LaSalle Investment Management

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:

Contributors:

Brian Klinksiek

Global Head of Research and Strategy

Dominic Silman , PhD

Europe Head of Debt and Value-add Capital Research and Strategy

Jen Wichmann

Senior Strategist, Research and Strategy

Hina Yamada

Senior Research Analyst, European Research and Strategy

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.

Contributors:

Brian Klinksiek

Global Head of Research and Strategy

Eduardo Gorab

Head of Global Portfolio Research and Strategy

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.

Contributors:

Brian Klinksiek

Global Head of Research and Strategy

Tobias Lindqvist

Strategist, Climate and Carbon Lead

Simone Caschili

Senior Analytics Strategist

Amanda Chiang

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.

Contributors:

Brian Klinksiek

Global Head of Research and Strategy

Zuhaib Butt

Head of Investment Risk Strategy and Management

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.

Contributors:

Brian Klinksiek

Global Head of Research and Strategy

Ryan Daily

Vice President, Strategist

Wayne Qin

Vice President, Strategist

Jen Wichmann

Senior Strategist

In the past decade, the urbanization narrative in the United States has shifted from the “rebirth of cities” to the “rise of the suburbs.” 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.

Contributors:

Brian Klinksiek

Global Head of Research and Strategy

Richard Kleinman

Americas Head of Research and Strategy

Jen Wichmann

Senior Strategist, 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.

Contributors:

Elysia Tse

Asia Pacific Head of Research and Strategy

Fred Tang, PhD

China Head of Research and Strategy

Dennis Wong

Senior Strategist, Asia Pacific 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.

Contributors:

Richard Kleinman

Americas Head of Research and Strategy

Chris Langstaff

Canada Head of 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.

Contributors:

Dan Mahoney

Europe Head of Research and Strategy

Petra Blazkova

Europe Head of Core and Core-plus Research and Strategy

Dominic Silman, PhD

Europe Head of Debt and Value-add Capital Research and Strategy

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?

Contributors:

Brian Klinksiek

Global Head of Research and Strategy

Eduardo Gorab

Head of Global Portfolio Research and Strategy