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.