PT: Thank you for joining me here today Professor Severino. I was hoping we could start off by hearing a little about your background and your role as Chief Economist at JLL.
RS: I’ve been in CRE for almost my entire career except for a short stint at an investment banking firm. I just found myself along the way. I started doing CMBS work before moving to asset portfolio management and the fixed income/private side, all of which I was interested in, but didn’t love.
I was a nerdy, academic person so I decided I should be in research and got a graduate degree studying math, finance, and economics. For the last 22 years, I’ve both worked on broad research and focused on economics specifically. At JLL, my job is to think very big picture. What’s going on with economics, geopolitics and demographics? Understanding those things and then translating them into discrete implications for commercial real estate. What does it mean for rents, vacancies, construction, net absorption, cap rates and returns? I try to do it in a way that is mathematically rigorous and grounded in sound econometrics. My job is to be tactical.
PT: I thought we’d start off the Q&A portion with what everyone has been following for the past two months, the Russian invasion of Ukraine. What impacts do you see this war having on the highly inflationary global economy, and in particular, real estate?
RS: The first thing I would say is that obviously we are sort of off the radar here. We have not had this sort of disturbance in Europe since WW2. I think it really depends on where in the world you are. Here in the US, we are a very domestically-oriented economy. However, we’re not completely immune from what goes on around the world. Certainly, the oil prices are set on a global market so we’re not going to avoid that completely. But with Europe being closer to what’s happening, there is more of a direct impact especially when it comes to energy.
The main impact of the crisis is that inflation will be exacerbated at a time where it was already elevated. Not just for energy-related costs but also for food and other commodity inputs. I don’t believe it’s going to be permanent, but it will cause inflation to stay elevated for a bit longer than we would have seen. It’s a shame because we were starting to see signs of inflation abating in other areas of the economy. This will push against that.
What this means is that many economies around the world will see high inflation restrain growth – especially concerning energy. It’s effectively an energy tax on countries that are energy consumers as opposed to energy producers. The US is a bit different because we can technically produce more oil if the decision makes sense financially to energy companies. Either way, it is probably going to strain growth. I don’t think it will be much of a situation here in the US, but it will be much more impactful for Europe.
As far as real estate goes, real estate is a good asset class at dealing with higher inflation. It’s a characteristic of real estate that hasn’t been emphasized for the last few decades since inflation had been relatively benign. If you look at the history of real estate, it does a respectable job of hedging against inflation. But it also depends on market strength. If you look at last year, the two strongest property types (apartments and industrial) had rents that grew in excess of inflation. So moving forward, is the market going to be in a position of strength? I think for most property types that will be the case. But I do think that office will have to get to a point where the market is stabilized and starts to improve over a period. Overall, real estate does a good but imperfect job in our current economy.
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