Changes linked to Demographics, Technology and Urbanization will drive investment in U.S.
17 July 2014 - Investors in the United States real estate market need to refocus their strategies by seizing opportunities linked to Demographics, Technology and Urbanization (DTU), according to LaSalle Investment Management’s Mid-Year 2014 Investment Strategy Annual (ISA) report.
LaSalle’s twice-yearly ISA looks at investment trends around the world and highlights the best investment opportunities. Seeking out attractive U.S. investment opportunities related to DTU themes is vital to boosting net operating income and counteract a tendency for returns to fall in a low interest rate environment, the study found. With young people drawn to city living and businesses demanding more connectivity in the workplace, there are opportunities for real estate investors in healthcare, residential and office developments in real estate markets throughout the country. Jacques Gordon, Global Head of Research and Strategy for LaSalle Investment Management said: “A very healthy recovery of the capital markets has combined with a below par recovery of the real economy and slowly improving fundamentals of global real estate demand. The result is that real estate prices are rising faster than net operating income and so yields and expected returns will fall, even as recent returns in many countries hit the double digits.” “Our guidance at the beginning of the year to seek out themes linked to Demographics, Technology and Urbanization to boost NOI and counteract the tendency for returns to fall in a low-interest rate environment, has worked out very well for many of our portfolios. The challenge now is that these themes are now becoming much more in the mainstream and the growth is getting fully-priced.”Mr. Gordon added that over the last six months, trends that have dominated commercial real estate have included debt and equity becoming more plentiful and less risk-averse in most countries, and persistently low interest rates meaning that required returns are near all-time lows. At the mid-way point of 2014, real estate investors need to assimilate recent market shifts and re-examine their investment strategies in light of this environment, he said.
Bill Maher, North American Strategist for LaSalle Investment Management said: “Despite a harsh winter and weak economy in the first quarter, the US real estate market has continued to improve across all fronts. Prices are up as well, so investors should look for long-term income growth driven by growing age groups, particularly Millennials, the growing importance of technology, and an increasing preference for urban jobs and homes.”
Other key findings about the United States market from the mid-year ISA include:
- Value add strategies are increasingly attractive, given improving growth and real estate fundamentals
- Millennial Magnets: A significant portion of the American millennial population is spread across a few urban neighborhoods. In fact more than 20% of 20-34 year olds live in just 15 different neighborhoods from 13 different cities.
- Rise of the Medical Office: As millions of Americans obtain health insurance, they will likely replace hospital visits with office visits for routine procedures, as well as yearly check-ups. This will support demand for these types of buildings. As more and more boomers reach post-retirement age, demand for routine medical care close to home will rise.
- Urban Warehouse: Warehouses and distribution centers used to be almost exclusively located near big cities, but not in them. As major e-retailers like Amazon look to increase delivery speeds in highly populated areas, many of these warehouses and fulfillment centers are being built or re-located to urban areas closer to greater population density.
Additional trends from other regions that the ISA found include:
- Ongoing DTU trends will provide benchmark-beating strategies across all property types.
- Value add and build/renovate to core strategies are increasingly attractive in Canada given high takeout values and improving economic growth and real estate fundamentals.
- US shopping centers and warehouse buildings are LaSalle’s top pick among US core property types. U.S. apartment market fundamentals have been better than expected, despite rising supply. Offices are the most promising sector for value-add investing.
- Industrial and edge of CBD offices remain top picks in Canada.
- In Mexico, strong industrial and office markets support our overweight in industrial and office properties, with good opportunities across the risk spectrum.
- Capital flows into the region continue to progress and there is now increased interest in markets that were previously not on international investors’ radar screens such as Spain, Italy and Greece.
- Europe’s real estate markets continue to run at different speeds. At the forefront is London and the wider South East UK, which boast both appealing real rental growth prospects in central locations, along with more attractively-priced income in London’s decentralized submarkets.
- Long leased (inflation) index-linked assets in DTU sectors, such as student housing are attractive for defensive core strategies.
- Value added strategies in the UK include undertaking refurbishments only, securing tenants for larger schemes prior to construction, or forward-funding existing projects. The best prospects are probably for those locations that are aligned with once-in-a-generation infrastructure projects across the greater city limits such as Crossrail.
- LaSalle continues to believe in the benefits of near-Central Business District office strategies linked to DTU trends in cities such as London, Paris and Munich.
- Alongside the UK, the other investible higher-growth markets in Europe are Sweden and Poland.
- Moving up the risk curve, there is a case for office development strategies in Paris and in Germany’s top tier cities. These strategies are less reliant on an expanding economy but instead capitalize on a long-standing undersupply of modern stock in key occupier markets.
- REITs had a record equity raising year in 2013 and while that slowed in early 2014, a recent upswing in performance could reverse that trend.
- Private equity fundraising has also been on the rise, although not yet on the scale of 2006.
- The competition for core assets is intense and in most markets they are fully priced.
- Stabilized logistics is also one of the better core options in the region and our unlevered return forecast of 6% or over is broadly in line with the ISA.
- Japanese suburban retail remains a core sector that is attractively priced.
About LaSalle Investment Management
LaSalle Investment Management, Inc. (together with its global investment advisory affiliates, “LaSalle”) is one of the world’s leading real estate investment managers. LaSalle on a global basis manages approximately $60 billion as of Q1 2018 of private and public equity and private debt investments. 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. LaSalle Investment Management, Inc. is a wholly-owned, operationally independent subsidiary of Jones Lang LaSalle Incorporated (NYSE: JLL), one of the world’s largest real estate companies. For more information please visit www.lasalle.com.
This information 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 by means of a private placement memorandum. Past performance is not indicative of future results.