Deadlines and headlines

Both are engaged in a dizzying pas de deux guaranteed to keep the markets transfixed in March.

In recent weeks, hard and fast deadlines have started to bend and break. The March 1st deadline for US-China trade tariffs was swept away by President Trump. The March 29th Brexit deadline is also turning soft, even as Prime Minister May runs out the clock. The much-ballyhooed Amazon HQ2 for New York City was a headline that was erased as fast as it appeared. The late December gloom in the stock markets, driven by fears of an economic slowdown, has lifted in all G-20 countries, ironically with the exception of the world’s fastest-growing major economy (India). So far in 2019, Donald Rumsfeld’s “known unknowns” and “unknown unknowns” should be amended to include “unknown knowns” — things perceived as certain that turn out not to be.

Private real estate investors may be more apt than others at understanding that decisions must always be made under conditions of uncertainty. By owning assets that take months to buy or sell, all private equity investors must live with their decisions for a long time — and are rarely able to re-position portfolios quickly in response to sudden shifts in policy or market expectations. To help LaSalle stay aware of the day-to-day, but still maintain a longer-term perspective, we rely on Capital Market Dashboards (CMDs). These are designed to provide a view of multiple data streams, including lead indicators that potentially signal pending changes in real estate pricing 6 to 12 months beforehand. Private real estate markets are not buffeted by every shift in market sentiment, but they are also not immune to influences from the broader markets. Recent periods of rapid swings in stock market sentiment demonstrate the value of CMDs to give an objective view of capital market conditions across several dimensions.

Looking at the CMDs in major markets today (page 4) we see caution signs, but clear danger signals are rare. By contrast, the US and UK historical data (pages 6 and 7) showed multiple danger signs leading up to the GFC. In using these dashboards, interpretation of signals is critical to understanding their meaning. For example, the decline in US CMBS issuance does not indicate the financing environment is stressed, but is driven by debt funds increasing market share and crowding out CMBS refinancing activity. This points to the challenge of separating the signal from the noise inherent in all data. Reaching high-conviction conclusions can sometimes be straightforward, but it is usually very difficult when interpreting broader capital markets or the direction of the global economy.