Divide in real estate property types likely to narrow — report

The sharp divide in performance between in-favor real estate properties and out-of-favor property types is expected to narrow as the impact of the COVID-19 pandemic ultimately declines for some sectors, according to a soon-to-be released report by real estate manager LaSalle Investment Management.

The spread between the best and worst property types in the U.S. and the U.K. was at a record high in 2021 because of the pandemic, LaSalle said. In the third quarter of 2021 in the U.S., for example, the spread between the top performing asset class — industrial, which returned 32.4% — and the worst-performing asset class — hotels, with -2.5% — was 34.9 percentage points.

By comparison, the 20-year average spread between the highest and lowest property types in the U.S was 11.9 percentage points, the report showed.

In the U.K., the best-performing property type, industrial, logged a 29.6% return and the worst-performing sector, office, returned 2.3%, amounting to a spread of 27.3 percentage points.

The difference between the top-performing and worst-performing property types in the U.S. and the U.K. has been about 10 percentage points on average over the last 20 years, the report showed.

The wide spread in 2021 was caused by changes in tenant preferences and behavior that were accelerated by the COVID-19 pandemic, including more people working from home and shopping online, the paper said. Industrial and residential property types benefited from this trend, while hotels, office and retail properties suffered.

What's more, lower relative transaction volumes for office and retail properties, which historically had been the two largest real estate sectors, have pushed investors into specialty property types such as single-family home rentals, the report said.

While the strong-performing asset types such as multifamily and industrial properties are expected to continue attracting capital from investors, out-of-favor property types such as hotels, office and retail should start to gradually recover between 2022 and 2024 as those sectors regain some of the market share lost during lockdowns, said Richard Kleinman, Chicago-based head of LaSalle's U.S. Research and Strategy group and co-CIO for the Americas.

"We are seeing signs of renewed investor interest in retail," Mr. Kleinman said in an interview.

Desirable retail properties, such as grocery-anchored centers, are on institutional investors' radar because they delivered stable income and are well-positioned for recovery, he said.