LaSalle’s Klinksiek on cooling values, expanding yields and rising rates

Rising interest rates across global markets are having a cooling effect on the volume of assets changing hands and causing a lack of clarity over valuations.

LaSalle Investment Management’s incoming global research head Brian Klinksiek is seeing more investors turn toward commercial real estate debt to counter near-term uncertainty.

“Taking debt positions today is a great way to invest capital without having to take a clear, decisive position on where precisely the value of that asset will land as we get through this inflationary episode,” Klinksiek tells Real Estate Capital USA.

Rising interest rates across global markets are having a cooling effect on the volume of assets changing hands and causing a lack of clarity over valuations, says Klinksiek, who will leave his current position as head of European research at LaSalle and replace Jacques Gordon, the firm’s long-time global research head, at year end.

“What is great about being a mortgage lender, whether in a senior loan position or some subordinated piece, is that you’re in a position in the capital stack which is largely insulated from the range of uncertainty on where values will settle,” Klinksiek says, noting that the markets have been largely more stable than in past cycles. “We’re not talking about the swings in values of the magnitude seen during the global financial crisis [and] that has allowed debt capital at re-priced yields to continue to flow into real estate wherever transactions are getting done.”

This philosophy is something that LaSalle implements across its US and European platforms, where it is mainly a floating-rate lender.

“Floating-rate today comes with a built-in upside opportunity if rates stay high or go up more than we expect,” says Klinksiek. “There’s a special appeal to that for a debt investor.”

Research realizations

LaSalle research has teams embedded in the regional business lines: an Asia team, a European team and a North American team. In the coming weeks, there will be an additional small but expanding team with a global outlook.

Across its main regional teams, LaSalle wants to answer three questions. What is the future of the office? What lessons can be learned from the success of multifamily across markets? And what are the common drivers and risks for real estate across the globe?

“The superior returns we have seen from beds and sheds cannot possibly go on forever without

those sectors’ strong outlooks becoming fully priced into asset values,” Klinksiek says. “We were already very actively identifying opportunities outside of those favored sectors before inflation surged, though recent market volatility has muddied the waters for now.”

LaSalle is making selective investments in office and retail assets as well, Klinksiek says. “Our big strategic view within pandemic-unfavored sectors like office and retail is they are very much an asset selection game and an asset enhancement game. The goal is to bridge the quality divide and the net-zero carbon divide,” he explains.

“There are definitely debt strategies that relate to supplying capital to those winning assets and shoring up their strength, making them defensible for the long haul.”

The firm believes winning and less-favored sectors can learn from each other.

“Investors in the favored sectors should keep in mind that what is favored and unfavored can change,” says Klinksiek. “There was a time when the highest-performing sector in US real estate was regional malls, while industrial performance was unexciting. Now we are seeing the complete and total reversal of that, the lesson being that these things can change.”

Post-pandemic, there are even more changes in the pipeline. “I think the landscape of perpetual, ever falling yields and yield compression [is ending] and real estate is moving into an asset selection and clever, sharp asset management environment,” Klinksiek says.