Turbulent real estate market has plenty of opportunities in 2017 — report

The real estate market is in for some turbulence in 2017, but it is not time for investors to hide under their beds, according to LaSalle Investment Management’s latest Investment Strategy report.

“While there is a good chance there will be some real game-changers … with (Donald) Trump’s election, Brexit, Italian referendum and more to come in 2017 … investors should future-proof their portfolios by trying to get ahead of certain slow-moving secular trends including climate change and urbanization,” said Jacques Gordon, global strategist in the real estate money manager’s Chicago office, in an interview.

In the U.S., there is significant uncertainty surrounding Mr. Trump’s policies and direction, as well as the future relationship between Mr. Trump as president and the Republican-controlled Congress, the 2017 annual report, released Tuesday, noted.

Tax cuts, infrastructure spending, deregulation and improved business sentiment — all things Mr. Trump has promoted — would benefit real estate investments, the paper stated.

Real estate connected to infrastructure projects typically does extremely well, Mr. Gordon said. Examples include projects to convert abandoned rail lines into walkable urban spaces such as Manhattan’s High Line and similar projects in Atlanta, Chicago and Portland, Ore., he said.

“All of this takes infrastructure spending to get it going,” Mr. Gordon said.

However, trade wars, reduced immigration, interest rate increases and a standoff between Congress and the president on deficit spending would be negative for real estate investors.

A trade war, for example, could hurt U.S. exports and real estate related to the technology, media and telecommunications sectors, the report noted.

“This is not a time for fear and terror,” Mr. Gordon cautioned. “It’s a time to pay attention and be aware of the structural changes that are coming, to be more cautious and to find places to move to offense.”

The four main structural, long-term trends that LaSalle tracks are demographics, technology, urbanization and environment. The latter category, new this year, covers climate change awareness, sustainability initiatives and measures to benefit the health and welfare of building users.

Investors should keep these trends in mind as they can dramatically affect real estate holdings, the report states. This means focusing on the parts of the city where there are demographic, urbanization, technology and environmental change drivers, Mr. Gordon said.

Tenants these days want properties that have recycling and energy conservation initiatives like saving on water, which also reduce costs, he said. Investors should also be aware of how properties in certain locations will do in climate-change conditions such as flooding.

“With 100-year floods happening every three years, it (climate change conditions) seems more common,” he said.

In some areas in Florida, for example, real estate investors should be aware of the costs of rising sea levels and rising tides on properties. Real estate investors can do things like making sure their backup generators are not in the basement in case of a flood, he said.

There are investment opportunities in the U.S. One of the most attractive in 2017 will be warehouse development to take advantage of shoppers’ increasing preference for shopping online and subsequent moves toward faster delivery, the report states. This trend is driving demand for modern warehouses built to accommodate e-commerce in locations close to cities and traditional distribution centers, the report noted.

LaSalle also is recommending defensive investments in premium malls, urban retail and grocery-anchored centers, which generally outperform other property types during recessions. The firm is making this recommendation even though the report acknowledges that in the future, shoppers could shift to online grocery shopping rather than buying groceries at brick-and-mortar stores.

Still, LaSalle predicts rent growth will moderate in the U.S. as well as in Canada during 2017 from the high rates of 2015 and 2016. However, supply of new property should not overrun demand in North America as construction loans are harder to obtain.

One investment opportunity in Canada stems from the globalization of Canadian pension plan portfolios, the report notes. As Canadian pension funds increase their international real estate exposure, they are selling off peripheral real estate holdings in Canada. This is creating investment opportunities in core and core-plus properties that are not typically available, the study states.

In Europe, the coming elections in 2017 could lead to significant market volatility. The resignation of Italian Prime Minister Matteo Renzi after voters rejected a referendum to change the country’s constitution has brought anti-European Union-immigration forces to power in Italy, the paper notes. But even had the referendum passed, Italy still has problems that negatively impact real estate investors, including the undercapitalization of banks stifling credit, the report notes.

With upcoming elections across Europe, LaSalle expects mainstream candidates to prevail over nationalist parties in Germany and France. If LaSalle executives are right, there will be moderate economic growth and inflation in 2017 and 2018, which should lead real estate investors to continue investing in income-producing properties in Europe.

Competition for core income-producing real estate in Europe will remain intense, the study states. However, aside from a potential upside for office properties as a result of the U.K. vote to exit the European Union in June, LaSalle foresees investment opportunities in retail, including shopping centers in dominant shopping destinations in France and premium shopping centers in Sweden and Germany.

There are also value-added opportunities in Europe. Examples are micro-apartments, apartment-hotels and student housing in Paris, Munich, Berlin, Amsterdam, Milan and Madrid.

In Asia, Japanese pension plans have announced interest in expanding investment in real estate from less than 1% of an estimated ¥356 trillion ($3.09 trillion) combined total assets should create opportunity, the report indicated. Pension fund officials are first expected to invest in real estate in Japan and then move into core markets, sectors and properties outside the country. If Japanese pension plans increase their allocations by 2 percentage points, it would increase institutionally held real estate in Japan by 25%, the paper states.

“If you can keep your head when others are losing it, that is a good investment trait,” Mr. Gordon said. “Sitting still and doing nothing is the worst thing an investor can do. Then you’re letting the market push you around.”