Despite Heightened Uncertainty, North America Real Estate Should Perform Well in 2017
CHICAGO (December 15, 2016) — Structural shifts associated with legislative outcomes and unwinding of stimulative monetary policies will influence the North American investment landscape in years ahead
Ripple effects from the recent presidential election in the U.S., coupled with the Federal Reserve’s expected increases of interest rates will shape the economic outlook for North America in 2017, according to LaSalle Investment Management’s Investment Strategy Annual (ISA) 2017.
The report suggests that 2017 will usher in significant uncertainty for the region, as lack of clarity and direction regarding President-Elect Donald Trump’s policies and a Republican-controlled U.S. Congress will keep investors questioning the appropriate strategy to implement.
Jacques Gordon, Global Head of Research and Strategy at LaSalle, said: “The winds of change will be blowing throughout the world economy and the US in 2017. Headwinds and tailwinds can both be expected, along with market turbulence. While structural changes will likely define the outlook for specific strategies in the U.S., real estate performance in most cases will be driven by secular shifts. The ISA’s best investment recommendations are aligned with the demographic, technology, urbanization, and environment (DTU+E) secular investment trends. Although some of these opportunities have become fully-priced, there is still value in portfolios that focus on the evolution of these long-term trends.”
Additional ISA 2017 findings for the U.S. include:
- Large, diversified economies (e.g., Dallas, Atlanta, Chicago, and Phoenix) are expected to see steady demand with local supply dynamics driving rent growth and returns.
- Energy-driven markets are seeing the weakest demand and there will have to be a significant increase in global demand and energy prices for a strong recovery to occur.
- Growth in leading tech markets (e.g., San Francisco, Silicon Valley, and Cambridge) is expected to slow as it becomes harder to attract and retain skilled workers due to high costs, with additional risks stemming from potential trade wars and immigration restrictions.
Property sector insights include:
- Warehouses/Industrial/Logistics: The most attractive risk-adjusted opportunity in 2017 in the U.S. is expected to be warehouse development. Driven by e-commerce and increases in delivery speed, supply chain changes are increasing the demand for modern warehouse space, at both close-in locations and traditional distribution centers.
- Apartments: The secular trend of increasing urbanization, associated with growth in millennial households and their propensity to delay home purchase, has been met by a supply response in many downtown apartment markets, driven by high rents and pro-development policies. Apartments are expected to remain durable sources of income, especially assets that will appeal to millennials in their next phase of life.
- Retail: As e-commerce disrupts the retail landscape, we are targeting three segments as defensive positions, which have consistently outperformed other property types during prior recessions: the best malls, urban retail, and necessity grocery-anchored centers.
- Office: Technological innovation is shifting office demand to areas with superior human capital — areas with a highly educated population who prefer living where there are abundant retail and leisure opportunities that are readily accessible.
Elsewhere in North America, the ISA anticipates Canada’s economy will improve, with 1.5%–2.0% annual growth forecasted for 2017 and 2018. The recent increase in longer-term bond yields could lead to slightly higher required real estate returns and debt costs. However, debt costs should remain low on an historic basis and continue to boost levered real estate returns.
Bill Maher, Head of Research and Strategy for North America at LaSalle, said: “The evolution and maturation of large Canadian pension funds is a continuing shift. These funds are seeking to diversify their portfolios with international investments. In doing so, they are putting ‘peripheral’ domestic assets on the market. This creates attractive core and core plus buying opportunities that are not typically available.” Maher continued, “While Alberta markets are weak due to low oil prices, the other leading Canadian markets are poised to benefit from steady demand and low volatility.”
The U.S. is the largest trading partner of Canada and Mexico by a wide margin, and a roll-back of the North American Free Trade Agreement (NAFTA) could have a detrimental impact on all three economies. Canada is also one of the few major economies continuing to embrace globalization, and the trade and immigration that accompany it. From an immigration point of view, this could be a positive for Canada, but trade-oriented industries will face headwinds.
After many years of false expectations, the era of “lower for longer” bond yields appears to be gradually coming to an end in the U.S. But, the path toward the “normalization” of monetary policy is still unclear. The Federal Reserve will consider interest rate increases in 2017 and potentially initiate the “Great Unwinding” of stimulative monetary policies. The pace of these increases will be greater if economic growth accelerates due to new and revised fiscal policies.
Rich Kleinman, Managing Director of Research and Strategy in the U.S. for LaSalle, said: “It is unclear how this shift will impact domestic and global markets, long-term interest rates, and real estate capital markets in particular. If inflation picks up in 2017, it could help certain types of real estate relative to long-term bonds and sustain real estate capital flows. Across the U.S., the best investment opportunities in 2017 will be found in asset-specific strategies more so than property type sector tilts.”
Globally, the ISA finds that real estate returns will vary depending on the vintage of assets held. For assets already owned, improving economic fundamentals will boost performance. At the same time, returns on new core investments will be hard-pressed to repeat those of recent years as elevated levels of liquidity have pushed prices up to levels where new investors with fresh capital will need to accept low returns by historic standards.
Mr. Gordon concluded: “Investing solely in domestic markets greatly reduces the number of potentially rewarding opportunities to take advantage of in the next two years. We think it makes sense to balance multiple risk-return strategies in a broad-based international real estate investment portfolio, including global real estate securities, that runs in parallel with a larger domestic program.”
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 $60.5 billion as of Q3 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.