demonstrate that. Congratulations to the 2023 honorees for their commitment to employee well-being, attractive incentive structures and talent development that demonstrate how investing in your employees can elevate our industry to greater heights.”
P&I Executive Editor Julie Tatge said: “As their employees attest, the companies named to this year’s Best Places to Work list demonstrate a commitment to building and maintaining a strong workplace culture. Even as firms grappled with volatile markets and ongoing stresses from the pandemic, their employees said they felt strong support from their managers, enabling them to do their best work.’’
Pensions & Investments partnered with Best Companies Group, a research firm specializing in identifying great places to work, to conduct a two-part survey process of employers and their employees. The first part consisted of evaluating each nominated company’s workplace policies, practices, philosophy, systems and demographics. This part of the process was worth approximately 25% of the total evaluation. The second part consisted of an employee survey to measure the employee experience. This part of the process was worth approximately 75% of the total evaluation. The combined scores determined the top companies. For a complete list of the 2023 Pensions & Investments Best Places to Work in Money Management winners and write-ups, go to www.pionline.com/BPTW2023.
About LaSalle Investment Management | Investing Today. For Tomorrow.
LaSalle Investment Management is one of the world’s leading real estate investment managers. On a global basis, LaSalle manages over $89 billion of assets in private and public real estate property and debt investments as of Q3 2023. LaSalle’s diverse client base includes public and private pension funds, insurance companies, governments, corporations, endowments and private individuals from across the globe. LaSalle sponsors a complete range of investment vehicles including separate accounts, open- and closed-end funds, public securities and entity-level investments. For more information please visit http://www.lasalle.com, and LinkedIn.
On November 28, LaSalle’s Global Head of Research and Strategy, Brian Klinksiek, gave a keynote address at Canadian Real Estate Forum’s annual Global Property Market conference in Toronto where he discussed our global real estate investment themes for 2024:
These themes are discussed in detail in ISA Outlook 2024, our annual publication designed to help our clients and partners navigate the year ahead. It brings together smart perspectives and investment ideas from our teams around the world, based on what we see across our more than 1,500 assets that span geographies, property types and risk profiles.
CHICAGO (Dec. 5, 2023) – The US and Canadian real estate markets continue to see subdued transaction volume and a wait-and-see approach from investors amid their respective central banks’ campaigns to snuff out inflation through interest rate hikes. LaSalle’s Insights, Strategy and Analysis (ISA) Outlook 2024 makes the case that secular trends, not cyclical trends, may hold answers as to where winning property types will land in 2024, with the early half of the year looking similar to 2023 and the potential for a rebound later in the year.
The report will be released in regional chapters throughout November and December, and can be viewed at: www.lasalle.com/Outlook2024.
The ISA Outlook 2024 looks at five key themes from a global and regional level:
On a broad basis in the Americas, the report observes a potential recovery later in 2024, a continued focus on interest rates and their impact and the potential for supply weighing on real estate fundamentals.
Brian Klinksiek, Global Head of Research and Strategy at LaSalle, said: “Significant unknowns remain in the global real estate market as we head into 2024, including interest rates, geopolitical tensions, and whether major economies may tip into recession. While it’s very difficult to time markets, data on previous down cycles suggest that it’s often during unsettled periods that savvy investors can find strong value in real estate, making this a potentially strong vintage for investment.”
Select ISA Outlook 2024 findings for North America include:
Rich Kleinman, Co-CIO and Head of Research & Strategy for the Americas at LaSalle, said, “Looking at real estate investment solely through the lens of interest rates means you’re missing the bigger picture as we believe sectors and markets will adjust to rates at varying speeds. Investors with dry powder, flexibility and who can identify price gaps are likely to come out as winners in this transitional market.”
Chris Langstaff, Head of Research & Strategy for Canada at LaSalle, said, “Looking to 2024, we expect that in the midst of a continued softening of the Canadian economy in the near term, the strong migration trends will support long-term growth of the Canadian economy. This will particularly benefit the apartment and industrial sectors when economic growth resumes.”
About LaSalle Investment Management | Investing Today. For Tomorrow.
LaSalle Investment Management is one of the world’s leading real estate investment managers. On a global basis, LaSalle manages approximately $89 billion of assets in private and public real estate property and debt investments as of Q3 2023. LaSalle’s diverse client base includes public and private pension funds, insurance companies, governments, corporations, endowments and private individuals from across the globe. The firm sponsors a complete range of investment vehicles including separate accounts, open- and closed-end funds, public securities and entity-level investments. For more information, please visit www.lasalle.com, and LinkedIn.
Forward looking statement
The information discussed above is based on the market analysis and expectations of LaSalle and should not be relied upon by the reader as research or investment advice regarding LaSalle funds or any issuer or security in particular. The information presented herein is for illustrative and educational purposes and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy in any jurisdiction where prohibited by law or where contrary to local law or regulation. Any such offer to invest, if made, will only be made to certain qualified investors by means of a private placement memorandum or applicable offering document and in accordance with applicable laws and regulations. Past performance is not indicative of future results, nor should any statements herein be construed as a prediction or guarantee of future results.
With shifting interest rates, dynamic occupier fundamentals and deepening bifurcation within sectors, ISA Outlook 2024 asks how real estate investors should respond to rapidly changing market conditions. To answer these questions and more, we published four separate chapters covering the global and regional outlooks over the course of November and December.
Download the full document now, or individual chapters covering the Global, European, North American and Asia Pacific outlooks are available in the tabs below.
The global macroeconomic context for real estate remains unsettled, and more so than earlier in 2023. Until late summer, interest rates in most major markets exhibited high volatility, but little overall trend. They moved mainly sideways, owing to cooling inflation and expectations that central banks were reaching the end of their tightening cycles. This was helpful in setting a pricing baseline for real estate investors. But the outlook for rates and thus real estate pricing has become more unsettled of late.
What does this mean for real estate and how does it intersect with other key trends?
Global Head of Research and Strategy
Managing Director, Global Research and Strategy
European property markets have been waiting for a peak in European Central Bank and Bank of England policy rates, for an end to the war in Ukraine and for bid-ask pricing spreads to resolve. Investors ready to move out of waiting mode in 2024 can benefit from rebased prices, opportunities to solve capital stack equations, and strong fundamentals in many sectors.
In this chapter of ISA Outlook 2024, we examine the state of the European market and conclude with recommendations for specific investment strategies – underpinned by realism and targeted toward areas of forecast resilient income growth.
Europe Head of Research and Strategy
Europe Head of Core and Core-plus Research and Strategy
Europe Head of Debt and Value-add Capital Research and Strategy
Against a volatile macroeconomic backdrop and with growth expected to slow, we believe that in 2024 it will be the trajectory of interest rates that will have the greatest impact on real estate values in the US and Canada.
As investors continue to adapt to cooler conditions, this chapter of ISA Outlook 2024 examines the current landscape and looks ahead to the coming year, including where we see select opportunities emerging, as well as variation between the two markets. We conclude with three broad strategic themes and recommended strategies where investors may consider deploying their capital.
Americas Head of Research and Strategy
Canada Head of Research and Strategy
The sheer size and complexity of the Asia Pacific region means real estate markets and investment opportunities are as diverse as the region itself.
In the final chapter of ISA Outlook 2024, we discuss this complexity and how China’s new economies – such as high-tech manufacturing and biotechnology – are growing rapidly and, after more than two decades, Japan is hoping to bid sayōnara to deflation. In other key parts of the region – Australia, Hong Kong, Singapore and South Korea – central banks are near the end of their rate-hiking campaigns in a bid to lower inflation which, as in the rest of the world, could lead to a rebound in transaction activity.
China Head of Research and Strategy
Senior Strategist, Asia Pacific Research and Strategy
Published every year since 1993, LaSalle’s annual ISA Outlook is designed to help our clients and partners navigate the year ahead. It brings together smart perspectives and investment ideas from our teams around the world, based on what we see across our more than 1,500 assets that span geographies, property types and risk profiles.
As always, we welcome your feedback. If you have any questions, comments or would like to learn more, please get in touch by using our Contact Us page.
In an uncertain market, it is tempting to prioritize cyclical questions such as the risk of recession and the path of interest rates over structural topics with longer-run implications. But challenging periods in real estate markets can also be attractive times to build exposure to the asset class.1 Questions about how to build portfolios do not diminish in importance just because bond market volatility makes front-page news. In our view, one of the most useful starting points for approaching portfolio construction is having a sense of the size of the real estate investable universe and its subcomponents. This is why we regularly update our estimates of the real estate investable universe and have done so consistently since 2005.
We first shared our latest estimates for the size of the global real estate universe in the 2023 edition of ISA Portfolio View. As described there, the vast scale of real estate as an asset class is among the key pillars supporting the case for including property in multi-asset portfolio. But putting a thoughtful number on the size of the asset class is easier said than done. We believe it is worth the effort because quantifying the size and distribution of the market — rather than just a subset covered by a particular index or data source — helps investors sharpen their thinking on target allocations by asset class, geography and investment structure. A full description of our methodology, data sources and summary table by country is available here, and we are glad to provide additional detail upon request.
We estimate market size, defined as aggregate gross asset value, for three nested segments, shown below. The largest and most comprehensive estimate is for all property held for the income it provides, inclusive of all types of owners (except owner-occupiers) and all quality levels. Using a separate methodology, we also estimate real estate owned by institutional investors, and by one particular type of institutional investor — those whose equity is publicly traded.
Our analysis shows that one fifth of global real estate is owned by institutional investors, and 40% of that institutional ownership is by listed companies. The estimates also break down market size by country, property type and city, using a methodology combining several bottom-up and top-down sources.
We take a closer look in this ISA Briefing at three key findings from the real estate universe analysis: (1) global income-producing real estate has recently ebbed to a below-average size relative to GDP, (2) real estate value has a fairly even distribution across the three major global regions and (3) those regions differ significantly in how real estate is distributed across metros, implying different optimal diversification strategies.
Figures in trillions can be so enormous that they lose some meaning — so it is helpful to put those numbers in context. An illuminating comparison is to put income producing real estate alongside other asset classes like stocks and bonds, as shown in the graph below.
These estimates show global real estate is a smaller sibling to stocks and bonds but very much in the same family of major asset classes. Notably, owner-occupied residential real estate, which is not included in LaSalle’s real estate estimates, is significantly larger in size than all income-producing property, and even larger than the global fixed-income market.
Another useful comparator, shown below, is against global GDP. We estimate that real estate is equal to 60% of global GDP in 2023. This puts it at a low ebb relative to recent history. This is consistent with the historic pattern of real estate comprising a higher share of GDP late in expansions and then a lower share of GDP in repricing episodes. Currently our real estate market size estimate is near previous cyclical lows as a share of GDP seen in 2009-2012. Since 2000, our real estate market size estimates have averaged 68% of global GDP.
A second key finding from LaSalle’s universe estimates is the relatively even split in value observed between the three major regions of the Americas, Asia Pacific, and Europe. We estimate that 35% of income producing property is in the Americas, 31% in Asia Pacific, and 29% is in Europe. We believe these estimates from LaSalle’s real estate universe analysis better reflect the true opportunity set than other splits based on simple GDP or real estate indices, which can sometimes be lopsided based on where coverage is greatest or which types of investment fund products predominate. For example, 67% of the MSCI Global Property Fund Annual Index AUM is in North America.2
The split above suggests an even distribution of opportunities by region. At the same time, our national estimates also show global diversification can be achieved with a small number of countries. The eight countries with the most institutional-invested real estate together account for 70% of the invested universe. A focus on these larger countries — as well as multi-country funds — can enable investors to efficiently achieve diverse exposures, while also managing the challenges that come with differences in market practices, currency, regulation and building market knowledge.
Our third notable finding emerges when zooming in one level further from the national level to individual cities. Cities and their surrounding metropolitan areas form the underlying building blocks of the real estate universe; they are often the basic level of analysis investors have in mind when comparing market allocations.
LaSalle estimates institutional real estate market size are for the entire metropolitan (metro) market — including the principal city and its suburbs that are economically connected to it, adopting official metropolitan area definitions from national statistical agencies where available.
Real estate held in institutional investor portfolios is highly concentrated in the largest metros, and these local market size estimates highlight the degree of that concentration. The 40 largest metropolitan real estate markets account for 58% of all institutional property. Some of the world’s largest metro areas dwarf many individual countries when it comes to institutional real estate ownership. Our latest estimates show that there is likely more institutional-owned real estate in Greater Tokyo than in all but three of the 201 countries covered in our estimates.
The metro market size distribution varies considerably across regions, with important implications for portfolio strategy. Institutional real estate ownership in Asia Pacific is more concentrated in its largest metros than in any other region. And its real estate is far more concentrated in a few cities than its population. In Asia Pacific, 18 metros account for 75% of institutional property, whereas the equivalent metro total is 52 in the Americas. In Europe, real estate is the most dispersed across cities, reflecting its more fragmented quilt of different jurisdictions. Over 100 European metros must be amalgamated to account for 75% of the regional total. Such dispersion makes the task of setting target markets even more complex, which is where tools like the recently released LaSalle European Cities Growth Index (ECGI) can help.
These differences impact investment strategy and approaches to diversification. Asia Pacific’s concentration of large institutional markets implies that investors may be able to achieve diversification by investing in fewer metros, but that it is also a region where each “bet” on geo-market allocation matters more. In Europe and North America, investors are more active across a larger number of medium-sized markets, offering diversification benefits as well as challenges in terms of access and efficiency.
Footnotes
1 Vintages around the time of market disruption tend to outperform, according to LaSalle analysis of data from the INREV Global IRR Index through Q4 2022. See page 30 of our ISA Portfolio View for a more complete discussion of this analysis.
2 Source: MSCI. Data as of 2022 (most recent available).
Important Notice and Disclaimer
This publication does not constitute an offer to sell, or the solicitation of an offer to buy, any securities or any interests in any investment products advised by, or the advisory services of, LaSalle Investment Management (together with its global investment advisory affiliates, “LaSalle”). This publication has been prepared without regard to the specific investment objectives, financial situation or particular needs of recipients and under no circumstances is this publication on its own intended to be, or serve as, investment advice. The discussions set forth in this publication are intended for informational purposes only, do not constitute investment advice and are subject to correction, completion and amendment without notice. Further, nothing herein constitutes legal or tax advice. Prior to making any investment, an investor should consult with its own investment, accounting, legal and tax advisers to independently evaluate the risks, consequences and suitability of that investment.
LaSalle has taken reasonable care to ensure that the information contained in this publication is accurate and has been obtained from reliable sources. Any opinions, forecasts, projections or other statements that are made in this publication are forward-looking statements. Although LaSalle believes that the expectations reflected in such forward-looking statements are reasonable, they do involve a number of assumptions, risks and uncertainties. Accordingly, LaSalle does not make any express or implied representation or warranty, and no responsibility is accepted with respect to the adequacy, accuracy, completeness or reasonableness of the facts, opinions, estimates, forecasts, or other information set out in this publication or any further information, written or oral notice, or other document at any time supplied in connection with this publication. LaSalle does not undertake and is under no obligation to update or keep current the information or content contained in this publication for future events. LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication and nothing contained herein shall be relied upon as a promise or guarantee regarding any future events or performance.
By accepting receipt of this publication, the recipient agrees not to distribute, offer or sell this publication or copies of it and agrees not to make use of the publication other than for its own general information purposes.
Copyright © LaSalle Investment Management 2023. All rights reserved. No part of this document may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of LaSalle Investment Management.
CHICAGO, LONDON, SINGAPORE (Oct. 10, 2023) — LaSalle Investment Management (“LaSalle”) today announced that after 34 years of distinguished service and leadership of the firm’s global finance group, CFO Mike Ricketts will retire in Q2 2024. He will remain CFO through year-end 2023, and effective January 1, 2024, will be succeeded by Louis Bowers, current Global Head of Financial Planning & Analysis (FP&A) for JLL. Mike and Louis will work closely in the coming months to ensure continuity and a smooth transition of responsibilities.
LaSalle CEO Mark Gabbay said, “Mike’s contributions and leadership at the firm cannot be overstated. Beyond his technical expertise, transparency and consistent drive to improve the business, Mike’s respect for others and collegial nature helped establish LaSalle’s award-winning culture. He is one of a kind, and we wish him the best on his well-deserved retirement. We look forward to Louis joining LaSalle in this global leadership role, and the benefit of his experience and connection to the broader JLL business.”
Louis joined JLL in September 2014 and served as the Global Controller and Principal Accounting Officer from August 2015 until December 2021. During this period, he oversaw JLL’s accounting policies, external reporting, Sarbanes-Oxley compliance and adherence to applicable regulatory requirements. He also helped the organization navigate through many complex aspects of change, ranging from adopting new accounting standards to integrating significant M&A volume.
Since December 2021, Louis has been Global Head of FP&A, during which he has helped lead JLL’s efforts to pivot its reporting segments to global business lines and implement a new standardized cost allocation methodology. During this tenure, Louis has also been responsible for the company’s budgeting and forecasting processes, periodic financial reporting to senior leadership and the Board of Directors, and providing ongoing support for the company’s quarterly earnings. Prior to joining JLL, Louis served in various positions at Retail Properties of Americas, Inc, a multi-tenant retail REIT, as well as member of KPMG’s audit practice.
Louis Bowers, incoming LaSalle CFO said, “I am eager to join LaSalle in this important global finance role. I have enjoyed and admired working alongside Mike over the years, and look forward to working with the teams around the world to optimize our financial performance in the years ahead.”
Mike Ricketts, retiring LaSalle CFO said, “I am grateful for my time and experience working at LaSalle. The growth and prosperity of the firm is a result of our people, and Louis is the right leader to advance our finance segment in the next phase of growth. I look forward to working with him in the months ahead, and tracking the continued success of the firm in the future.”
About LaSalle Investment Management | Investing Today. For Tomorrow
LaSalle Investment Management is one of the world’s leading real estate investment managers. On a global basis, LaSalle manages approximately $78 billion of assets in private and public real estate property and debt investments as of Q1 2023. LaSalle’s diverse client base includes public and private pension funds, insurance companies, governments, corporations, endowments and private individuals from across the globe. LaSalle sponsors a complete range of investment vehicles including separate accounts, open- and closed-end funds, public securities and entity-level investments. For more information, please visit http://www.lasalle.com, and LinkedIn.
Forward looking statement
The information discussed above is based on the market analysis and expectations of LaSalle and should not be relied upon by the reader as research or investment advice regarding LaSalle funds or any issuer or security in particular. The information presented herein is for illustrative and educational purposes and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy in any jurisdiction where prohibited by law or where contrary to local law or regulation. Any such offer to invest, if made, will only be made to certain qualified investors by means of a private placement memorandum or applicable offering document and in accordance with applicable laws and regulations. Past performance is not indicative of future results, nor should any statements herein be construed as a prediction or guarantee of future results.
Kristina Meyer is a Managing Director on LaSalle’s Investor Relations team. She oversees the Investor Relations global operations team responsible for driving the fundraising efforts on all of LaSalle’s institutional products. This includes fundraise tracking and reporting, responding to prospective investor requests and working closely with portfolio managers, Research & Strategy and the Legal and Compliance teams on the launch of new commingled funds. Additionally, Kristina serves as President and General Securities Principal for LaSalle Investment Management Distributors (LIMD), responsible for supervising the North America institutional and retail sales channels.
Prior to joining LaSalle in 2015, Kristina was an Asset Manager at Mid-America Asset Management, Inc. overseeing the daily operations of retail properties owned by institutional clients and private entities in the Midwest.
Kristina graduated from the University of Wisconsin – Madison with a Bachelor of Business Administration in Real Estate and Urban Land Economics and earned a Master of Business Administration from the Kellogg School of Management at Northwestern University.
Managing Director, Investor Relations
Senior Managing Director, Investor Relations
Head of Global Direct Investments
Managing Director, Investor Relations
Global Head of Investor Relations
Managing Director, Investor Relations
Managing Director, Investor Relations
Head of Americas Investor and Consultant Relations
Vice President, Investor Relations
Senior Vice President, Investor Relations
Senior Vice President, Investor Relations
Head of Investor Relations, Asia Pacific
Senior Vice President, Investor Relations
Managing Director, Investor Relations
Senior Vice President, Investor Relations
Vice President, Investor Relations
Head of Investor Relations, Japan
Vice President, Investor Relations
We have been fielding questions on two big macroeconomic topics impacting the Asia-Pacific region: (1) the outlook for China’s economic recovery and (2) the path of the Bank of Japan’s monetary policy. These involve legitimate worries about China’s growth engine and the risk of interest rate hikes in Japan. Nonetheless, we find that media coverage of these topics can sometimes sensationalize their implications without going below the surface.
In this ISA Briefing, and the accompanying LaSalle Macro Quarterly (LMQ), we dissect these concerns and share our views on several frequently asked questions. Our analysis points to a nuanced picture that is more supportive of investments in these two countries than the media coverage might suggest.
China’s economic recovery has been slower than in past cycles, as we anticipated in our ISA Briefing from early March (China’s Great Reopening). While exports and for-sale residential investment have been sluggish, domestic consumption, industrial output, manufacturing and infrastructure investment continue to support the economy (see the chart below). The for-sale residential market could bottom in the next 6-12 months as demand-supply dynamics gradually improve. Unlike previous downturns, the government has not announced a blast of mega monetary or fiscal stimulus. This conservative approach could help ensure a sustainable long-term growth environment for the Chinese economy without unintentionally creating new imbalances.
We expect economic activity in China to continue to recover through 2024. Various supportive economic measures designed to boost business and consumer confidence were rolled out after the Politburo meeting on July 24; however, it takes time for stimulus measures to take effect. We continue to expect a modest recovery in China this year, likely close to the 5% GDP growth target. But oft-cited concerns over the Chinese economy such as the weak for-sale residential sector, the defaults of highly leveraged real estate developers, high youth unemployment and deflationary pressures deserve to be addressed, as we do in this FAQ.
Note: The growth rate of industrial value-added is the y-o-y growth rate of the YTD data. The growth rates of other indicators are the y-o-y growth rates of quarterly data. The historical ranges of the indicators are based on historical y-o-y growth rates in the 20 quarters in 2015-2019.
Sources: The National Bureau of Statistics of China (GDP growth, retail sales volume, fixed asset investment growth, and industrial value-add growth), as of Q2 2023; General Administration of Customs (export growth), as of Q2 2023; LaSalle Investment Management (retail sales growth), as of Q2 2023.
Despite short-term volatility in sales volume and prices, China’s for-sale residential sector is experiencing a slowing decline in sales volumes and prices compared to the second half of 2022. In Tier 1 cities, however, both sales volume and prices are already improving [LMQ page 24]. In the next 6-12 months, the overall for-sale residential market could reach bottom, supported by government policies, a decline in supply and a reduction in mortgage rates and down payments. We expect the subsequent recovery to be gradual. For-sale residential prices may improve, though sales volumes are unlikely to recover to their prior peak. We expect housing markets in Tier 1 and top Tier 2 cities to lead the recovery of low-tier cities.
Despite our expectation of an eventual recovery in China’s for-sale residential sector, the outlook for over-leveraged developers with large exposures to low-tier cities, including Evergrande and Country Garden, remains gloomy. The resolution of these developers’ onshore and offshore corporate debt is expected to take time, which will continue to draw media attention. However, the impact of the default or bankruptcy of these troubled residential developers on the Chinese financial system has been limited so far, and we expect it to remain so, given the exposure of Chinese commercial banks to real estate construction loans only accounted for ~4% of their total assets as of the second quarter of 2023.1 Even for the more vulnerable trust companies, the exposure to real estate declined from ~13% of their total assets in the second quarter of 2019 to ~5% in the second quarter of 2023.2
The unemployment rate of the labor force aged 16-24 in China is rising. However, the direct impacts of this on retail sales and the broader economy are likely to be limited. Those aged 16-24 accounted for only around ten percent of the Chinese population as of 2021.3 In addition, many of those aged 16-24 are still in school, given that young people in China finish education at around age 20, on average.4 There could be some indirect impacts of high youth unemployment on household confidence, although we do not expect them to be significant given that the unemployment rate for the key labor force in China (aged 25-59) is at its lowest level since 2018 [LMQ page 25].
It is true that China’s headline inflation rates have been fluctuating around 0% in recent months, primarily driven by food and energy prices coming off peak levels post lockdowns. However, the core inflation rate (excluding food and energy) remains in positive territory [LMQ page 16]. As the Chinese economy gradually recovers and the post-lockdown effects fade, we expect inflation to gradually escalate.
The Bank of Japan (BoJ) remains an outlier among global central banks, as it continues to maintain ultra-accommodative policy in the form of yield curve control (YCC). The BoJ introduced YCC in 2016, with the intent to keep 10-year government bond yields low to stimulate consumer spending and business investment. Over the past year, speculation has mounted as to whether this policy would be sustained, with volatility being triggered around moments of policy adjustments or speculation that YCC would be abandoned.
Most recently, on September 22, the BoJ kept the YCC policy unchanged with a unanimous vote. The 3-month rates used a reference for borrowing costs have been bouncing around -0.2 to -0.1%, while the 10-year Japanese government bond (JGB) yields have increased to 0.73% since the BoJ’s surprise tweak to the YCC in December last year [LMQ page 7].5 Inflation in Japan has been running above the BoJ’s two percent target over the past 17 months,6 which in theory could be a catalyst for the BoJ to make more tweaks to its YCC policy or even exit it in the near term. But the answers to complex questions about the trajectory of rates in Japan aren’t so simple; policy actions and capital market reactions are inherently difficult to predict, but are likely to be less dramatic than feared.
The latest BoJ inflation projections and Tankan survey results7 suggest that inflation could remain above the BoJ’s 2% target at least over the next 12 months [LMQ page 19]. Wages in Japan, a key component of inflation, grew by 2.3% y-o-y in July 2023 due to a tight labor market.8 Employment conditions are expected to tighten further in the near term,9 potentially reaching levels last seen in 1990s. The 2024 Shunto (spring) wage negotiation is the next key event to monitor. Hence, it is as yet uncertain whether wage growth in Japan could remain consistently above its 2% target.
Source: The Japan Statistics Bureau (historical inflation data), as of August 2023. The Bank of Japan (inflation projection for fiscal year 2023 and 2024), as of July 2023.
Inflationary pressures do not exist in a national vacuum. Thankfully, inflation is now declining in other developed markets [LMQ page 12], potentially giving the BoJ more time to evaluate the prospects for inflation in Japan. Many central banks, following the lead of the US Federal Reserve, are seen to be at or near the end of their tightening cycles as inflationary pressure tapers. That said, global central banks are highly unlikely to cut interest rates sharply any time soon, unless economies fall into deep recession. Therefore, we expect the interest rate differential between Japan and the US to remain wide but may narrow somewhat in the near term. Moderation in the interest rate differential could help the weak yen to regain some ground, which might also alleviate some pressure on the BoJ.
Inflation in Japan has been outpacing wage growth, putting pressure on Prime Minister Fumio Kishida’s approval ratings, according to a poll conducted by the Asahi Shimbun newspaper on September 18. There is a strong political impetus for Kishida and the new cabinet to ensure wage growth consistently exceeds the inflation rate. Moreover, as more than 70% of the mortgage loans in Japan have floating rates,10 there is a strong incentive for the BoJ to keep short-term interest rates relatively low. BoJ measures that could derail Japan’s economic recovery or disrupt the capital markets could be considered politically risky and thus less likely.
Footnotes
1 Source: The People’s Bank of China (total amount of outstanding real estate construction loans), as of Q2 2023; State Administration of Financial Supervision and Administration of China (total assets of commercial banks), as of Q2 2023
2 Source: The China Trustee Association, as of Q2 2023
3 Source: The National Bureau of Statistics of China, as of 2021
4 Source: LaSalle Investment Management, as of 2021. The estimation is based on the average years of education among the young labor force in China published by the Ministry of Education of China in 2021.
5 Source: Bloomberg, as of September 25, 2023
6 Source: The Japan Statistics Bureau, as of August 2023
7 Source: The Bank of Japan’s Tankan survey on the inflation expectation and the output price expectation among corporates of all industries, as of June 2023
8 Source: The Japan Statistics Bureau, as of August 2023
9 The Bank of Japan’s Tankan survey: all-industry employment conditions, as of June 2023
10 Source: The Japan Housing Finance Agency, covering home loans between October 2022 and March 2023.
Important Notice and Disclaimer
This publication does not constitute an offer to sell, or the solicitation of an offer to buy, any securities or any interests in any investment products advised by, or the advisory services of, LaSalle Investment Management (together with its global investment advisory affiliates, “LaSalle”). This publication has been prepared without regard to the specific investment objectives, financial situation or particular needs of recipients and under no circumstances is this publication on its own intended to be, or serve as, investment advice. The discussions set forth in this publication are intended for informational purposes only, do not constitute investment advice and are subject to correction, completion and amendment without notice. Further, nothing herein constitutes legal or tax advice. Prior to making any investment, an investor should consult with its own investment, accounting, legal and tax advisers to independently evaluate the risks, consequences and suitability of that investment.
LaSalle has taken reasonable care to ensure that the information contained in this publication is accurate and has been obtained from reliable sources. Any opinions, forecasts, projections or other statements that are made in this publication are forward-looking statements. Although LaSalle believes that the expectations reflected in such forward-looking statements are reasonable, they do involve a number of assumptions, risks and uncertainties. Accordingly, LaSalle does not make any express or implied representation or warranty, and no responsibility is accepted with respect to the adequacy, accuracy, completeness or reasonableness of the facts, opinions, estimates, forecasts, or other information set out in this publication or any further information, written or oral notice, or other document at any time supplied in connection with this publication. LaSalle does not undertake and is under no obligation to update or keep current the information or content contained in this publication for future events. LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication and nothing contained herein shall be relied upon as a promise or guarantee regarding any future events or performance.
By accepting receipt of this publication, the recipient agrees not to distribute, offer or sell this publication or copies of it and agrees not to make use of the publication other than for its own general information purposes.
Copyright © LaSalle Investment Management 2023. All rights reserved. No part of this document may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of LaSalle Investment Management.
The transition to a lower-carbon built environment is reshaping the definition of quality real estate. We can point to numerous anecdotal examples of green building features driving higher rents and values, as well as better overall performance. However, showing this rigorously and quantitively is challenging.
Various academics, real estate agencies and other researchers have attempted to measure the difference between assets that possess and those that lack green features. They use a range of datasets that vary widely and have enjoyed varying degrees of success in drawing clear, convincing findings from their analysis.
So is there a green premium? Or a brown discount?
Price, value and performance differentials between assets that possess and those that lack certain sustainable credentials are often called one of the other. In our view, the difference between the green premiums and brown discounts is a matter of perspective and can vary with time, as given attributes transition from novel, to highly valued, to standard.
For simplicity’s sake, we think of them as a single concept that we call “the value of green.”
Our approach for this report is to examine the existing work on the topic and identify the most helpful and relevant analyses. This sits alongside our monitoring of outcomes within our own portfolio, a few examples of which we highlight as case studies.
We find that while the range of estimates are wide, and depend on a variety of methodological considerations, the studies consistently find a statistically significant financial impact of asset sustainability features on metrics such as achieved rent, capital value, leasing success and overall performance. We will continue to monitor the evolving evidence of these differentials, both in the broader literature and within our portfolios.
The art and science of portfolio construction matters most when market conditions change suddenly. This has never been truer than in the past few years, which saw major pivots in capital markets as policymakers shifted from trying to stimulate the economy at the start of the pandemic, to applying the breaks to prevent inflation running out of control. The speed and unpredictability of these changes highlights the importance of planning ahead by thinking carefully about how to create portfolios that can be expected to be resilient. Foundational concepts of portfolio management such as diversification and risk management should be considered alongside an investor’s objectives and values to devise a strategy for their portfolio.
It is with these factors in mind that we release first edition of LaSalle’s ISA Portfolio View, which seeks to answer five foundational questions about real estate:
Why real estate lays out the case for property exposure in a multi-asset context? Why global considers the benefits of expanding horizons beyond an investor’s domestic market? Why be sector smart tries to make sense of the recent changes in relative sector performance with an eye to building resilient portfolios? Why be quadrant smart addresses the interplay among the “four quadrants” of real estate? Why manage risk explores the importance of—and our approach to—managing investment risk? In many ways the ISA Portfolio View is the continuation of a longstanding strand of LaSalle’s analysis that would typically form the latter chapters of the Investment Strategy Annual. In this new standalone edition, we draw from a deep pool of experts from around the firm, acknowledging the interconnectedness of real estate opportunities: across borders, across sectors, and across quadrants. We welcome your questions and feedback.
Important Notice and Disclaimer
This publication does not constitute an offer to sell, or the solicitation of an offer to buy, any securities or any interests in any investment products advised by, or the advisory services of, LaSalle Investment Management (together with its global investment advisory affiliates, “LaSalle”). This publication has been prepared without regard to the specific investment objectives, financial situation or particular needs of recipients and under no circumstances is this publication on its own intended to be, or serve as, investment advice. The discussions set forth in this publication are intended for informational purposes only, do not constitute investment advice and are subject to correction, completion and amendment without notice. Further, nothing herein constitutes legal or tax advice. Prior to making any investment, an investor should consult with its own investment, accounting, legal and tax advisers to independently evaluate the risks, consequences and suitability of that investment.
LaSalle has taken reasonable care to ensure that the information contained in this publication is accurate and has been obtained from reliable sources. Any opinions, forecasts, projections or other statements that are made in this publication are forward-looking statements. Although LaSalle believes that the expectations reflected in such forward-looking statements are reasonable, they do involve a number of assumptions, risks and uncertainties. Accordingly, LaSalle does not make any express or implied representation or warranty, and no responsibility is accepted with respect to the adequacy, accuracy, completeness or reasonableness of the facts, opinions, estimates, forecasts, or other information set out in this publication or any further information, written or oral notice, or other document at any time supplied in connection with this publication. LaSalle does not undertake and is under no obligation to update or keep current the information or content contained in this publication for future events. LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication and nothing contained herein shall be relied upon as a promise or guarantee regarding any future events or performance.
By accepting receipt of this publication, the recipient agrees not to distribute, offer or sell this publication or copies of it and agrees not to make use of the publication other than for its own general information purposes.
Copyright © LaSalle Investment Management 2023. All rights reserved. No part of this document may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of LaSalle Investment Management.
In recent editions of LaSalle Macro Quarterly (LMQ), many charts have highlighted interest rate rises. LaSalle has especially focused on the repricing of income-producing real estate that rate rises have triggered in much of the globe. But the spike in rates is also having an impact on owner-occupied residential real estate, which accounts for a much larger share of the global property pie than do institutional assets. As we release the LMQ for Q3 2023, we look at the broad implications of higher residential mortgage rates, and how they vary by country. Even if institutional investors do not directly touch owner-occupied housing, they should consider the risks (and a few opportunities) caused by these dynamics.
Higher residential mortgage rates have implications for both new buyers and existing owners. For new buyers, higher rates reduce the purchase price they can pay (assuming a fixed amount of debt service). In practice, buyers cope with this by dedicating a larger share of their income to housing, or by scaling back or postponing their home purchase ambitions. For economies in which housing constitutes a meaningful share of the economy, this can create a noticeable drag on GDP growth. It may also put downward pressure on home prices, which can have indirect wealth effects on consumer spending. (So far, house prices for key countries have held up reasonably well during this period of rising rates—as shown in the chart on page 7 of the LMQ—but risks remain.)
For existing owners, much depends on the specific terms of the mortgage. The US mortgage market is unique globally in having a very large share of loans with rates that are fixed over a fully amortizing term (typically 30 years), according to data from Fitch. Assuming they do not move, borrowers can continue to enjoy low fixed payments. Elsewhere in the world, residential mortgage rates are usually floating or fixed only for a limited time. When rates rise, they filter through to borrowers gradually as fixed rate periods end—in other words, when rates reset. Depending on the mechanism for rate resets, they can cause a direct hit to disposable incomes. Households may react to this by scaling back spending elsewhere, or in the extreme, leaving the ranks of homeownership. These impacts will be more significant in places where consumers already have a high debt service burden.
For investors in income-producing institutional real estate, there are two aspects of these dynamics that are especially relevant. One is the broad recession risk that comes from weaker housing markets and stretched consumers. Oxford Economics has cited differential exposures to mortgage resets as a driver of divergence in near-term economic growth between the US and Canada. Second, the substitution effect from owned to rented housing may provide a boost to both multifamily and single-family rental demand, potentially driving stronger performance for residential strategies.
Canada is an interesting case study because the structural characteristics of its residential mortgage market and the availability of transparent data permit a relatively clear identification of mortgage rate resets. Most residential mortgages in Canada have 25- or 30-year amortization periods, with typical fixed rate periods (known as “terms”) running from as short as one year to as long as ten years, according to the Bank of Canada. Some mortgages have a fixed interest rate that is reset for the next term according to the prevailing market rate. This occurs through a renewal at the end of each term, until the mortgage is fully paid off. According to Bank of Canada (see table), fixed-rate mortgages account for two-thirds of balances outstanding in the country among lenders. Most fixed-rate mortgages have remaining terms of five years or more (40% of overall balances), followed by three-to-five years at 18.4%. Only 8.5% of all fixed-rate mortgages expire in the next three years
However, the remaining one-third of Canadian mortgages are variable rate, which float based on short-term interest rate movements. The Bank of Canada has hiked interest rates nine times since March 2022, pushing up rates on some variable-rate mortgages to around 6.0%, from roughly 2.8% a year ago. The most common type of variable-rate mortgages in Canada have fixed monthly payments. As interest rates rise, a higher proportion of the payment goes toward interest and less toward principal. Rising rates over the past 18 months have put some borrowers in the position of having monthly payments that do not cover the interest portion of the mortgage. The excess (unpaid) interest for that month gets added to the principal, increasing the original mortgage amount. Compared to countries where the absolute monthly payment amount adjusts directly with rates, this mechanism prevents an immediate near-term hit to disposable income from rising rates. But it does effectively embed the impact of higher rates into a longer-term increase in debt on household balance sheets.
Beyond Canada, which countries are impacted by rising residential mortgage rates? Cross-border comparisons are not straightforward; the devil is in the detail. Nuances to consider include variation in fixed-rate terms, amortization periods, interest rate levels, and when and how rates reset. Many factors, including macro indicators like household debt levels and the structure of countries’ residential mortgage markets, need to be considered in assessing a market’s exposure.
One persistent issue is that data on the relative shares of fixed- versus variable-rate mortgages by country tend to classify any mortgage as fixed rate if it is fixed for a period of time, even if it that rate will reset in the near term. Analysis by Fitch Ratings attempts to correct for this with a metric that includes any mortgages with rates that are expected to expire or reset within 24 months. On this analysis, Australia leads in exposure to resets, followed by Spain, the UK, and Canada. Australian mortgages with fixed rates generally have shorter fixed-rate periods of around two years; this compares with five years in the United Kingdom and Canada, and 30 years in the U.S. (Although not in the Fitch dataset, we understand that Sweden is also relatively highly exposed to resets.)
Fitch extended their analysis to combine and layer in pre-reset mortgage debt-service-to-income (“DTI”) ratios by country. This allowed them to estimate how much an increase in DTIs would be caused by a five-percentage point increase in interest rates. They found that the impact roughly followed the rank ordering above, with Australia and the UK most exposed, and the US least exposed. It should be noted that many of the same mitigating factors that apply to Canada (e.g., strong immigration, shortages of housing, low mortgage arrears) also apply to Australia, Spain and the UK.
The outlier case of the US is not quite as positive as it may appear. As a country with high internal mobility and (unlike many other markets) mortgages that are not “portable” between different collateral, the effective exposure of US households to mortgage rate changes is probably higher than implied by these data alone. Moreover, there are some downsides to having a large share of long, fixed rate mortgages. For one, the lesser impact of higher rates on consumer spending potentially requires more interest rates increases to have the same desired impact on inflation. Another factor, which is already evident, is that having a low interest rate locked in creates a barrier to moving, limiting the supply of housing for sale and making home prices sticky.
Sources:
1. ECONOSIGHTS: Three reasons why Australia is more vulnerable to higher rates – Mousina, Diana, AMP Capital, September 2022.
2. Fear of Renewal: Most new homebuyers ‘very worried’ next term will bring much higher monthly payments – Angus Reid Institute, May 2023
3. How Do Mortgage Rate Resets Affect Consumer Spending and Debt Repayment? Evidence from Canadian Consumers – Bank of Canada, May 2020
4. Statistics on Mortgage Arrears in Canada – Canadian Bankers Association, Table DB50 Public, June 2023
5. Global Housing and Mortgage Outlook – 2023 – Fitch Ratings, December 2022
6. Mortgage Interest Payments in Advanced Economies – One Channel of Monetary Policy – Reserve Bank of Australia, Statement on Monetary Policy, February 2023
Important Notice and Disclaimer
This publication does not constitute an offer to sell, or the solicitation of an offer to buy, any securities or any interests in any investment products advised by, or the advisory services of, LaSalle Investment Management (together with its global investment advisory affiliates, “LaSalle”). This publication has been prepared without regard to the specific investment objectives, financial situation or particular needs of recipients and under no circumstances is this publication on its own intended to be, or serve as, investment advice. The discussions set forth in this publication are intended for informational purposes only, do not constitute investment advice and are subject to correction, completion and amendment without notice. Further, nothing herein constitutes legal or tax advice. Prior to making any investment, an investor should consult with its own investment, accounting, legal and tax advisers to independently evaluate the risks, consequences and suitability of that investment.
LaSalle has taken reasonable care to ensure that the information contained in this publication is accurate and has been obtained from reliable sources. Any opinions, forecasts, projections or other statements that are made in this publication are forward-looking statements. Although LaSalle believes that the expectations reflected in such forward-looking statements are reasonable, they do involve a number of assumptions, risks and uncertainties. Accordingly, LaSalle does not make any express or implied representation or warranty, and no responsibility is accepted with respect to the adequacy, accuracy, completeness or reasonableness of the facts, opinions, estimates, forecasts, or other information set out in this publication or any further information, written or oral notice, or other document at any time supplied in connection with this publication. LaSalle does not undertake and is under no obligation to update or keep current the information or content contained in this publication for future events. LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication and nothing contained herein shall be relied upon as a promise or guarantee regarding any future events or performance.
By accepting receipt of this publication, the recipient agrees not to distribute, offer or sell this publication or copies of it and agrees not to make use of the publication other than for its own general information purposes.
Copyright © LaSalle Investment Management 2023. All rights reserved. No part of this document may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of LaSalle Investment Management.
London (5 July 2023) – LaSalle’s European COO Beverley Kilbride has been named to PEI’s 2023 list of Women of Influence in Private Markets. The list spotlights women whose achievements, innovation and leadership are reshaping private markets across a range of asset classes: real estate, private debt, private equity, infrastructure and venture capital.
The teams at PERE, Private Debt Investor, Private Equity International, Infrastructure Investor, and Venture Capital Journal faced a daunting task in selecting the honorees. With over 630 nominations, only 10 professionals globally are recognized in each category.
Read more about the impact Beverley has had on the real estate market, as well as the other nine professionals who join her on this esteemed list on PERE’s website (subscription required).
About LaSalle Investment Management | Investing Today. For Tomorrow.
LaSalle Investment Management is one of the world’s leading real estate investment managers. On a global basis, LaSalle manages approximately $79 billion of assets in private and public real estate property and debt investments as of Q3 2022. LaSalle’s diverse client base includes public and private pension funds, insurance companies, governments, corporations, endowments and private individuals from across the globe. LaSalle sponsors a complete range of investment vehicles, including separate accounts, open- and closed-end funds, public securities and entity-level investments. For more information, please visit www.lasalle.com, and LinkedIn.
Tobias Lindqvist is a strategist in the LaSalle research and strategy team, based in London. He is focused on developing investment strategies mainly within the logistics and industrial sector and driving predictive data analytics in the team, combining a traditional approach to analysis with modern implementations of machine learning models. He is working as part of the Global Climate and Carbon team, on integrating climate risk into the investment process and understanding the role sustainability has in value creation.
Tobias has worked within LaSalle research and strategy since March 2018.
Tobias graduated from the Faculty of Engineering at Lund University with a Master’s degree in Engineering Physics.
Europe Head of Core and Core-plus Research and Strategy
Senior Research Analyst
Head of Investment Risk Strategy and Management
Senior Analytics Strategist
Senior Research Analyst
Vice President, Strategist
Managing Director, Global Research and Strategy
Senior Strategist, Americas Research and Strategy
Americas Head of Research and Strategy
Global Head of Research and Strategy
Canada Head of Research and Strategy
Europe Head of Research and Strategy
Global Strategist (senior advisor)
Senior Strategist, European Research and Strategy
Vice President, Strategist
Europe Head of Debt and Value-add Capital Research and Strategy
China Head of Research and Strategy
Senior Analyst, Research and Strategy
Senior Vice President, Research and Strategy
Senior Strategist, Asia Pacific Research and Strategy
Senior Research Analyst
Through history, residential rent controls have tended to appear at times of external shock and dislocation.1 COVID-19 and the subsequent inflationary spike have proven to be such a catalyst. Changes to rent regulations can potentially reshape the risk-reward profile of residential investments, impacting values over both short and long timescales. As we set out in a previous piece, A New Wave of Residential Rent Control, the introduction of rent control measures can also have unintended consequences that distort the market. While often sold as a solution to spiralling housing costs, in practice they can have the opposite effect to their intent, deterring the construction of new rental housing, thus leading to further increases in rents.
Our findings in that report still hold true, but an update is needed because the “great reflation” period has seen a groundswell of support for further rent regulations, especially in Europe. The pandemic opened the door to unprecedented government intervention, and there has been a heightened willingness among politicians to introduce forms of rent control. But there continues to be vast differences across countries, regions and cities, reflecting varying political appetites for intervention. What is the impact of these recently enacted measures and which markets have been most impacted?
Rent regulation starting positions vary widely
Regulations take many different guises including broad brush limits on initial rent levels (e.g., in France, Ireland), market-wide caps to annual rental increases (Germany, Sweden) or caps limited to buildings of a certain age or in certain areas deemed to be stretched (Denmark, Catalonia, New York City, California). Beyond rent-setting, lease length, security of tenancy and eviction protections are additional factors to consider. Crucially, regulation should be viewed on a spectrum rather than as a binary determination.
In “unregulated” rental markets, such as England, most of the US and select European countries (e.g., Finland, Poland and Czechia), rents can typically be freely set at the outset of a tenancy, with the landlord permitted to increase them at the end of the agreement (typically 12 months) by any amount. This allows landlords in these markets to mark rents to market levels quickly. Even in markets that are usually considered to be unregulated, other legal limitations should also be considered; for example, the UK parliament is currently considering a law which would end no-fault evictions in England and Wales.
Elsewhere in Europe, in parts of Canada, and in several US states like California, Oregon and New York, the most typical form of rent control is limiting annual rent escalations for existing tenants. The devil is in the detail of these specific regulations. California, Oregon and New York City’s regulations, for example, apply to a subset of older assets; in Toronto (and all of Ontario) they apply to all but the newest. In the case of Oregon, a limit of 7% increase plus CPI is not much of a limitation on investment economics,2 while in New York City, rent increases are set by a regulatory body and can have a significant impact.
Europe’s generally more constraining rent increase caps mean that in-place rents are normally significantly below open-market rents for new leases. Limiting annual rent increases for in-place tenants prevents rents from being marked to market, usually resulting in tenants being “stickier”, staying in their homes in the knowledge that the rents they are paying are below what they would pay under a new lease. This has the effect of higher occupancy levels and lower expenses on unit turnover and voids. Catch-up between in-place and market rents occurs gradually, even during periods of weakness in market rents.
As a result of these factors, heavily regulated markets tend to experience stable in-place cash flow growth, without the cyclicality of less restrictive markets. This is highlighted on the below chart, which shows that residential rental growth in the UK has been far more volatile than regulated European markets. Given steady, non-cyclical growth, regulated residential in Europe has been able to deliver a higher level of long-run growth than most of the commercial sectors. These attributes of stability and low-but-dependable growth can be appealing to core investors, especially in lower inflation environments.
Rental growth and volatility
[Average per annum since 2000* and standard deviation]
Source: LaSalle (May 2023), MSCI (December 2021)
Variety of cash flows can be a positive – but beware regulatory surprises
If regulations are known and stable, they can be priced in, limiting the risks to informed investors. A bigger concern comes from new, unforeseen regulations during the ownership of an asset. So-called “stroke-of-the-pen” risks may cause underwritten rent levels and growth to suddenly change. This remains a persistent threat as long as some policymakers are willing to support new rent controls. The factors which have made residential such a compelling sector in recent years, namely the undersupply of housing and tailwinds supporting demand, have exacerbated the threat, as rents in many major markets have increased as a share of average household income. The bout of high inflation seen in 2022-23 has put even more pressure on household finances and motivated politicians to act. The result has been new regulations brought in across Europe and North America, although some are some supposedly temporary.
Another wave of new regulation—Europe
Since beginning of 2022, several European markets have introduced new rental regulations, including in Scotland, France, Spain, Denmark and the Netherlands (see map). In other markets, such as Germany, new regulations are now being discussed.
The impact of these is just beginning to play out, but they are having meaningful effects already, with significant variation by market and asset profile. During this period of high inflation, these caps have created a double hit for some residential owners, limiting rental growth at the same time as operating expenses rose quickly.
Rental regulations introduced over 2022-2023
[Lighter colored markets considered unregulated]
Source: LaSalle (May 2023)
In some markets, recent regulatory changes are less disruptive. For example, the cap to indexation at 4% in Denmark may result in below-inflation rental growth for one or two years. Should inflation revert to historic levels as anticipated, this is unlikely to meaningfully damage performance on assets held over the long term, but potentially mean negative real cashflow growth for landlords in the near term. This is because inflation exceeded the cap in 2022 and will expect it will likely do so again in 2023. Residential assets in regulated markets have only been able to deliver inflationary in-place rent growth when inflation is at “normal” levels. This is because regulators in Denmark and elsewhere have tended to prevent double-digit nominal increases even when justified by inflation.
The Scottish government’s decision to ban rent increases completely in September 2022 was potentially more disruptive. Some developers and investors indicated that construction of badly needed new for-rent supply was not viable in such an environment. Being unable to underwrite rental growth would likely discourage private investment in Scotland’s housing market, exacerbating the housing shortages which necessitated the rent controls in the first place. The Scottish government backtracked in April 2023, replacing the freeze with a still tight 3% cap.
Once regulations are introduced they are often very difficult to unwind, as few politicians will publicly campaign to reverse policies which will result in their voters paying more in rent. Evidence of this can already be seen in Spain, which introduced supposedly temporary caps to rent increases that have been extended beyond their original end dates and has further tightened regulations with the introduction of a wide-ranging national housing law.
Less constraining changes in the US
In parts of the US, rent control gained traction in the late 2010s, reversing a two-decade trend toward less regulation. But most cases, new measures have been relatively mild. In 2019, Oregon and California enacted statewide caps on annual rent increases for existing tenants, but limited the restrictions to older properties and set the level of the caps high.3 A notable example of a more severe new rent ordinance comes from St. Paul, Minnesota. Voters there approved an ordinance in 2021 that limited rental increases to 3% across all buildings and for renewals and new leases alike. Developers responded by halting construction projects in the city, with residential permits falling by 30%. Less than a year later, the St. Paul city council revised the ordinance to more closely resemble the legislation in California and Oregon.4
Despite the advances of rent control legislation in a small number of states and cities in recent years, many more jurisdictions have rejected it. In 2022 alone, new rent regulations were introduced by state legislators in 19 states and did not receive enough support to pass. Most recently, in April 2023, Florida passed an outright ban on rent control in that state while at the same time allocating new funding for the development of affordable housing.
Living with increased regulation
Despite the risks of regulatory change, regulated residential assets can potentially offer investors a favourable return given low risks, particularly when compared to the more challenged office sector. That said, the devil is in the details, given widely varying regulatory frameworks across cities, states and countries. With changes to policies underway, managing the risks of greater regulation is now more important than ever for investors. To do so, we recommend an approach that encompasses vigilance, diversification and identification of less-regulated proxies for residential—we detail each of these strategies below.
Tim Kessler, LaSalle’s Global Chief Operating Officer, spoke with NAREIM about why LaSalle is expanding co-investment eligibility, what it is delivering for the firm, and the pros and cons of expansion.
For LaSalle Investment Management, co-investment is key to attracting and retaining employees and to aligning employees with clients’ interests and the firm’s culture. Once limited to select senior executives, opening up co-investment participation to a 950-strong workforce located globally across 23 offices has been a complex operational undertaking.
Silicon Valley Bank (SVB) and Signature Bank failed. Regulators hastily arranged the sale of Credit Suisse to UBS. Concerns spread about numerous other small and major global banks including Deutsche Bank. Recent events have raised fears that the global economy is in for a credit crunch of unknown magnitude and duration. As we release our first LaSalle Macro Quarterly (LMQ), a revamp of our long-standing “macro indicators deck,” banking sector strains represent the number one macro risk we are assessing.
The proximate cause of each recent bank failure was deposit flight, a drain from the liabilities side of the bank balance sheet. This is fundamentally not a toxic assets problem of the sort that banks faced in the Global Financial Crisis (GFC). Rather, it is a liquidity issue that can be addressed by temporary emergency funding from central banks. But solvency, the greater concern for banks in the longer run is closely tied to the duration of the asset book.
When investors in interest rate-sensitive assets refer to duration, they typically mean the change in value associated with a change in risk-free rates. SVB failed, in large part, due to a perception that it had sustained severe losses on riskless (but long-duration) US Treasuries and near-riskless agency mortgage-backed securities as these assets had mechanically repriced in the higher interest rate environment.
Just as there was a mechanical element to the initiation of this crisis, there is a mechanical feedback loop that can help the crisis partially self-resolve. As worries around bank solvency, credit conditions and the real economy spread, expectations for policy rates fell, causing long-duration assets to once more increase in price, shoring up balance sheets.
As a result, there has been a 360-degree round trip in interest rate forward curves between the beginning of February and the end of March. At first, curves shifted upward due to spiking inflation data, before falling substantially as banking systems came under pressure, followed by a return to the status quo as resolution measures stabilized markets and inflation seized the attention of policymakers and investors once again. As a result of this volatility in rate expectations, the MOVE index of bond option volatility1 has reached the highest levels since the GFC.
There are many media, economic and financial industry sources to turn to for a deeper discussion of the underpinnings of the recent financial sector instability, or to track the daily news flow and the resulting volatility. Our focus is on the practical considerations for investors in property. We have identified four key recommendations for how real estate investors can assess risks and manage through volatility.
A lot of analyses have focused on idiosyncratic aspects of individual banks. For example, Silicon Valley Bank has been highlighted for its tech sector links and an unusually large share of its deposits not covered by deposit insurance. Credit Suisse had faced multiple controversies in recent years, including a recent disclosure of reporting irregularities which triggered an equity sell-off, as well as an outsized exposure to losses in cryptocurrencies.
Fundamentally, however, the current pressures impact all banks, with the weakest links facing the greatest strain. The question is: How far beyond those weakest links will the challenges spread? This will depend on how the vagaries of sentiment and fear interact with the willingness of policymakers to take action to protect the banking system. Thus far, action taken to resolve liquidity issues seems to have had the intended stabilizing effect, with banks such as Deutsche tested, but not forced to failure.
Central banks meeting at the end of March faced a dilemma between continuing their path of tightening to fight inflation, versus moderating or pausing to prioritize financial stability. In the end, the European Central Bank (ECB), Federal Reserve (‘Fed’) and the Bank of England (BoE) all opted to press ahead with rate rises2. Their decisions were helped in part by data showing an unexpected re-acceleration in inflation, and perhaps also wishing not to betray significant concern about the stability of financial systems.
Volatility in rates markets has a symmetric aspect, so both the initial fall in expectations and the return to a higher implied path for rates have contributed to the MOVE index reaching decade highs. Research suggests3 that bond volatility is less tied to meeting-by-meeting central bank decisions, which may be well-telegraphed, and more to expectations about the ‘terminal’ rate—the highest level that policy rates will reach over a cycle. As we near that peak rate, bond options are more sensitive to news at the margin than they were even to 75bp rate increases when it was well understood that the terminal rate was still far higher.
Long duration—and therefore high sensitivity to interest rates—is a characteristic not just of bonds, but any long-hold assets with uncertain cashflows, including income-producing real estate. It follows that real estate values, especially in sectors and geographies which have repriced furthest and most quickly such as UK industrial, are also more tightly linked to terminal policy rates at this point than month-to-month central bank decisions.
Bank lending is likely to become more conservative as duration risk attracts both external regulatory attention and enhanced internal risk management scrutiny. Any pullback in bank lending activity should further increase the importance of private credit across the economy, including in real estate. This could be beneficial to non-bank lenders funded by sticky capital, who can be expected to originate a greater proportion of mortgage loans. On the equity side, investors should cautiously manage their debt maturity schedule in the near term and diversify their sources of debt capital over the medium term.
The failures of SVB, Signature and Credit Suisse, and the pressures on other banks, have elicited a policy response that some banking experts consider to be sufficient to prevent severe additional damage to the economy. Certainly, rate-setters have felt sufficiently confident to press ahead with policy rate increases. But as in all cases of banking sector turbulence, there is considerable uncertainty and outcomes will depend on difficult-to-predict sentiment factors. Ultimately, the systemic nature of financial market risks makes them inherently difficult to control. As real estate managers and investors, our best approach is to understand and monitor these risks and practically diversify investments to mitigate the impact on the overall portfolio.
Footnotes: 1 [LMQ slide 3], 2 [LMQ slide 4], 3 Based on work by Natixis, a French corporate and investment bank, 4 [LMQ slide 6]
The balance of virtual and in-person interaction is close to a post-pandemic steady state. So we observed in our ISA Outlook 2023, where we called this out as one of our key global themes for the year. We pointed out that after a long period of gradual improvement in office attendance, the rate of change has substantially leveled off, with weekly office visits stabilizing below 50% in many US markets, and at somewhat higher levels in Europe and substantially higher levels in much of Asia-Pacific.
In many markets, but especially North America, work-from-home (WFH) headwinds have hit leasing demand as leases roll. An anticipated boost from permanent social distancing failed to materialize. At the same time, the cyclical outlook for job growth has weakened with the macroeconomy. These factors have contributed to deepening worries about the prospects for office values, which have made front-page news due to prominent defaults on commercial mortgages backed by office assets.
In this context, we thought it important to revisit the prospects for the office sector, addressing key questions, while highlighting differences and similarities among global markets. Where are risks greatest and where are they less? How should we think about the role of office in the portfolio? How will current trends play out in the various regions where we invest?
This is also an opportunity to look back on our predictions to assess where we got things right, and where we did not. As a part of this, we introduce a new feature in our ISA suite, “Looking Back”, in which we check on our prior predictions and forecasts.
Value investing in European real estate today is characterised by an abundance of unmeasurable uncertainty over quantifiable risk. Successfully navigating that uncertainty requires the intersection of expertise and experience.
Beyond the current turmoil however, we believe four themes will define the Europe of the near future – Europeans will be smarter, greener, older and more mobile.
Periods of dislocation, while testing for investors’ convictions, can also offer opportunity. Uncertainty can result in attractive entry pricing as markets become over-correlated. As a result, fund vintages raised during challenging markets, which are able to take advantage of this repricing, have outperformed in recent cycles.
Where short-term dislocation overlaps with our long-term convictions, we believe lasting value can be created.
We property strategists are accustomed to working with traditional real estate variables such as net absorption, rental growth and vacancy rates. But in the early days of the COVID-19 pandemic, there was no choice but to go on a crash course in previously unfamiliar epidemiological concepts like positivity rates, R-naught¹ and vaccine effectiveness, as these suddenly became drivers of short-term real estate conditions. Over the past year, real estate researchers have likewise had to quickly scale a learning curve in understanding energy markets. For the first time ever, we produced charts denominated in once esoteric units of measurement like therms, MMBTUs and MWhs.²
Gas, electricity and oil prices have long been linked to real estate outcomes—energy crises sparked 1970s inflation and have shaped real estate demand from Alberta to Texas and Scotland. But when supply is predictable and prices moderate, as in the years before the pandemic, those links can become dormant. They have awoken again in the past year. The recent dramatic but uneven volatility in energy prices has deeply influenced the economic and property market outlook—especially in Europe—and we expect it to continue to do so going forward.
One year on from Russia’s invasion of Ukraine in February 2022, European energy markets have proven adaptable, facing down a unique degree of energy disruption owing to the region’s dependence on pipeline links from Russia. After initially skyrocketing—European natural gas price at their peak were twelve-times higher relative to the ten-year, pre-conflict average—by mid-February 2023 prices it had fallen to a level only around two and a half times that long-term average.³ Government schemes to partially socialize the cost of higher energy, at the expected expense of massive government deficits and higher borrowing costs, now look a lot less extreme.
¹ R0 is the basic reproduction number, which describes the expected number of cases of an infectious disease directly generated by a single case, in a population where all individuals are susceptible to infection.
² 1 therm = 100,000 British thermal units (BTUs), a measure used in UK natural gas pricing. 1 MMBTU = 1,000,000 BTUs, which is used in US gas pricing. 1 MWh = 1,000,000 watts of electricity over one hour, used in European pricing of natural gas.
³ Refinitiv, Natural Gas TTF (Title Transfer Facility) historical front month futures as of 13 February 2023
Source: New York Mercantile Exchange and Intercontinental Exchange data via Bloomberg. As of 1 February 2023⁴
Relatively warm weather, cutbacks in consumption and alternative sources of energy, such as renewables and the global liquified natural gas (LNG) market, have contributed to unusually full gas storage reserves. German wind, solar, biomass, hydro, and other renewables generated 47% of the country’s electricity in 2022, a five-percentage point rise in mix.⁵ This allowed European energy prices to fall and has caused headline inflation to ease substantially, even if European core inflation remains stubbornly high. This has brightened the region’s economic prospects as well; our call in the ISA Outlook 2023 (published in December 2022) that a European recession was “almost certainly underway” now appears premature.
Is Europe out of the woods? Far from it. The winter is not yet over, and a cold snap could quickly deplete gas storage reserves. Going into next winter, the Russian supply that was used to partly fill those tanks last autumn will likely be completely unavailable. Meanwhile, Chinese demand for LNG, which was down by 20% in 2022 owing to the country’s zero-COVID policy⁶, is likely to rebound as its economy reopens, leading to more competition for tanker deliveries. Europe’s energy reorientation will probably be at least a decade-long process, which will not be reduced in scope, scale or difficulty by one fortuitously warm winter—though new LNG import capacity and suppliers have accelerated the shift in the past year. We expect that energy prices will continue to have deep impacts on Europe’s economy and real estate markets.
⁴ TTF future prices have been used as a benchmark for European natural gas prices due to being the most liquid gas trading hub in Europe
⁵ German Environment Agency (UBA), press release from 12 December 2022
⁶ International Energy Agency (IEA), report from November 2022
While Europe’s historic reliance on Russian fossil fuels makes it uniquely exposed to energy risks, we see energy as a relevant, if variable, factor for global real estate. This is in part because energy markets operate at both global and regional scales. The Ukraine crisis caused an acute surge in European gas prices, but also a worldwide spike in the price of oil, which trades in a more globalized marketplace. It is worth noting that Canada and now the US are in aggregate net energy exporters, meaning increases in energy costs can be a net positive for economic growth in metro areas with concentrations of energy companies.
Going beyond the macro, the impact of energy costs on real estate varies greatly by building type. Data centers, cell towers, hotels, and cold storage are especially energy-hungry property types, and ones where operational business models mean landlords may be directly exposed to energy costs. Residential sectors vary widely, depending on the age and energy efficiency of the stock, the nature of building systems and leasing conventions. For example, the bulk of the older German residential inventory is heated by gas-fired boilers providing steam heat, and tenants pay “warm rents”—meaning the landlord is responsible paying for heat. Individually metered, modern multifamily product is more insulated—literally and figuratively—from energy prices.
Investments in commercial real estate sectors with net lease structures under which tenants pay energy bills directly, such as office and logistics, may appear shielded from energy volatility. But tenants in places where energy prices have surged have become painfully aware that these costs, historically a small portion of their total expense of occupancy, can suddenly become a significant burden. In our European portfolio, we have for the first time received requests from tenants to help lower their energy bills. Indeed, working with occupiers to improve efficiency and to generate on-site energy to reduce these bills has become an important way to retain them and maximize the affordability of the net rents they pay.
The limitations of electrical grids are also influencing property markets. The availability (or unavailability) of power is already shaping location decisions globally for energy-consumptive uses like data centers, and can be a constraining factor on building electrification, a key step in decarbonization. Weather events can intersect with the nuances of energy supply to cause blackouts, such as occurred in Texas in February 2021 and recently in parts of China, potentially putting a premium on buildings with backup sources of power.
These are just a few of the ways that energy risks have become closely intertwined with real estate investment outcomes. We expect to be following these issues more closely in the years ahead.
Converging needs are leading to more dialogue and transparency than ever before
Investors are wary about the economy. Companies are trying to attract people back to the office. Both camps are working toward their sustainability goals.
This all makes high-quality real estate – buildings that meet green specifications, or spaces that companies want to lease and where employees want to work – what everyone wants right now.
The convergence on quality is bringing about a major shift in the industry. The relationship between investors and occupiers has long been largely transactional, and at times even adversarial. But it’s increasingly becoming one of cooperation and partnership.
Beverley Kilbride, European COO of LaSalle Investment Management, and Andy Poppink, CEO of JLL EMEA Markets discuss the drivers behind this changing dynamic – and the state of real estate in general – on JLL’s website.
At LaSalle, our mission is to deliver investment performance for a better tomorrow for all our stakeholders, and sustainability and strong climate action are an integral part of delivering both performance and a better tomorrow.
We are addressing the physical and transitional risks associated with the impacts of climate change and the move to a decarbonized world, with action across all areas of our business. We firmly believe that this climate-focused approach can drive investment performance.
Our 2022 sustainability review covers our environmental sustainability strategy and approach as well as how our actions can add value for investors and other stakeholders. It highlights our 2022 results and details how we are tackling resource conservation, reducing carbon emissions and evaluating climate risk across all areas of our business. We conclude with a selection of case studies from around the world highlighting our efforts in carbon conservation, resource capture, supporting biodiversity and supporting a more circular economy.
Far from simply mitigating climate risk, our commitment to sustainability runs through every facet of our business, to ensure that we add value at every stage of an asset’s lifecycle and across the investment process.
James Pallett is the Senior Finance Director, Sustainability in the Investor Accounting and Finance team. He is responsible for driving improvements in sustainability data and reporting across all of LaSalle’s mandates globally and leading the finance and operations of new net zero carbon initiatives.
Prior to his current role, James managed the European and Asian Finance and Operations team of LaSalle’s global indirect real estate investment platform, LaSalle Global Solutions. He has extensive experience as a fund controller launching a number of open and closed-end real estate funds. James began his career with the accounting firm MHA MacIntyre Hudson in 2008 before joining LaSalle in 2013.
James is a Chartered Accountant and holds a degree in Accounting and Finance from the University of Exeter (UK).
Sustainability Associate, Continental Europe
Head of Sustainability, Americas
Senior Analyst, Asset Management
Head of Sustainability, Asia Pacific
Head of Sustainability, Europe
Sustainability Analyst
Vice President, Global Sustainability
Head of Sustainability, LaSalle Global Solutions
European Net Zero Carbon Implementation Lead
Managing Director, Sustainable Investments
Strategist, Climate and Carbon Lead
Senior Portfolio Accountant
Global Head of Sustainability
Associate Vice President, Sustainability
European Net Zero Carbon Lead
Sustainability Manager, Continental Europe
Net Zero Carbon Associate
Global Sustainability Associate
Sustainability Manager
ESG Manager, Asia Pacific
Amy Jacks joined LaSalle in 2022 and is a Vice President on our Global Sustainability team. In her role, she is focused on the ESG strategy collaboration across global and regional teams. Her responsibilities include global ESG reporting, policies and supporting initiatives in climate strategy.
Amy joined LaSalle from JBG SMITH, where she led the implementation of sustainability strategies within a diversified operating portfolio and development pipeline. Prior to JBG SMITH, she was an Environmental Defense Fund (EDF) Climate Corps Fellow with Boston Properties as well as a Consultant for the Enterprise Community Partners, Green Communities program.
Amy earned a Bachelor of Arts from Bates College and a Master of Business Administration from Boston University Questrom School of Business. She is accredited as a LEED AP.
Sustainability Associate, Continental Europe
Head of Sustainability, Americas
Senior Analyst, Asset Management
Head of Sustainability, Asia Pacific
Head of Sustainability, Europe
Sustainability Analyst
Head of Sustainability, LaSalle Global Solutions
European Net Zero Carbon Implementation Lead
Managing Director, Sustainable Investments
Strategist, Climate and Carbon Lead
Senior Portfolio Accountant
Global Head of Sustainability
Associate Vice President, Sustainability
European Net Zero Carbon Lead
Senior Finance Director, Sustainability
Sustainability Manager, Continental Europe
Net Zero Carbon Associate
Global Sustainability Associate
Sustainability Manager
ESG Manager, Asia Pacific
As macroeconomic and geopolitical trends generate concern, investors are weighing the impact of inflation, rising rates and an uncertain economic outlook. Clarity remains elusive in many areas of real estate, but LaSalle’s Insights, Strategy and Analysis (ISA) Outlook 2023 makes the case that looking through the acute phase of volatility can lead investors to find patterns and identify opportunities.
The full report can be viewed at: www.lasalle.com/isa
As the 2022 Investment Strategy Annual predicted, two areas of continued strength are the residential (encompassing both single-family rental and apartments) and industrial sectors, which continue to see healthy fundamentals. But, as the report notes, price discovery across the market remains difficult, and many sellers are anchoring to aspirational “peak” pricing, perpetuating a bid-ask gap and reducing transaction volume.
The report “looks through” this current period of volatility to a potentially more positive second half of 2023 and 2024 as economic growth recovers and new supply remains limited, potentially providing a rebound in rent growth for investors with holdings in sectors that are underpinned by solid fundamentals.
Brian Klinksiek, incoming Global Head of Research and Strategy at LaSalle, said: “Crises go through phases, but we humans are wired with recency bias that causes us to worry that short term pain could last forever. However, we’ve been through up and down cycles before, and we will eventually enter a more stable phase in the capital markets. Even now there remain opportunities within real estate for well-capitalized investors who understand the nuances of local markets and sectors.”
Select ISA Outlook 2023 findings for North America include:
Rich Kleinman, Co-CIO and Head of Research & Strategy for the Americas at LaSalle, said, “While private real estate is often slower to re-price than public real estate, it is impacted by the same capital markets pressures driven by inflation and rising interest rates. In the short term, we expect price discovery to be slow in the US as both buyers and sellers have shifting price expectations. However, we believe this uncertainty can produce opportunity if you have the right insights on markets and sectors. This will be challenging and will require investors to weigh short-term value with long-term portfolio objectives.”
Chris Langstaff, Head of Research & Strategy for Canada at LaSalle, said, “We anticipate some short-term softening in the Canadian economy, especially given that household wealth is closely tied to home prices. However, Canada’s high levels of immigration will help the country with a more rapid recovery and the demand generated will allow real estate markets to quickly recover.”
About LaSalle Investment Management | Investing Today. For Tomorrow.
LaSalle Investment Management is one of the world’s leading real estate investment managers. On a global basis, LaSalle manages approximately $79 billion of assets in private and public real estate property and debt investments as of Q3 2022. LaSalle’s diverse client base includes public and private pension funds, insurance companies, governments, corporations, endowments and private individuals from across the globe. LaSalle sponsors a complete range of investment vehicles including separate accounts, open- and closed-end funds, public securities and entity-level investments. For more information, please visit http://www.lasalle.com, and LinkedIn.
Forward looking statement
NOTE: This information discussed above is based on the market analysis and expectations of LaSalle and should not be relied upon by the reader as research or investment advice regarding LaSalle funds or any issuer or security in particular. The information presented herein is for illustrative and educational purposes and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy in any jurisdiction where prohibited by law or where contrary to local law or regulation. Any such offer to invest, if made, will only be made to certain qualified investors by means of a private placement memorandum or applicable offering document and in accordance with applicable laws and regulations. Past performance is not indicative of future results, nor should any statements herein be construed as a prediction or guarantee of future results.
Ryunosuke (Ryu) Konishi is managing director based in New York with a specific focus on sustainability and decarbonized real estate investing. Prior to his current role, he served as head of acquisitions and investor relations for a logistics-focused, publicly traded Japanese REIT, LaSalle Logiport REIT, as well as managing acquisitions for the LaSalle Asia Opportunities Fund IV and Japanese separate accounts in Tokyo.
Ryu began his investment management career in 2003 and has significant experience in commercial real estate debt and equity investments across the capital structure in both the United States and Japan. He joined LaSalle in August 2014 from Hanover Street Capital Partners, which was the Special Situations Group of Deutsche Bank in the U.S. Prior to Hanover Street, he was an advisor to Sciame Development Inc. and Aozora Bank and a Vice President at Aetos Capital. His first role in real estate investment management was with Lehman Brothers in their Global Real Estate and Real Estate Private Equity groups in Tokyo and New York, respectively. Prior to his real estate career, Ryu also practiced as an architect for three years in New York with Beyer Blinder Belle Architects & Planners.
Ryu holds a Master of Science in Real Estate, a Master of Architecture, and a Bachelor of Science in Architectural Design, all from the Massachusetts Institute of Technology. He is fluent in both English and Japanese.
Senior Analyst, Fund Management
Head of Transactions Europe Core and Core+ Strategies
Managing Director, Development and Fund Management
Managing Director, Fund CFO
Fund Manager, LaSalle E-REGI
Senior Analyst, Fund Management
Associate, Fund Management
Head of Healthcare Real Estate, United States
Managing Director, LaSalle Global Solutions
Head of Investment Risk Strategy and Management
Senior Managing Director, Fund Management
Deputy Portfolio Manager, LaSalle Property Fund
Chief Financial Officer, LaSalle Property Fund
Head of Custom Accounts, Asia Pacific
Managing Director, CFO of JLLIPT
Chief Investment Officer, Canada
Securities Global Portfolio Manager
Portfolio Manager and President, LaSalle Property Fund
Senior Associate, LaSalle Global Solutions
Head of Asia Pacific, LaSalle Global Solutions
Managing Director, Investor Accounting and Finance
Senior Vice President, Value-add Investments
Deputy Fund Manager, LaSalle Encore+
Fund Manager, LaSalle Encore+
Director, European Debt Investments
Head of Korea
Portfolio Management
Americas Head of Research and Strategy
Global Head of Research and Strategy
Director, Value-Add Investments
Head of Debt Capital Markets, Americas
Fund Manager, UK Custom Accounts
Managing Director, Value-Add Investments
Managing Director, Head of Portfolio Management, European Debt and Value-Add strategies
Portfolio Manager, US Custom Accounts
Head of Value-Add Investments
Senior Portfolio Accountant
Head of Americas Investor and Consultant Relations
Portfolio Manager
Securities Global Portfolio Manager
Senior Managing Director, Fund Management
Head of International Accounts, Europe
Fund Manager, LaSalle Japan Property Fund
Chief Executive Officer, Japan
Portfolio Manager and President
Managing Director, European Debt Investments
Managing Director, Portfolio Management, LaSalle Global Solutions
Senior Fund Manager, LaSalle Global Solutions
Fund Manager
Chief Financial Officer and Executive Vice President
Chief Investment Officer, LaSalle Global Solutions
President, LaSalle Value Partners US
Managing Director, UK Custom Accounts
President and Chief Executive Officer, JLL Income Property Trust
Senior Managing Director, United States
Deputy Fund Manager, Value-add Strategies
Associate, Fund Management
Vice President, LaSalle Global Solutions
Senior Portfolio Manager
Head of Real Estate Debt Strategies, Europe
Chief Investment Officer, Structured Investments
Portfolio Associate, LaSalle Global Solutions
Head of Debt and Value-Add Strategies, Europe
Eventually, we expect post-COVID-19 pressures such as inflation, supply chain issues and large fiscal stimulus to settle and a new normal to emerge. It’s just a question of “when?”
In this year’s edition, we seek to look through the current acute period of volatility and uncertainty, to discuss our view of likely outcomes and scenarios to consider, key themes for investing and real estate strategy recommendations that we expect to be resilient across the range of conceivable macro environments.
In this keynote interview with PERE on net zero’s responsibility and consequences, Darline Scelzo says employees want greater connectivity and a stronger sense of belonging.
When the pandemic hit, LaSalle was already formulating a new strategy for diversity, equity, inclusion (DE&I) and employee wellbeing, which evolved into a comprehensive initiative it calls the Culture of Care.
In this keynote interview with PERE on net zero’s responsibility and consequences, David DeVos considers how to manage the risk of ESG obsolescence
As the real estate industry moves toward` net zero, how to do so cost-effectively is a consideration for investors, developers, vendors, suppliers and tenants. David DeVos, trained and licensed as an architect and now global head of ESG at LaSalle Investment Management, reflects on the direction of travel and how the industry’s many constituents must balance competing priorities.
In 2016 LaSalle added “E” or Environmental factors to the demographics, technology and urbanization (DTU) set of secular forces real estate investors need to focus on for delivering positive long-term performance. As with other secular forces the “E-factors” are long-term in nature and live beyond the cyclical market shifts that drive near-term performance.
The early nature of the decarbonization process—both pledges and regulation—creates risks and opportunities. Catching a secular trend too early or too late in its trajectory are both risky. Our view is to move carefully and deliberately to mitigate portfolio risk and maximize returns. The net zero carbon (NZC) movement will impact different markets and segments at different points in time. The most important lesson is to pay close attention to how the trend affects specific projects and investment decisions.
LaSalle Investment Management (“LaSalle”) has continued to deliver upon its environmental, social responsibility and governance (ESG) goals, recording improved performance in two industry-recognized global ESG benchmarks for asset managers.
Within the 2022 Global Real Estate Sustainability Benchmark (GRESB), 18 of the firm’s funds and separate accounts, domiciled across Europe, North America, and the Asia-Pacific region, have been recognized again for their ESG standards, further improving upon the results reported in 2021. Across 18 submissions, the firm achieved four 5-Star, eight 4-Star and six 3-Star GRESB Ratings.
LaSalle commingled products recognized within the 2022 GRESB include:
In addition, LaSalle has also received updated scores for the 2021 ‘Principles for Responsible Investment’ (PRI) Assessment Report, most notably securing a 5-star rating in the Investment & Stewardship Policy score, the only rating that applies across the whole of the firm. 5-star scores are reserved for asset managers that can, “demonstrate leading practices within the responsible investment industry.”
These results come following changes to the PRI’s reporting structure and scoring methodology, which included moving to a star classification system from letter classification.
LaSalle PRI Assessment Report results include:
David DeVos, Global Head of ESG at LaSalle said: “These impressive results evidenced in leading industry benchmarks demonstrate LaSalle’s commitment and expertise in delivering upon our ESG goals. While pleasing to have secured these metrics, reinforcing LaSalle’s status as a leader in responsible real estate investment, we continue to seek opportunities to accelerate our efforts in achieving our long-term targets and achieving superior performance for our clients.”
About GRESB
GRESB is an industry-driven organization transforming the way capital markets assess the environmental, social and governance (ESG) performance of real asset investments. More than 900 property companies and funds, jointly representing more than USD 3.6 trillion in assets under management, participated in the 2018 GRESB Real Estate Assessment. The Infrastructure Assessment covered 75 funds and 280 assets, and 25 portfolios completed the Debt Assessment. GRESB data and analytical tools are used by more than 75 institutional and retail investors, including pension funds and insurance companies, collectively representing over USD 18 trillion in institutional capital, to engage with investment managers to enhance and protect shareholder value. Greater transparency on ESG issues has become the norm, with GRESB widely recognized as the global ESG benchmark for real assets. For more information about GRESB and its ESG benchmarking and reporting for real estate, please visit https://gresb.com/gresb-real-estate-assessment/.
About the PRI
The PRI is the world’s leading proponent of responsible investment. It works to understand the investment implications of environmental, social and governance (ESG) factors and to support its international network of investor signatories in incorporating these factors into their investment and ownership decisions. The PRI acts in the long-term interests of its signatories, of the financial markets and economies in which they operate and ultimately of the environment and society as a whole. The PRI encourages investors to use responsible investment to enhance returns and better manage risks, but does not operate for its own profit; it engages with global policymakers but is not associated with any government; it is supported by, but not part of, the United Nations. For more information about UN PRI and its ESG benchmarking and reporting for real estate, please visit https://www.unpri.org/
About LaSalle Investment Management
LaSalle Investment Management is one of the world’s leading real estate investment managers. On a global basis, we manage approximately $82 billion of assets in private equity, debt and public real estate investments as of Q2 2022. The firm sponsors a complete range of investment vehicles including open- and closed-end funds, separate accounts and indirect investments. Our diverse client base includes public and private pension funds, insurance companies, governments, corporations, endowments and private individuals from across the globe. For more information please visit www.lasalle.com and LinkedIn.
NOTE: This information discussed above is based on the market analysis and expectations of LaSalle and should not be relied upon by the reader as research or investment advice regarding LaSalle funds or any issuer or security in particular. The information presented herein is for illustrative and educational purposes and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy in any jurisdiction where prohibited by law or where contrary to local law or regulation. Any such offer to invest, if made, will only be made to certain qualified investors by means of a private placement memorandum or applicable offering document and in accordance with applicable laws and regulations. Past performance is not indicative of future results, nor should any statements herein be construed as a prediction or guarantee of future results.
Inflation has moved rapidly from overlooked to top-of-mind this year. For the past eight months, many different types of price movements have received significant attention among economists, central bankers and real estate owners and occupiers. Global supply chain bottlenecks and pandemic-related fiscal and monetary stimulus have all contributed to price instability. More recently, Russia’s invasion of Ukraine has been a particularly troubling cause of energy price volatility, especially in Europe.
Many countries are transitioning their energy grids to more renewable sources, but a full transition could take several decades. Fossil fuels supply about 77% of the world’s energy, according to the Environmental and Energy Study Institute (see p. 7). The chaotic collision of inflation and energy shortages – particularly in Europe – has decision-makers scrambling as winter approaches.
The disruption of Russian natural gas flows to Europe prompted delegates of the European Union to discuss solutions and to wean itself from Russian gas. Some are promoting a common price cap on all gas imports, while others believe this will limit supply, further stressing consumers and businesses. As winter approaches, strategic reserves in Europe are at full storage capacity (see p. 45 Gas Storage), so an immediate crisis has likely been averted. However, it remains unclear how these reserves will be replenished once they are depleted. Our analysis of this rapidly-changing situation in Europe can be found on p. 9 of this month’s deck.
Energy inflation is also impacting lease agreements between real estate owners and occupiers. Green Street Advisors recently noted that on average, energy costs to either the owner or tenant equals roughly 6% of total rent or USD ~$2.00 psf in both the US and EU. But with energy costs having risen sharply, the question becomes: who bears the cost?
In North America, most commercial leases are triple net, with tenants responsible for utilities, taxes, maintenance, and insurance. Triple net leases are also prevalent among retail properties in the US and Canada, but Canada also has gross, semi-gross or base-year leases which are indexed to CPI inflation. While tenants pay directly for their energy usage, owners are not fully off the hook as they bear responsibility for vacant spaces. Owners can also mitigate cost risk through guaranteed maximum price contracts for certain utilities.
Leases in the UK are also generally on a net basis. However, to counter rising prices, tenants have been renegotiating rents based on total occupancy cost, thus the property owner becomes responsible for any costs that exceed a threshold. In this regard, UK tenants have been increasingly seeking different lease structures that are effectively gross in nature, with shorter lease terms (see p. 10).
On the European continent, most commercial leases are fully indexed to inflation annually. Larger retail tenancies such as grocers often have bargaining power and can negotiate an index cap or lower indexation levels. But even with indexation, tenants are becoming more sensitive to utility costs and are negotiating for increases to be capped. In Japan and China, fixed-term leases typically put the burden of paying higher utility costs on the tenant, but landlords must be careful to keep total occupancy costs under control or a downward reset to the base rent could be the only way to get a tenant to renew.
Despite progress in transitioning energy grids to renewables in many countries, the world remains largely dependent on fossil fuels to provide the power to heat and cool buildings. Rising energy prices are testing the tenant-landlord relationship and the balance of power is rapidly shifting in favor of tenants, especially in weaker sectors like mall retail and offices.
LaSalle Investment Management (“LaSalle”) today announced Samer Honein will succeed Alok Gaur as its Global Head of Investor Relations, effective November 30. Samer will join LaSalle’s Global Management Committee upon commencement of his new role, and continue to be based in Paris.
LaSalle Global CEO Mark Gabbay said, “We are grateful to have a leader of Samer’s caliber step up to this critical leadership role, and thankful for the many contributions Alok has made during his time at LaSalle. Our IR team is well-positioned to continue driving growth for LaSalle, as we seek to scale our flagship vehicles and deliver new offerings in the market.”
Samer has been with LaSalle and JLL for more than 21 years, and has over 25 years of industry experience. He was appointed the LaSalle’s Head of EMEA Investor Relations in April 2021 and in that role has served as a leader both within the IR group and for the firm. During his time at LaSalle, Samer has driven large capital raises and maintained relationships with key clients in the EMEA region with a focus on the Middle East. Samer previously worked with LaSalle’s Acquisitions team, sourcing investments opportunities and executing acquisitions in France on behalf of LaSalle’s Strategic Partnerships.
Samer Honein, Head of EMEA Investor Relations said, “It is an honor to be named the next leader of LaSalle’s global Investor Relations group. I thank Alok for his partnership, insight and leadership, and look forward to building on the momentum our team has created in recent years, having raised more than $35 billion of capital since 2017. We have strong and respected IR leaders in each region that will continue to deliver world-class service to our investor clients, while helping LaSalle achieve its strategic objectives.”
Alok joined LaSalle in 2016 to co-lead the global capital raising team and then assumed the Global Head role in January 2021. During his tenure he helped accelerate several programmatic IR processes enhanced transparency and cross-functional collaboration across the firm.
Alok Gaur, Global Head of Investor Relations said, “I am thankful for the colleagues I’ve worked alongside during my time at LaSalle. The firm has an enviable track record and platform to help drive its future successes and Samer is an ideal leader to advance the next phase of growth. I thank Mark and our Global Management Committee for their partnership and confidence in me to lead this team, and look forward to seeing the firm prosper in the years ahead.”
About LaSalle Investment Management
LaSalle Investment Management is one of the world’s leading real estate investment managers. On a global basis, we manage approximately $82 billion of assets in private equity, debt and public real estate investments as of Q2 2022. The firm sponsors a complete range of investment vehicles including open- and closed-end funds, separate accounts and indirect investments. Our diverse client base includes public and private pension funds, insurance companies, governments, corporations, endowments and private individuals from across the globe. For more information please visit www.lasalle.com and LinkedIn.
NOTE: This information discussed above is based on the market analysis and expectations of LaSalle and should not be relied upon by the reader as research or investment advice regarding LaSalle funds or any issuer or security in particular. The information presented herein is for illustrative and educational purposes and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy in any jurisdiction where prohibited by law or where contrary to local law or regulation. Any such offer to invest, if made, will only be made to certain qualified investors by means of a private placement memorandum or applicable offering document and in accordance with applicable laws and regulations. Past performance is not indicative of future results, nor should any statements herein be construed as a prediction or guarantee of future results.
LaSalle Investment Management (“LaSalle”) is pleased to confirm it has been selected for a global real estate investment mandate by the Government Pension Investment Fund (GPIF), Japan. With Mizuho Trust & Banking Co., Ltd. acting as gatekeeper, the mandate will pursue co-investments, joint ventures and club deals.
Mark Gabbay, Global CEO of LaSalle, said: “It is an honor to be selected by GPIF for this investment mandate. Our global scale, wide ranging real estate investment capabilities and long track record will help shape our strategy and we look forward to delivering strong performance on behalf of GPIF for years to come.”
Jon Zehner, Head of LaSalle Global Partner Solutions at LaSalle, added: “We are pleased to have earned the trust of GPIF to manage real estate investments on their behalf. Our team is focused on sourcing and delivering compelling opportunities, and we look forward to strengthening our relationship of trust as we build a global portfolio.”
About GPIF
Government Pension Investment Fund (GPIF) is an incorporated administrative agency, established by the Japanese government. Total assets as of the end of June in 2022 count for JPY193,012.6 billion. For more information, visit: https://www.gpif.go.jp/en/about/.
About LaSalle Investment Management
LaSalle Investment Management is one of the world’s leading real estate investment managers. On a global basis, we manage approximately $82 billion of assets in private equity, debt and public real estate investments as of Q2 2022. The firm sponsors a complete range of investment vehicles including open- and closed-end funds, separate accounts and indirect investments. Our diverse client base includes public and private pension funds, insurance companies, governments, corporations, endowments and private individuals from across the globe. For more information please visit www.lasalle.com and LinkedIn.
NOTE: This information discussed above is based on the market analysis and expectations of LaSalle and should not be relied upon by the reader as research or investment advice regarding LaSalle funds or any issuer or security in particular. The information presented herein is for illustrative and educational purposes and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy in any jurisdiction where prohibited by law or where contrary to local law or regulation. Any such offer to invest, if made, will only be made to certain qualified investors by means of a private placement memorandum or applicable offering document and in accordance with applicable laws and regulations. Past performance is not indicative of future results, nor should any statements herein be construed as a prediction or guarantee of future results.
The last day of summer in the Northern Hemisphere was September 22nd, and cooler temperatures will surely be welcomed by many. Europe and China recorded their hottest-ever summers since recordkeeping began in 1880, according to NOAA’s National Centers for Environmental Information. Meanwhile, the US recorded its third-hottest summer by the same metric.
The summer has also been a reminder to consider both the physical and transition risks associated with climate change. Reducing carbon emissions, which is key to preventing further long-term escalation in events such as these, has come under renewed urgency given recent geopolitical tensions.
Economic impacts extended across the world. Transport throughout the UK ground to a halt for part of July as temperatures reached levels never imagined by the Victorian engineers who designed its railway network. A lack of rainfall left crops parched and caused key rivers such as the Rhine to reach levels so shallow that they were not navigable by the barges that have become a key part of Central Europe’s supply chains. In some areas of the US, the key problem was too much precipitation, with extreme rain causing severe disruption in Kentucky and Saint Louis; flooding contributed to a drinking water crisis in Jackson, Mississippi. In China, precipitation in Jiangxi and Anhui provinces in July and August was 60% less than a year ago. Record heat and drought across China, including parts of the Yangtze River, caused a shortage of hydro-power and halted shipping. Relief from this year’s extreme temperatures is coming at the same time as what looks to be another severe season for hurricanes and wildfires takes shape. Hurricane Fiona left all of Puerto Rico without power before making a rare assault on Canada’s maritime provinces, and Hurricane Ian is likely to be the worst hurricane to hit the west coast of Florida since 1921.
The summer has also been a reminder to consider both the physical and transition risks associated with climate change. Reducing carbon emissions, which is key to preventing further long-term escalation in events such as these, has come under renewed urgency given recent geopolitical tensions. Most European countries face a severe energy crisis triggered by Russia’s war in Ukraine and the cessation of natural gas flows through key pipelines. Renewables like solar power have the dual benefit of aiding decarbonization and reducing dependence on Russian fossil fuels.
As real estate investors, we are concerned about the impacts that climate change will have on our investments. On the physical risk side, it is critical that we become aware of the extent to which climate risk hazards may directly impact our portfolios and prepare our buildings to be resilient to climate change. The first step is to identify the physical climate hazards that will impact specific buildings, measure the exposure to those hazards in aggregate within the portfolio, and then get to work managing, mitigating, and strategizing around these risks.
To get the data, we have a plethora of climate data providers and forecasters to choose from, but it can be overwhelming to narrow the field down. When we reviewed multiple data providers, we found considerable inconsistency in how metrics are defined, and wide variation in risk scores for the same hazard at the same property.
Our recent report, “How to Choose, Use and Better Understand Climate Risk Analytics”, researched and written in partnership with the Urban Land Institute (ULI), is an excellent overview of the challenges faced by first-time consumers of climate data. The paper outlines physical climate risk basics, identifies differences between data providers to be aware of, and raises a call to action to standardize the outputs in ways that are most meaningful and useful for real estate, with transparency that enables apples‑to‑apples comparisons across models.
Once the data is in hand, the next step is to manage the risks at two levels: at the property level, through evaluating both existing and potential new hardening strategies to be more resilient against particular hazards; and at the portfolio level, through assessment of exposure concentrations and consideration of how climate risk informs overall portfolio construction strategies. And lastly, we must continue to monitor these risks on a regular basis, because one thing we know for sure is that our climate will continue to change, and more disruptive and damaging seasons like the hot summer of 2022 are likely to recur.
for wine and for real estate
The start of the grape harvest season calls to mind the similarities between winemaking and real estate. Real estate fund managers often borrow vineyard terminology to describe their actions. Seed capital is raised and invested, portfolios are pruned, proceeds are harvested, and funds are classified by their vintage year, meaning the year of fund formation.
Does the inception year for a fund matter in the same way a vintage year matters for wine? Our analysis of data from Preqin highlights that both the vintage year and risk style of a fund have been important determinants of performance over the last 30 year.
Does the inception year for a fund matter in the same way a vintage year matters for wine? Our analysis of data from Preqin highlights that both the vintage year and risk style of a fund have been important determinants of performance over the last 30 years (Page 5).
A wine vintage is shaped by external conditions like the weather. Stressful conditions like droughts can produce great wine. Likewise, macroeconomic conditions influence a fund’s risk and return characteristics. In the Mid-Year 2022 ISA, we noted how capital markets are experiencing a major regime shift. The macroeconomic environment has quickly moved from lower-for-longer to weaker growth (Page 33), high inflation (Page 14), and higher interest rates (Page 9), all of which affect real estate performance.
Vintage years characterized by major disruptions in macroeconomic conditions – like the dot-com crash or the global financial crisis – have been associated with modestly higher median returns compared to the prior period, but also a significantly higher dispersion of returns (Page 6). So, a stressful macro environment simultaneously creates higher volatility while it also slightly raises the odds of a stronger entry point for investing. Put differently, choosing a wine from a good vintage year is no guarantee that it will turn out to be a memorable bottle!
In wine-growing countries across the world, the summer has been dry and hot. Decades of historic data allow oenologists to draw inferences about the likely quality of the 2022 wine vintage. However, vintage year analysis for real estate funds is trickier. For one thing, the combination of macroeconomic conditions that the 2022 real estate fund vintage faces–weak growth, high inflation and rising interest rates–have not been seen in conjunction since the 1970s.
In addition, the repricing implied by public real estate markets (page 31) has not yet fully worked its way through private markets. On the one hand, capital that has been invested early in 2022 already might face valuation declines if the repricing continues. On the other hand, any private equity repricing in late 2022 offers an interesting entry point for funds with dry powder.
Even with plenty of data to review, it takes the passage of time to confirm the final quality of a wine vintage. We also expect that it will take several years for the true quality of the 2022 real estate fund vintage to be known. Nevertheless, the wine analogy (and our own research) shows that stress can still produce a strong vintage, for wine or for real estate.
Heightened geopolitical risk, persistent high inflation, and a possible recession will place European real estate under acute pressure in H2 2022. However, the asset class is expected to continue to provide longer-term stability for core investors via carefully curated portfolios, as well as offering new opportunity for investors seeking value-add returns – according to the mid-year 2022 edition of the Investment Strategy Annual (“ISA”), the report published by global real estate investment manager LaSalle Investment Management (“LaSalle”).
Europe is facing a macroeconomic environment rendered fragile by supply chain issues, a hot war on the region’s periphery and a squeeze on consumers’ disposable incomes. As a result, LaSalle expects real estate investors to adopt a much more cautious approach in the second half of 2022. However, while inflationary pressures have surged, and interest rates have increased earlier and more quickly than expected, real estate assets can act as a hedge against inflation in cases where landlords have pricing power. Fundamentally, this will manifest for investors with the best assets in the right locations, where supply-demand imbalances underpin rental growth.
Furthermore, in an uncertain environment, investors seeking higher returns can expect to benefit from dislocation and opportunities to repurpose assets. Off-market or value-add opportunities could potentially offset the effect of rising operating expenses, construction costs and interest rates, either through building-specific renovation or repositioning to achieve occupancy improvement or rental uplift.
Long-term resilience will be underpinned by careful stock selection. Although European real estate markets have been impacted by global headwinds, pockets of opportunity persist for investors across each sector.
Retail rebound postponed
In retail, the post-Covid recovery has been shaken by the impact of inflation on consumer discretionary spending power. Bricks-and-mortar retail warehouses have, however, remained resilient due to the non-discretionary nature of underlying demand for grocery anchors and their convenience offer. But fundamental challenges for European shopping centres and high-street retail is expected to persist, despite destination shopping continuing to remain an integral part of the retail experience in the long term. We remain optimistic on the outlook for outlet centres, which are set to benefit from increasing consumer frugality.
Office sector ‘trifurcation’
As with retail, the office sector is experiencing occupier and investor needs varying greatly by the quality of asset and micro location. Experientially rich buildings in prime locations that meet sustainability standards and benefit from high-quality amenities will continue to attract demand. In addition, with the pathway to Net Zero Carbon in mind, the age and quality of existing stock in European markets presents an opportunity to create the offices of the future, particularly through refurbishment. However, there is a growing range of older stock which is likely to be stranded and should be sold at – or at times even below – current valuation before liquidity dries up.
Logistics demand story remains intact
Logistics has not been immune to recent market shocks and the ongoing cost-of-living crisis. A slowdown in take-up by major occupiers marks a change from many years of continued expansion. However, LaSalle believes that the sector remains in a robust position to grow in the coming months. European logistics properties recorded the highest demand for new space ever in H1 2022, driven by continuous e-commerce expansion, as well as just-in-case inventories and the nearshoring of some manufacturing activity. As a result, vacancy rates are at historical lows, and we remain confident of future prospects for European logistics rental growth.
Living strategies’ prospects at risk of divergence
The living sectors remain underpinneD by strong demand drivers including robust household formation, growth in key cities, an ageing population, increasing mobility and a structural undersupply across Europe. However, potential home buyers may tilt toward renting, owing to the rising cost of debt. For the more niche living sub-sectors, such as student housing and senior housing, investors will need to be ahead of the curve to take advantage of attractive pricing.
Finding value across the yield spectrum
With the European landscape evolving quickly, assessing the prospect for various sectors requires consideration of assets’ pricing yield levels and income growth potential.
LaSalle’s framework finds that for low-yield sectors with excellent fundamentals, like logistics, prime low-carbon offices in key cities and unregulated residential, valuations will hinge on the potential for and relative magnitude of future rental growth and an upward shift in yields. In low-yielding sectors where inflation cannot be offset by rental growth, caution must be exercised until markets stabilise.
Although higher-yielding sectors with challenged fundamentals are intuitively those in which value may be identifiable, recent concerns around economic growth have made their impact felt. The nascent retail recovery, for instance, is at risk from inflationary pressure on real incomes, while capex-intensive strategies to renovate buildings are affected by rising construction costs. Meanwhile, sectors with relatively higher yields and stronger net operating income growth potential – namely alternative living sectors, such as student accommodation or senior living – continue to remain attractive.
Brian Klinksiek, Head of European Research and Global Portfolio Strategies at LaSalle, said: “The past six months have seen macroeconomic headwinds and geopolitical risk affect the global economic outlook. European investors should therefore exercise caution in the coming months until market valuations and asset pricing stabilise. But despite this, real estate will remain an anchor as other asset classes struggle, and investors look for predictability. Underpinned by the long-term resilience of the asset class, careful portfolio construction across the key sectors of European real estate can continue to deliver the benefits of diversification, stability and long-term income growth for investors.”
Jacques Gordon, Global Head of Research and Strategy at LaSalle, added: “Real estate generally provided shelter during the waves of volatility that swept through the securities markets in the first half of the year. In the second half, we foresee different dynamics unfolding. The big change has been the sharp rise in inflation in Western countries and a “regime shift” from highly accommodative to tightening monetary policies by several central banks. Many world events simultaneously contributed to this inflection point including: the re-opening of economies after COVID-19, Russia’s invasion of Ukraine, trade wars, and government stimulus spending. Although these pressures were building in 2021, there is no escaping the fact that the financial and commodity markets shifted sharply in the first half of 2022. Our guidance for investors to seek inflation protection in real estate is a focus-theme of our mid-year update.”
About LaSalle Investment Management
LaSalle Investment Management is one of the world’s leading real estate investment managers. On a global basis, we manage approximately $82 billion of assets in private equity, debt and public real estate investments as of Q2 2022. The firm sponsors a complete range of investment vehicles including open- and closed-end funds, separate accounts and indirect investments. Our diverse client base includes public and private pension funds, insurance companies, governments, corporations, endowments and private individuals from across the globe. For more information please visit www.lasalle.com and LinkedIn.
NOTE: This information discussed above is based on the market analysis and expectations of LaSalle and should not be relied upon by the reader as research or investment advice regarding LaSalle funds or any issuer or security in particular. The information presented herein is for illustrative and educational purposes and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy in any jurisdiction where prohibited by law or where contrary to local law or regulation. Any such offer to invest, if made, will only be made to certain qualified investors by means of a private placement memorandum or applicable offering document and in accordance with applicable laws and regulations. Past performance is not indicative of future results, nor should any statements herein be construed as a prediction or guarantee of future results.
An unrelenting wave of macro news amidst record-breaking heat has carried through all of 2022 to the start of August. With persistent high inflation readings (p.13), energy price volatility and supply disruption (p. 20), interest rate hikes (p. 4), bear equity markets (p. 8), heightened recession risk (p. 3), and VC capital slowing (p. 7) – the post-COVID recovery cycle is at risk.
Recently published books that we’re reading – and recommending – this summer delve into energy geopolitics, climate change impacts, and the history of real estate and investments.
Yet August, with its summer festivals and family holidays for many, is a good month to put the frenetic pace of change into perspective. Many of the indices, prices, and events summarized in our macro indicators deck reveal just the tip of the iceberg, with a deeper, complex story hidden from view. Often only a longer form, like a book, can do justice to these stories.
Recently published books that we’re reading – and recommending – this summer delve into energy geopolitics, climate change impacts, and the history of real estate and investments. Helen Thompson’s Disorder: Hard Times in the 21st Century (Feb. 2022) traces how historic energy policy contributed to today’s geopolitical fractures, in Europe and beyond.In asimilar vein, Ian Bremmer’s Power of Crisis (May 2022) looks at how leaders are responding to three big crises facing the world: health emergencies, climate change, and the rise of artificial intelligence (AI). The UK, Central China, and Texas have sweltered through record temperatures over the last month and the continued backdrop of virulent COVID strains, like BA.5, continue to show how these crises are not mere abstractions but are a recurring part of modern life.
Concrete examples of climate impacts, like how reptiles are trying to cope with more frequent Caribbean storms, abound in Thor Hanson’s excellent book, Hurricane Lizards and Plastic Squid (Sept. 2021). Hansen delves into a new field of climate change biology. He describes the long sweep of natural time as one of “punctuated equilibrium.” This consists of “bursts of rapid activity (punctuations) followed by long periods of stability.” This pattern also aptly describes economic and real estate cycles, with current turmoil upsetting the post-GFC equilibrium.
Turning to real estate – and some quite recent history – The Cult of We (July 2021) by Eliot Brown and Maureen Farrell – lifts the curtain on the madcap history of WeWork’s founding by Adam Neumann. The writers focus on the hubris that led to the downfall of “We”, although the recent reset and rebound of many shared office concepts is beyond their scope. Alexandra Lange’s Meet Me by the Fountain focuses on the shopping mall – and how it “has changed and changed again” from futuristic, to ubiquitous, to pandemic-induced redevelopments (June 2022). In Land (Jan. 2021), Simon Winchester links a variety of tales on a theme of land as “the only thing on earth
that lasts.”
And, in a book tailored for investors, In Pursuit of the Perfect Portfolio (Aug. 2021), Lo and Foerster describe how the ideas of Markowitz, Bogle, Shiller, Siegel, and six other investment visionaries developed the frameworks that have taught us to build better portfolios.
We also invite you to read our Mid-Year ISA, released last month, laying out our global real estate investment recommendations at this inflection point, with a particular focus on inflation protection, strategies to weather shifting monetary policy, and the ESG revolution in real estate. In addition, we have published a new white paper this month on the Demographics of Aging and its impact on real estate.
Market direction and economic outlooks have shifted since the start of 2022, with elevated inflation, slowing economic growth, and higher interest rates impacting the real estate market. According to LaSalle’s 2022 Mid-Year Investment Strategy Annual (“ISA”), the overall market shifts are causing real estate investors to re-visit earlier strategies as they understand and react to higher inflation, the Fed’s and the Bank of Canada’s rapid interest rate increases to combat it, and global geopolitical and economic upheaval.
LaSalle clients can view the full report at: www.lasalle.com/research-and-insights/isa-2020
In North America, the impacts of inflation and rising rates on real estate are nuanced, and require an understanding of each sector’s fundamentals, which the report explores. Coming into 2022, LaSalle Research & Strategy noted that the pandemic and its ensuing economic ripple effects had accelerated pre-pandemic trends, widening the gap between favored and non-favored property types. The mid-year report shows these trends are continuing as investors gravitate to favored property types with strong underlying fundamentals. Looking ahead, there is uncertainty in the market, but it appears as though the favored property types are well-positioned to withstand a potential economic slowdown.
Jacques Gordon, Global Head of Research and Strategy at LaSalle, said: “Real estate generally provided shelter during the waves of volatility that swept through the securities markets in the first half of the year. In the second half, we foresee different dynamics unfolding. The big change has been the sharp rise in inflation in Western countries and a “regime shift” from highly accommodative to tightening monetary policies by several central banks. Many world events simultaneously contributed to this inflection point including: the re-opening of economies after COVID-19, Russia’s invasion of Ukraine, trade wars, and government stimulus spending. Although these pressures were building in 2021, there is no escaping the fact that the financial and commodity markets shifted sharply in the first half of 2022. Our guidance for investors to seek inflation protection in real estate is a focus-theme of our mid-year update.”
Select 2022 Mid-Year ISA findings for North America include:
Rich Kleinman, Americas Co-CIO and Head of US Research & Strategy at LaSalle, said, “While it remains to be seen how inflation and interest rates will evolve in the second half of the year, it is our view that many property types are well-positioned to support investor goals in the months ahead, and that real estate exposure should play a productive role in investors’ portfolios. Experience in recent downturns is also helping investors and lenders navigate the uncertainty, which should bode well for the industry as a whole.”
Chris Langstaff, Head of Research and Strategy for Canada at LaSalle, said, “Canada is historically a stable market, and it appears that while many of the same headwinds apply, fundamentals remain strong and transactions in many property types are moving forward.”
About LaSalle Investment Management
LaSalle Investment Management is one of the world’s leading real estate investment managers. On a global basis, we manage approximately $82 billion of assets in private equity, debt and public real estate investments as of Q2 2022. The firm sponsors a complete range of investment vehicles including open- and closed-end funds, separate accounts and indirect investments. Our diverse client base includes public and private pension funds, insurance companies, governments, corporations, endowments and private individuals from across the globe. For more information please visit www.lasalle.com and LinkedIn.
NOTE: This information discussed above is based on the market analysis and expectations of LaSalle and should not be relied upon by the reader as research or investment advice regarding LaSalle funds or any issuer or security in particular. The information presented herein is for illustrative and educational purposes and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy in any jurisdiction where prohibited by law or where contrary to local law or regulation. Any such offer to invest, if made, will only be made to certain qualified investors by means of a private placement memorandum or applicable offering document and in accordance with applicable laws and regulations. Past performance is not indicative of future results, nor should any statements herein be construed as a prediction or guarantee of future results.
LaSalle Investment Management (“LaSalle”) today announced that after 28 years of distinguished service and leadership of the Research & Strategy group at the firm, Jacques Gordon has confirmed he will retire from the business at the end of 2022 in to order pursue interests in higher education. He will remain as the Global Head of Research & Strategy through the remainder of this year, and will be succeeded by Brian Klinksiek, LaSalle’s current Head of European Research & Global Portfolio Strategies, effective 1 January 2023.
Brian will continue to be based in London and will join LaSalle’s Global Management committee, reporting to CEO Mark Gabbay. Succession for Brian’s Head of European Research & Strategy role is in process and will be announced prior to his transition to global leadership in 2023.
LaSalle Global CEO Mark Gabbay said, “This transition reflects LaSalle’s continued focus on thoughtful leadership succession, offering both continuity along with fresh ideas to be infused across the organization. We are grateful for the numerous contributions Jacques has provided LaSalle and the broader industry over the course of his career, and look forward to recognizing these accomplishments in the months ahead. Brian’s professional experience positions him well to take on this role, having lived, worked, and covered the real estate markets in North America, Europe and Asia-Pacific.”
After joining LaSalle in 2020, Brian led the reorganization of LaSalle’s European Research & Strategy team from a geography-focused model to a more dynamic pan-European sector-focused model. He has deepened the Research & Strategy team’s integration within the firm’s newly formed European Debt & Value-add platform, and also led the creation of LaSalle’s global investment risk management function. Brian has been a leading industry advocate for the incorporation of climate risk analysis into investment-making decisions, and is a champion for DEI in the workplace, having been appointed Chair of LaSalle’s European DEI committee in 2021.
Brian Klinksiek, incoming Global Head of Research & Strategy said, “It is an honor to be named the next leader of LaSalle’s world-class Research & Strategy team. Jacques has done a remarkable job establishing LaSalle’s reputation for timely insights, accurate forecasts, and impactful strategy that is fully integrated with the investment process. He has been a role model for me throughout my career – even before I joined the firm. I am thankful for his guidance and partnership, and look forward to continuing to seek his counsel as he moves into academia.”
Jacques Gordon, retiring Global Head of Research & Strategy said, “I am grateful for the experiences, insights and friendships I’ve gained during my time at LaSalle. Our Global Research & Strategy team is well-positioned to continue to deliver great value to our clients and investment colleagues around the world, and Brian is the right leader to drive the next phase of innovation and growth. I look forward to seeing the firm prosper as I transition to the next chapter of my career.”
About LaSalle Investment Management
LaSalle Investment Management is one of the world’s leading real estate investment managers. On a global basis, we manage approximately $82 billion of assets in private equity, debt and public real estate investments as of Q2 2022. The firm sponsors a complete range of investment vehicles including open- and closed-end funds, separate accounts and indirect investments. Our diverse client base includes public and private pension funds, insurance companies, governments, corporations, endowments and private individuals from across the globe. For more information please visit www.lasalle.com and LinkedIn.
NOTE: This information discussed above is based on the market analysis and expectations of LaSalle and should not be relied upon by the reader as research or investment advice regarding LaSalle funds or any issuer or security in particular. The information presented herein is for illustrative and educational purposes and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy in any jurisdiction where prohibited by law or where contrary to local law or regulation. Any such offer to invest, if made, will only be made to certain qualified investors by means of a private placement memorandum or applicable offering document and in accordance with applicable laws and regulations. Past performance is not indicative of future results, nor should any statements herein be construed as a prediction or guarantee of future results.
Shelter from the storm
More economic and geopolitical history unfolded in the first half of 2022 than typically occurs during the span of several “normal” years. The quaint concept of “normality” may itself prove to be an artifact of history. Yet, the mid-year ISA describes how real estate held up well despite all the tumult. Strategies we set out in 2021, performed as expected, or sometimes even better than expected. Strategy shifts recommended by LaSalle for the second half of the year are modest, despite a renewed focus on the changing macro environment.
Real estate generally provided shelter during the waves of volatility that swept through the securities markets in the first half of the year. In the second half, we foresee different dynamics unfolding as described in Chapter 1, and in the specific strategy shifts recommended in Chapter 2. The big change has been the end of ultra-low interest rates in Western countries. Finally, we revisit the role of real estate in a portfolio in Chapter 3, based on new research done with JLL for the bi-annual Transparency Index, as well as the most recent updates to the correlations with other asset classes.
The most important change in the macroeconomic outlook has been the regime shift from highly accommodative to tightening monetary policies by Western central banks. Many world events simultaneously contributed to this inflection point including: the re-opening of economies after COVID-19, Russia’s invasion of Ukraine, trade wars, and government stimulus spending. Although these pressures were building in 2021, there is no escaping the fact that the financial and commodity markets shifted sharply in the first half of 2022.
In this mid-year update, we focus on the ways that assets and portfolios can be positioned to weather a sustained period of high inflation. We acknowledge that each country is in a slightly different position in the transition from low to higher inflation and that each central bank will react differently to the mix of cost-push and demand-pull inflationary forces.
Other highlighted trends include the continuing competition and complementarity between virtual and physical space. Patterns that affect both asset and sector selection are now coming more clearly into view. Also, we point to the continued momentum of the ESG revolution as investment managers commit to reducing the carbon footprint of their portfolios, while also grappling with climate risk forecast challenges, transition risks from new regulations, and social issues like housing affordability or health and well-being factors that affect tenants.
The transition from acute to chronic stress
Three months after the Russian invasion of the Ukraine, the fighting and destruction continues. Our March macro deck focused on the ensuing volatility of equity markets, consumer prices and energy costs. In June, there is no sign of the conflict abating, volatility in the capital markets remains high, and energy costs continue to edge upward. As the situation in Ukraine transforms from an acute conflict into a chronic state of affairs, it joins a string of other global stress points that remain ongoing and without closure. Among them are: COVID-19, rising inflation, supply-chain blockages, climate change, and geo-political tensions that exist far beyond Eastern Europe.
The progression from acute to chronic has another positive aspect. The transition allows investors to underwrite assets with the new risks accounted for.
The trade links between the world and the conflict zone in Ukraine are relatively small in aggregate terms. However, when combined with COVID-related snags and new sanctions on Russian exports, these blockages become severe all across Europe and beyond. Critical commodities such as energy, grains, and specific materials with direct implications for real estate (such as sheet metal and sprinklers used in warehouse buildings) are all affected. This contributes to higher levels of inflation in Europe and around the world. The macro deck shows that medium- and long-term inflation expectations remain subdued (pages 7,8,10). But, this comforting view does not alleviate the stress on major economies and construction pipelines in the short term.
Chronic inflation risk will likely be mitigated by real estate’s ability to work as a partial inflation hedge, although this ability is uneven across markets and sectors. This is because real estate has performed best as an inflation hedge when landlords have pricing power to push market rents. Today, this pricing power is in place for many property types favoured by investors. Moreover, this inflation hedging performs best when rising utility costs can be passed through to tenants via “triple net” leases, rental indexation and shorter lease terms. Inflation also contributes to higher construction costs, which means higher replacement costs, extended construction periods and slowdown of development pipelines. In the past, this has supported resilient values for standing assets during periods of elevated inflation. There are no guarantees that this resilience will occur, but the pieces are in place for a strong inflation hedge effect again.
From an investor’s perspective, geo-political tensions would appear to represent a chronic malady of the post-globalization era. Examples of authoritarianism, geopolitical disputes, populism, and nationalism can be found across the world. Important measures to watch are: geopolitical risk (page 3), the health of democracy (page 13) and real estate transparency. According to EIU’s Democracy Index 2022, the scores have been falling in many countries, due to pandemic restrictions that meant many countries struggled to balance public health with personal freedom. On the bright side, JLL and LaSalle’s soon-to-be released Global Real Estate Transparency Index shows marked improvements in three categories: sustainability reporting, proptech adoption, and data tracking of alternative property types. Rising transparency may not counter all the negative effects of falling democracy; but data availability and strong property rights have historically underpinned the free movement of capital to real estate.
The progression from acute to chronic has another positive aspect. The transition allows investors to underwrite assets with the new risks accounted for. During the acute stage, investment decision-making can become paralyzed. In the chronic stage, investors can begin to make longer-term risk adjustments that anticipate the long-term trajectory of the situation.
A panel discussion at MIPIM 2022 with the Urban Land Institute and PwC
LaSalle’s Head of European Research and Global Portfolio Strategies Brian Klinksiek discusses emerging trends in real estate at MIPIM 2020: rising inflation, risk-off investor sentiment and the changing energy mix in light of the climate crisis.
The transition from pandemic to endemic
On March 11, 2020, the World Health Organization (WHO) declared COVID-19 a pandemic.
As the pandemic enters its third year, there is a growing consensus that COVID-19 variants are likely here to stay. The world will need to adapt to this endemic phase as new, milder variants are likely to continue to emerge. The decline in the number of reported new cases worldwide and the accelerated vaccination efforts have boosted public confidence. In February, Denmark became the first European Union member state to lift its COVID-19 measures. Other European countries and the United States have also eased restrictions. Last week, Ursula von der Leyen (the European Commission President) and Dr. Anthony Fauci (the US infectious disease expert) both declared that the acute phase of the pandemic phase may be over — at least for now.
As the pandemic enters its third year, there is a growing consensus that COVID-19 variants are likely here to stay. The world will need to adapt to this endemic phase as new, milder variants are likely to continue to emerge.
Similarly, many countries in the Asia Pacific region are also transitioning to living with COVID-19. The Asia Pacific region has been relatively successful in keeping the coronavirus at bay over the last two years. As a result, some countries in the region, like China, were able to restart their economies relatively quickly and limit the economic impact of the pandemic. However, the emergence of the highly contagious Omicron variant has pushed governments in the region to re-impose strict measures to give their healthcare system time to recalibrate and set the stage for living with COVID-19. While many countries in the Asia Pacific region are moving towards living with COVID-19, China has maintained a zero-COVID policy. Since March 2022, the Chinese government re-introduced mass PCR testing and lockdowns in “high risk” neighborhoods of several Chinese cities to curb the Omicron variant outbreak. In April 2022, the IMF and other economists gave China a modest downgrade on its growth outlook, although these revised estimates remain higher than any major European or North American economy. On April 28th, President Xi made a solid commitment to increase infrastructure spending to counter slowing growth. In addition, the People’s Bank of China’s has re-committed to easing monetary policies. These efforts are expected to offset some negative impacts from the zero-COVID policy. We expect the recovery of occupier markets in China to be delayed, but not detoured.
Australia, Singapore, and South Korea are among the leading countries in the Asia Pacific region that are making the transition to living with COVID-19, helped by their stabilizing infection rates, and rapid vaccination/booster rollout. As of the end of April 2022, Australia, Singapore, and South Korea have eased nearly all COVID-19 safety measures and re-opened their borders to fully-vaccinated foreign visitors without the need for quarantine. Japan is also moving toward living with COVID-19, albeit at a slower pace than Australia, Singapore, and South Korea, after its quasi-state of emergency was lifted on March 21, 2022.
The relaxation of public health measures and the transition to living with COVID-19 have been highly beneficial for real estate demand. In the Asia Pacific region, the relaxation of social distancing measures and the strong willingness to return to offices has supported the recovery of office demand, especially in countries leading the transition from pandemic to endemic. In this month’s deck we track work from home expectations around the world (see p.3). Office markets like the Sydney CBD and Seoul saw vacancy rate improvements since the height of the pandemic, while other office markets, such as the Singapore CBD, had a positive net effective rent growth. Although rents in the Tokyo Central office market continued to decline in the first quarter of 2022 due to the quasi-state of emergency, the average vacancy rate in the Tokyo Central office market remained the lowest among major office markets in the Asia Pacific region. Major office markets across Europe show a similar recovery, although North American office markets still lag and the recovery in the largest US office markets is tepid at best.
Looking ahead, the transition from the pandemic to the endemic stage is expected to continue to support the recovery in real estate demand. However, other macro forces are now taking center stage as Covid retreats. Russia’s invasion of Ukraine, rising inflation, and interest rate hikes could cast a shadow on the recovery. Therefore, as shown in this month’s deck, the pace of improving real estate fundamentals varies greatly in cities around the world. Investors will need to pay close attention to these cross currents when underwriting new investments and adjusting portfolios.
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The news from Ukraine is disturbing and relentless. Lurking under the headlines are dramatic economic gyrations — higher interest rates, higher inflation, successive waves of “risk-off” and “risk-on” market sentiment, yield curve changes, and rising commodity prices. This volatility should not go unnoticed; it is the focus of our April Macro Deck.
The conclusion to date is that while lease terms and expense burdens are useful to guide the ability of a property to hedge inflation, the most important element is the market power to raise rents.
In March, interest rates generally moved higher after an initial “safe haven” effect as sovereign yields fell following the invasion of Ukraine (see pages 3, 6). Stock markets also fell, then rebounded and ended the month up as the month progressed (see pages 7-8). Elevated inflation indicators continued to be reported from around the world (see pages 11-16), and the concern that higher inflation will remain persistent became widespread. The US Federal Reserve became the 11th G20 Central Bank to raise interest rates since the COVID pandemic (see page 4-5). The US Fed has taken the approach of communicating direction well ahead of action, and the signal is the March rate hike will be the first of several in the coming months (see page 17, 24).
Higher interest rates are a concern to real estate investors because real estate is very dependent on borrowing. In 2020, economic distress was accompanied by falling interest rates, and the net result was higher real estate values. The question now is if higher interest rates will lead to lower real estate values. There is no global answer to this question. The outlook for each market, sector, and property is impacted by secular trends, economic growth, ability to raise rents, and buyers’ access to leverage. Consideration of all these factors, alongside interest rates, determines the value outlook. In some cases, accelerating NOI growth will outweigh any negative impact from higher rates; while in other cases, the balance will go the other way.
Inflation’s impact on real estate is similarly nuanced. It has been decades since developed economies have seen a higher inflation regime. Yet, the case for including real estate in a diversified portfolio has included its inflation hedging ability. The increase in real estate allocations over the last two decades may have been more about risk-adjusted returns than inflation hedging. Now that we actually have elevated levels of inflation, will real estate’s hedging power hold up?
One challenge of demonstrating if real estate is an inflation hedge is that real estate data from the last period of elevated inflation in the late 1970s and early 1980s is limited (see page 18). The year 2021 had elevated inflation — how much of an inflation hedge was real estate last year? The answer–based on 2021–seems to be “it depends”. The first critical element for real estate to be an inflation hedge is an ability to raise rents. This depends on landlord-favorable market conditions, which was the case in some investment segments, but not others.
In 2021, there were great-to-amazing returns for residential and industrial properties in many markets, while office and retail returns were often mediocre at best (see page 45). This corresponds with the sectors where landlords had pricing power and where they didn’t. The conclusion to date is that while lease terms and expense burdens are useful to guide the ability of a property to hedge inflation (see page 46), the most important element is the market power to raise rents.
Darline Scelzo oversees all aspects of Human Resources globally for LaSalle. She is responsible for strategic hiring, employee relations, performance and talent management, management development, training, diversity programs, and change management. Darline has worked in various specialties of Human Resources since 1989. Areas of experience include recruiting, information systems, benefits administration, compensation and merger/acquisition activities. In 2002, she experienced an expatriate assignment to JLL’s London office where she led Human Resources initiatives on a European basis. Darline joined JLL in 1990 and moved to LaSalle in 2003. Previous positions within the firm include Vice President of HR Administration, Expatriate Administration Manager and Staff Selection Manager.
Prior to joining JLL, she worked for the Human Resources department of Chapman & Cutler, a law firm specializing in bankruptcy/workout, mergers and acquisitions and general corporate law.
Darline holds an MSHR from Loyola University with a dual concentration in Global HR and Compensation/Benefits. She also obtained her BA in Psychology from Dominican University. She is a member of Society of Human Resources Management and World at Work Compensation Association.
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