Higher interest rates could cause some investors to shift to fixed-income alternatives from real estate, but the shift would be slow as many investors plan to hold real estate in their portfolios for the long term, according to LaSalle Investment Management's Investment Strategy Annual 2019 released Monday.
While chances of sudden spikes in inflation and interest rates are low, what could increase the chance of a more rapid rise are trade wars, commodity price increases and employment market tightening.
"We've been warning clients about volatility" for three years, said Jacques Gordon, LaSalle's global head of research and strategy, in an interview. "We don't know when volatility events will happen."
Even so, LaSalle executives expect real estate to provide strong returns in 2019 and 2020, in part because real estate capitalization rates — a measure of investment return — trend slowly, Mr. Gordon said in an interview.
However, investors' expected return targets for real estate of an average 8.2% in 2018, down from investors' average expected return of 8.4% in 2016, the report shows.
LaSalle executives are recommending investors' real estate portfolios should have low-beta investments that can withstand volatility in other asset classes, reflected in a core real estate portfolio. At the same time, the portfolio should have alpha-seeking investments that can outperform core real estate, expected to be about 3% to 5%.
Also, modern warehouses for e-commerce with large populations nearby should perform well in 2019, the report noted.