LaSalle’s ISA Outlook 2025: The start of a new cycle for US and Canadian real estate

Chicago (December 4, 2024) – US and Canadian real estate is on the verge of a new cycle in 2025, with interest rates down from peak levels and economic growth concerns fading, but also new risks on the horizon, according to the North America chapter of the ISA Outlook 2025 report published by global real estate investment manager LaSalle Investment Management (“LaSalle”).

The landscape for US and Canadian real estate has shifted since last year’s ISA Outlook 2024, which saw lower transaction volumes due to higher interest rates and challenging macroeconomic conditions.  LaSalle sees considerable differences between this upcoming cycle and prior ones across both countries. Specifically, interest rates are expected to remain higher, which will lead to a more moderate pace of value recovery. And while the pace of capital flows to real estate is expected to pick-up in 2025, conditions across real estate sectors and markets will remain uneven.

These differences suggest that investing into the coming real estate cycle will not be a simple story of a “rising tide lifts all boats”; selectivity at the sector, market and sub-market level is likely to add value. LaSalle’s ISA Outlook 2025 follows several main themes that will influence real estate decision-making within the US and Canada, as well as sector by sector analysis of different property types:

• Economic Outlook – Falling Rates but Risks on the Horizon: While the summer and fall of 2024 saw growing optimism among real estate investors, uncertainty around long-term interest rates rose in the fourth quarter of 2024.  Long bond rates have moved higher, even as the Fed started cutting interest rates and Canada’s central bank has become more aggressive in lowering its policy rate. The recent volatility is a reminder that the goldilocks environment has not returned. Pandemic-era reverberations continue as we adjust to a new normal that includes at least the fear of higher inflation.

• Capital Markets – Best Market Entry Points Tend to be Early Cycle: Historically, the best entry points for investors tend to come early in the cycle, and the ISA Outlook predicts that 2025 will be the best year for entry into appraisal-based funds, and second best to 2024 for entry at market pricing. However, the research cautions that unless interest rates fall back to the low levels of the post-GFC period, pricing will not likely enable returns similar to those seen in the early years of previous cycles. Despite expectations for a strong vintage year, the ISA forecasts that transaction volume will grow slowly throughout 2025, as many sellers will delay sales expecting better values and fundamentals for 2026.

• Balancing a Portfolio – Real Estate Debt: LaSalle’s ISA Outlook 2025 notes that investors need to weigh the potential upside from allocating to equity vs. the downside protection in a debt position. While today this analysis tends to favor equity, there are still strong reasons for investors to allocate to debt. First, interest rates remain high relative to historic levels, which is a benefit to investors seeking high absolute current cash returns from debt investment. Second, there are structural tailwinds to private real estate debt investment as banks dial back direct mortgage activity in favor of providing cross-collateralized ‘back leverage’ to debt portfolios. Finally, debt is a good source of portfolio diversification as volatility remains elevated.

• Distress – The Capital Stack Hangover: LaSalle’s North America chapter of the ISA Outlook indicates that some market segments and assets will remain stressed under any realistic outlook for economic growth and interest rates. Challenged capital stacks will not be cured by lower rates, and the “pretend and extend” approach to distressed assets will eventually require resolution. Distress in the US office sector is rising fast, with US residential and retail seeing some limited distress. In Canada, the number of distressed commercial properties in 2024 is expected to double from 2023 levels, though on a dollar volume basis this is a small fraction of US levels.

Global and North American Property Sector Outlooks

The North America chapter of the ISA forms part of LaSalle’s Global ISA Outlook 2025, which analyzes real estate trends across geographies and sectors, and similarly finds the new cycle extends to global real estate markets.

• Apartments –In 2025, US apartments will still be dealing with the hangover from a supply boom that followed spiking rents, low cap rates and soaring values in 2021 and 2022. While there are significant market level differences, the ISA 2025’s national view is the hangover will not clear until 2026, while 2025 will be another year to muddle through. In Canada, apartment fundamentals remain strong due to migration-related demand drivers.

• Industrial – Industrial performance in 2025 is likely to be favorable in both countries, largely because the supply hangover is already ending, leaving fundamentals better positioned. Secular tailwinds are expected to continue, with e-commerce remaining a demand driver and policies boosting domestic manufacturing a growing benefit.

• Retail – Globally, the retail outlook continues to improve after an extended period as the least-favored sector. Across the US and Canada, retail construction is expected to remain very low, making existing supply more attractive, especially for the best centers in growing markets and sub-markets. Rent growth remains moderate as tenants’ ability to bear higher rents is constrained, but entry yields in some retail sub-segments are expected to provide an attractive investment opportunity. 

• Office – Office continues to generate headlines and remains the most discussed sector. Remote working is expected to continue to negatively impact office demand in both countries, but economic growth will eventually outweigh that negative factor. Across North America, the investability of the office sector is increasing and the focus continues to be on quality.

Richard Kleinman, LaSalle’s Americas Head of Research and Strategy, said: “We are on the cusp of a new real estate cycle both globally and in the Americas specifically. That said, navigating the current environment will require selectivity at the sector, market, and submarket levels. The ISA Outlook 2025 research we’ve released today looks in depth at what is driving trends in North American real estate, and lays out our strategy for the year ahead.”

Chris Langstaff, Head of Research and Strategy for Canada at LaSalle, commented: “Our outlook for Canadian real estate next year resembles many of our global projections, with some important distinctions. Optimism is a bit more contained as economic performance has lagged and there’s been uncertainty around trade policies, but favourable demographics, healthy fundamentals in most sectors and forecasts for improved GDP and job growth in 2025 and 2026 will continue to drive opportunities across markets, including in specialty sectors.”

Brian Klinksiek, Global Head of Research and Strategy at LaSalle, added: “Global real estate sentiment is gradually improving following a long period of negativity and signs are pointing to the beginning of a new real estate cycle. History has shown that investing early in a cycle tends to lead to relatively strong performance. There are still risks on the horizon, however, and investors are advised to focus on diversified strategies that are flexible and broad enough to adapt to a complex and evolving relative value landscape. A comprehensive look at value across a wide range of sectors and markets will be required to build a well-positioned real estate portfolio.”

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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 US$88.2 billion of assets in private and public real estate equity and debt investments as of Q3 2024. LaSalle’s diverse client base includes public and private pension funds, insurance companies, governments, corporations, endowments and private individuals from across the globe. LaSalle 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.

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.