World Turmoil Having Little Impact on US Real Estate

CHICAGO—The US economy continues to expand at a steady pace while job growth generates a robust demand for real estate. Furthermore, the possibility of a major downturn in 2018 increasingly seems remote. That’s the good news, according to researchers from Chicago-based LaSalle Investment Management, who just released their latest report on investment strategy.

However, since the company released its last report in December, a number of factors have complicated the overall picture, and investors need to be ready to adapt quickly to many possible shifts in real estate capital markets or fundamentals.

The researchers point out that the Trump Administration has put the US at loggerheads with many of its major trading partners, including China, Canada and much of Europe. Other geo-political tensions have flared up on several continents and expected increases in interest rates still loom over everything else. But so far, the real estate world has calmly absorbed all of these developments.

“We’re seeing very little impact on real estate demand or pricing at this point,” Bill Maher, head of North America research and strategy for LaSalle, tells GlobeSt.com. The cost of steel and aluminum has gone up somewhat due to new tariffs, and that certainly increases the price of new construction, but the amounts involved are for now far less than the costs of attracting skilled labor. “The market is in equilibrium and there are no real negative signs out there.”

“The US stands out as one of the easiest places to invest,” Maher adds, due to its size, liquidity and the far greater turmoil hitting other advanced overseas markets. That powerful fundamental seems to help smooth out whatever bumps are encountered. “The market tends to be self-correcting.”

The mid-year report shows, for example, that the REIT market generally underperformed in 2018 and was at a 5% to 10% discount to net asset value in mid-June. But the REITs “rallied a little bit in the last month or so,” Maher says, and along with new M&A and privatization activity, should over the long run turn in satisfactory performances.

The office market also seems to find new sources of strength and opportunities for investors. Maher points to the astonishing growth of shared office providers such as WeWork, growth which should fuel demand for years. “It’s a different model and a different kind of tenant, but it’s now clearly accepted.”

LaSalle researchers also took a deep dive into technology and how it will shape urban economies, the capital markets and real estate markets. New technology has already fundamentally changed the way financial institutions organize data for privacy, speed and efficiency. And entrepreneurs have formed hundreds of new property technology companies. “The intersection of Fin-Tech and Prop-Tech start-ups have been accelerated by the $6 billion in growth capital provided to companies that bring new technologies to real estate,” according to the LaSalle report.

Almost everyone involved in commercial real estate keeps close watch on interest rates, and several years ago some worried rising rates would squelch a recovering economy. But even though Federal Reserve officials boosted rates three times recently, they also made sure to communicate well ahead of time what actions were on the table, and that allowed businesses to plan ahead. The increases “were broadly anticipated, so we’re seeing no impact on pricing or volumes,” Maher says.

And those prices seem to keep increasing on the same slow and steady pace. “We’re not in a bubble,” he adds, like the one that formed in 2006-07, when lenders, investors, tenants and developers all decided to push their luck. The inevitable bust taught lessons that have not been forgotten. “It’s been very moderate and rational for two years now.”