Strong performance is expected for both the U.S. and Canadian real estate markets in 2019 and into 2020, as fundamentals will continue to exhibit stability amidst a chaotic political climate and economic cycle, according to LaSalle Investment Management’s Investment Strategy Annual (ISA) 2019. This stability does not extend to every facet of either market, but core values will demonstrate resilience, despite the potential challenges of inflation and late-cycle anxiety that have permeated the North American economy.

In order to mitigate these potential risks, LaSalle recommends the institutional investors construct real estate portfolios that employ defensive (low beta) positioning, while still dedicating a portion of investment to higher (alpha-seeking) return strategies.

LaSalle’s Bill Maher says, “Late-cycle investing requires higher degrees of both caution and conviction to keep a real estate portfolio performing at a high level.”

Key LaSalle report findings:

– Job growth will continue to support real estate demand, although the pace of growth will slow as shifting demographics limit the growth of the working age population and lower the unemployment rate.
– The U.S. Federal Reserve is on a path of measured interest rate increases, and the federal funds rate approaching 2.5 percent, up from effectively zero. Short-term and long-term interest rates are also climbing, with the 12-month LIBOR up almost 200 basis points and the 10-year Treasury note increasing– but thus far, the increases have not been enough to move real estate pricing materially.
– Higher interest rates could trigger changes in 2019-2020, as some capital sources move away from real estate towards fixed income alternatives. However, this will not be a rapid shift – many investors hold real estate as a long-term investment, and do not adjust real estate allocations quickly.
– Domestic buyers remain active but tilt towards higher return strategies in order to meet absolute return objectives, while foreign buyers have curtailed their activities, for many due to the costs of hedging their currency exposures.
– New supply poses a potential cyclical risk. Secular risks will also continue to influence real estate markets.

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