Volatility Expected for North America Property Markets Amid Start-Stop Economic Recovery, LaSalle Mid-Year Report Finds
CHICAGO (August 14, 2020) — While robust fiscal and monetary policy support has helped mitigate the economic impact of the pandemic in North America thus far, the performance of property markets and asset classes across the U.S. and Canada over the near- and long-term will vary significantly. These variances will be attributed to divergent health policies, consumer behavior around disease mitigation strategies and shifting lifestyle preferences. Despite these uncertainties, real estate remains a shock absorber against economic volatility, and the benefits of real estate for portfolio diversification and risk management have shone through amid the turmoil.
LaSalle clients can view the full report at: https://www.lasalle.com/research/reports/2020-isa-mid-year-update
Heading into the pandemic, the U.S. and Canadian economies, and most of each country’s major real estate markets, were in a period of remarkable stability, characterized by low unemployment and vacancy rates, moderate value increases for most of the primary property types, and balanced supply and demand. These factors should support both countries as they navigate the crisis, despite near-term volatility and risks. While unemployment rates have risen sharply, they started at an all-time low. Moreover, the vast majority of unemployment spikes resulted from furloughs in impacted sectors such as travel and retail, and the expectation is that many of these jobs will return once circumstances stabilize. This does not eliminate the immediate impacts of high unemployment on individuals or the economy. However, the U.S. and Canadian labor markets are more fluid than others with higher levels of metro-to-metro migration, which should support the recovery.
Jacques Gordon, Global Head of Research and Strategy at LaSalle, said: “The ways that policy, geography, climate and human behavior interact with the diversity of regional economic drivers will determine the relative performance across markets and global real estate portfolios. In the near-term, leaders will be locations that appeal to technology, life sciences, and a noticeable improvement in migration to sunbelt markets. Laggards will be metros with high levels of new infections, and markets with the greatest exposure to tourism and energy. As we move into a post-COVID-19 world, we see a different set of drivers being critical to economic and real estate performance. When the dust settles on 2020, we expect that real estate will remain an important contributor to the performance of an investment portfolio through its income-generating ability and the different path it tends to take during up and down economic and capital market cycles.”
As it relates to investment strategies, opportunities exist for both real estate securities and indirect investors to capitalize on the wide gaps between public and private real estate valuations. Likewise, specialized debt investors can benefit from a less crowded competitive landscape and wider debt spreads. For core investors, inflection points and recessions can generate attractive entry points for long-term strategies.
The near-term relative performance across property types is reflected in the level of vacancy entering the downturn. Industrial and multifamily properties were well occupied and positioned strongly prior to the downturn, suggesting a near-term rise in vacancies followed by a quick recovery. Office had only moderate demand with higher vacancy rates, at levels just below the sector’s long-term average, which aligns with LaSalle’s forecast for a volatile downturn and slow recovery. Retail had been suffering from eroding brick-and-mortar sales and over-leverage, which may compound near-term weakness across retail segments and tip some properties into distress.
Rich Kleinman, Co-CIO, Americas & Head of U.S. Research and Strategy for LaSalle, said: “At this point in the pandemic recovery, there is limited visibility on real estate pricing, and only marginally more on the direction of capital flows. Transaction volumes have fallen sharply in the U.S. since March, and properties trading are those with the strongest buyer interest with limited value declines from pre-COVID-19 pricing. To determine where the market might be heading, we are focused on which pools of capital are active, what they are likely to target, and where capital seems to be lacking. As transaction activity picks up in the second half of the year, the market disruption should create opportunities for investors to fill the capital market gaps and take advantage of pricing shifts.”
The lack of visibility into pricing has made research, data and technology even more critical to informing investment decisions during the pandemic. In addition to leveraging information technology firms and health authorities have provided to the general public, other tools can be useful in assessing the pandemic’s impact on real estate. LaSalle is incorporating data from the Blavatnik School of Government at Oxford University, which tracks policies such as school closure, travel bans and other lockdown measures, and combines it with fiscal and monetary interventions – all of which can be leading indicators for the economy and risk asset markets. Moreover, the firm is analyzing hyperlocal mobile data from Safegraph, Google, Apple and health agencies to monitor the spread of COVID-19 and estimate how people are altering their social distancing behavior. This helps to track hot spots, predicting which markets may see deeper and longer lasting effects of the virus. Finally, keeping track of the aggregate movement of people and vehicles highlights the economic activities that are prioritized and the rate at which other economic activities recover, as well as geographic disparity in such activity.
The data efforts LaSalle has put in place in prior years have turned out to be very valuable for identifying potential trouble spots. These studies accentuate the importance of high-frequency data in our industry and the uses to which this data can be put to underwrite and manage real estate assets.
Like many other countries, the Canadian government implemented robust fiscal and monetary policy support to help mitigate the economic impact of the pandemic. Nearly CAD $255 billion was approved at the federal level, or roughly 12% of GDP. If future stimulus is needed, the Canadian government appears more willing to extend unemployment benefits if needed. The Bank of Canada also quickly cut its Policy Rate to 0.25% and initiated bond buying for the first time in its history. This support has enabled lending to resume and provides many businesses with the footing needed to survive until the recovery and the capacity to expand when that recovery starts.
Chris Langstaff, Head of Research and Strategy in Canada for LaSalle said: “In Canada, office demand was strong in most markets, with the exception of Calgary and Edmonton, which have been weak since the 2014-15 oil price downturn. Industrial properties were near record low levels of availability, a key reason we expect the severity of this downturn to be less for industrial than past recessions. Apartments were also in a strong position with relatively low vacancy and a balanced supply and demand, but both at strong levels. This suggests the near-term will see rising vacancy and falling rents, but a quick recovery as new supply slows and the previous demand trends resume.”
About LaSalle Investment Management
LaSalle Investment Management is one of the world's leading real estate investment managers. On a global basis, LaSalle manages more than $69 billion of assets in private and public real estate property and debt investments as of Q3 2020. 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.
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.