LaSalle’s 2022 Mid-Year ISA: Inflation, Sector Fundamentals Take Center Stage in North America

Market direction and economic outlooks have shifted since the start of 2022, with elevated inflation, slowing economic growth, and higher interest rates impacting the real estate market. According to LaSalle’s 2022 Mid-Year Investment Strategy Annual (“ISA”), the overall market shifts are causing real estate investors to re-visit earlier strategies as they understand and react to higher inflation, the Fed’s and the Bank of Canada’s rapid interest rate increases to combat it, and global geopolitical and economic upheaval.  

LaSalle clients can view the full report at: www.lasalle.com/research-and-insights/isa-2020

In North America, the impacts of inflation and rising rates on real estate are nuanced, and require an understanding of each sector’s fundamentals, which the report explores. Coming into 2022, LaSalle Research & Strategy noted that the pandemic and its ensuing economic ripple effects had accelerated pre-pandemic trends, widening the gap between favored and non-favored property types. The mid-year report shows these trends are continuing as investors gravitate to favored property types with strong underlying fundamentals. Looking ahead, there is uncertainty in the market, but it appears as though the favored property types are well-positioned to withstand a potential economic slowdown.

Jacques Gordon, Global Head of Research and Strategy at LaSalle, said: “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. The big change has been the sharp rise in inflation in Western countries and a “regime shift” from highly accommodative to tightening monetary policies by several 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.  Our guidance for investors to seek inflation protection in real estate is a focus-theme of our mid-year update.”
 

Select 2022 Mid-Year ISA findings for North America include:

• In line with the full-year ISA’s prediction, favored property types including industrial, multifamily, medical office and single family rentals continue to have strong fundamentals and outperform on a relative basis. Industrial development and transactions continue as there remains a supply gap and businesses who lease these spaces continue to show they can continue to pay rents, even as they increase. The residential property types also have a strong outlook. As interest rates rise and inflation impacts housing starts, many would-be homebuyers may look to rent.
   
• The debt markets remain liquid, providing the capital needed to finance transactions. While the Mid-Year ISA expects a slowdown in transactions, debt funds, life insurance companies and banks continue to lend to strong, established sponsors. Meanwhile, CMBS issuance has slowed, and higher interest rates mean highly leveraged borrowers are less competitive bidders for property. For borrowers, leverage is less accretive than last year, but many are still using leverage with the belief that future income growth will make leverage accretive to returns over their hold period.
   
• The report also looks at capital flows as barometer of market health, and notes that NAV REITs continue to raise capital, as retail investors start to establish a portfolio allocation to real estate and diversify amid a volatile market environment. While many closed-end funds still have dry powder from previous capital raises, new institutional capital raises appear to have slowed slightly as established investors have reached their target allocations after playing catchup over the last several years.
   
• Transaction volume in the first quarter of the year was higher than the first quarter of the prior year. US transaction volume last quarter was $157.6 billion, 76 percent higher than a year ago. In Canada, USD $10.7 billion traded in last quarter, representing a 71 percent year-over-year increase. The report estimates that pricing has adjusted downward from a peak in the first quarter of 2022 by a range of 0-15 percent depending on market segment, giving back a portion of the gains from the last 12 months. Though second quarter data is not yet available, anecdotally it seems transactions have slowed amidst shifting pricing and broader uncertainty. However, a bid-ask gap has not developed as buyers and sellers have been willing to accept similar price declines.
   

Rich Kleinman, Americas Co-CIO and Head of US Research & Strategy at LaSalle, said, “While it remains to be seen how inflation and interest rates will evolve in the second half of the year, it is our view that many property types are well-positioned to support investor goals in the months ahead, and that real estate exposure should play a productive role in investors’ portfolios. Experience in recent downturns is also helping investors and lenders navigate the uncertainty, which should bode well for the industry as a whole.”

Chris Langstaff, Head of Research and Strategy for Canada at LaSalle, said, “Canada is historically a stable market, and it appears that while many of the same headwinds apply, fundamentals remain strong and transactions in many property types are moving forward.”

About LaSalle Investment Management 
LaSalle Investment Management is one of the world’s leading real estate investment managers. On a global basis, we manage approximately $82 billion of assets in private equity, debt and public real estate investments as of Q2 2022. The firm sponsors a complete range of investment vehicles including open- and closed-end funds, separate accounts and indirect investments. Our diverse client base includes public and private pension funds, insurance companies, governments, corporations, endowments and private individuals from across the globe. For more information please visit 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.