LaSalle’s ISA Outlook 2024: Has real estate digested interest rates?

CHICAGO (Dec. 5, 2023) – The US and Canadian real estate markets continue to see subdued transaction volume and a wait-and-see approach from investors amid their respective central banks’ campaigns to snuff out inflation through interest rate hikes. LaSalle’s Insights, Strategy and Analysis (ISA) Outlook 2024 makes the case that secular trends, not cyclical trends, may hold answers as to where winning property types will land in 2024, with the early half of the year looking similar to 2023 and the potential for a rebound later in the year.

The report will be released in regional chapters throughout November and December, and can be viewed at: www.lasalle.com/Outlook2024.

The ISA Outlook 2024 looks at five key themes from a global and regional level:

1. The search for peak interest rates
2. Solving the capital stack equation
3. Coming off the boil
4. Beyond bifurcation
5. The changing definition of quality and core

On a broad basis in the Americas, the report observes a potential recovery later in 2024, a continued focus on interest rates and their impact and the potential for supply weighing on real estate fundamentals.

Brian Klinksiek, Global Head of Research and Strategy at LaSalle, said: “Significant unknowns remain in the global real estate market as we head into 2024, including interest rates, geopolitical tensions, and whether major economies may tip into recession. While it’s very difficult to time markets, data on previous down cycles suggest that it’s often during unsettled periods that savvy investors can find strong value in real estate, making this a potentially strong vintage for investment.”

Select ISA Outlook 2024 findings for North America include:

• The residential (encompassing both single-family rental and apartments) sector continues to see healthy fundamentals. However, as the report notes, residential properties that were bought at peak pricing in 2021 and 2022 and financed with elevated levels of floating rate debt will need to either be recapitalized or sold which may cause a cooling effect on the sector in 2024. The industrial sector will also cool from peak performance levels, with pockets of softening rents in some markets. Both residential and industrial will benefit in time from the reduced levels of new development starts in 2023 and beyond.
• Select sub-sectors of retail such as US grocery-anchored properties are seeing a boost in investor confidence. Limited new supply and a better understanding of which assets are better positioned is creating confidence that these properties can be an accretive portion of a balanced real estate portfolio.
• The question around the future of office properties continues to be pervasive, and something investors are watching closely. The report observes a divide between Canadian and US office markets with Canada slightly better positioned than the US due to lease structures. The US continues to deal with substantial work-from-home headwinds. The report notes that widespread distress may lead to high-risk, high-reward opportunities for investors.

Rich Kleinman, Co-CIO and Head of Research & Strategy for the Americas at LaSalle, said, “Looking at real estate investment solely through the lens of interest rates means you’re missing the bigger picture as we believe sectors and markets will adjust to rates at varying speeds. Investors with dry powder, flexibility and who can identify price gaps are likely to come out as winners in this transitional market.”

Chris Langstaff, Head of Research & Strategy for Canada at LaSalle, said, “Looking to 2024, we expect that in the midst of a continued softening of the Canadian economy in the near term, the strong migration trends will support long-term growth of the Canadian economy. This will particularly benefit the apartment and industrial sectors when economic growth resumes.”

About LaSalle Investment Management | Investing Today. For Tomorrow.

LaSalle Investment Management is one of the world’s leading real estate investment managers. On a global basis, LaSalle manages approximately $89 billion of assets in private and public real estate property and debt investments as of Q3 2023. LaSalle’s diverse client base includes public and private pension funds, insurance companies, governments, corporations, endowments and private individuals from across the globe. The firm 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 www.lasalle.com, and LinkedIn.

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The 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.