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Since 2010, commercial real estate markets have broadly recovered around the world, although at different speeds and different levels of strength. As indicated by the Property Clocks (sm) published by JLL’s research team and provided below, commercial values in most markets continued to rise through 2014, though at varying rates of growth.
Global capital flows for investment sales by region, below, indicate that volumes have continued to expand since they reached their lowest levels in the wake of the global financial crisis. However, market dynamics reflect contrasting conditions between the capital markets and the leasing markets. The strong capital markets have been supported by globally low interest rates, which have been encouraged by the so-called ‘‘quantitative easing’’ by the U.S. Federal Reserve Bank.
We define market volumes for Leasing as gross absorption of office real estate space in square meters for the United States, Europe and selected markets in Asia Pacific. We define market volumes for Capital Markets as the US dollar equivalent value of investment sales transactions globally in the office, retail, industrial, hotels, mixed-use and certain other asset classes (excluding entity-level transactions, development deals and multi- family residential investment), for individual property assets or portfolios of assets with a value above $5 million. Our research professionals aggregate this market volume information from a number of sources globally and make it publicly available through the quarterly publication of our Global Market Perspective reports. In assessing our market share performance, we compare our own Leasing and Capital Markets revenue performance to the market volume performance in a region or globally to determine whether we are growing faster than the overall market.
During 2011 and 2012, additional uncertainty was injected into the markets by the political and economic challenges that arose within the European Union, particularly as they influenced the credit quality of sovereign bonds issued by various European countries and the stability and liquidity of European banks. These pressures seemed to abate somewhat during 2013, but later in 2014 there have been indications of renewed weakness in the Eurozone as currencies have fallen and deflation concerns have surfaced. Significant negative developments occurred during 2014 in the relationship between Russia, on the one hand, and the United States and European countries on the other, with sanctions being applied to trade with Russia and no clear path to any resolution in the foreseeable future. In late 2014, oil prices began to reduce significantly, which has put pressure on economies, such as Russia’s, that rely on oil sales. Unemployment has continued to improve steadily in the United States, although wages have not improved commensurately. Interest rates remained very low in the United States and the equity markets were strong throughout 2014. Political change and uncertainty, combined with slower than previous growth, also have led to questions that largely remained during 2014 about the ability of certain countries in Asia, particularly China and India, to continue to develop at historical rates, with India showing signs of recovery with a more pro-business government now in place.
Conditions in the Middle East remained unstable, or in some cases worsened, during 2014, and lower oil prices added uncertainty to the picture toward the end of 2014. Commercial interests in the business potential of the more stable African countries appeared to continue to expand during 2014, although the Ebola outbreak caused severe concerns in affected countries.
Increasing demand for global services and globalization of capital flows. Many corporations have continued to pursue growth opportunities in international markets. Many are striving to control costs by outsourcing or off-shoring non-core business activities. Both trends have increased the demand for global real estate services, including facility management, tenant representation and leasing, and property and energy management services. We believe that these trends will favor real estate service providers with the capability to provide services — and consistently high service levels — in multiple markets around the world. The highly competitive marketplace for the services we provide, combined with financial pressures experienced by certain of our competitors have, however, continued to put negative pressure on fees within some of our service lines.
Additionally, real estate capital flows have become increasingly global, as more assets are marketed internationally and as more investors seek real estate investment opportunities beyond their own borders. This trend has created new opportunities for investment managers equipped to facilitate international real estate capital flows and execute cross-border real estate transactions. One example we have seen in particular is that London residential real estate has become a type of ‘‘reserve currency’’ for wealthy individuals from other countries who are seeking stability in their investment holdings, which we expect to continue as uncertainty increases within Russia and the Middle East.
Growth of outsourcing. In recent years, outsourcing of professional real estate services has increased substantially, as corporations focused corporate resources on core competencies. Although some continue to unbundle and separate the sources of their real estate services, large users of commercial real estate services continue to demonstrate an overall preference for working with single-source service providers able to operate locally, regionally and globally. The ability to offer a full range of services on this scale requires significant infrastructure investment, including information technology applications and personnel training. Smaller regional and local real estate service firms, with limited resources, are less able to make such investments. In addition, public and other non-corporate users of real estate, including government agencies and health and educational institutions, have begun to outsource real estate activities as a means of reducing costs. As a result, we believe there continues to be significant growth opportunities for firms like ours that can provide integrated real estate services across many geographic markets.
Alignment of interests of investors and investment managers. Institutional investors continue to allocate significant portions of their investment capital to real estate. Many investors have shown a desire to commit their capital to investment managers willing to co-invest their own capital in specific real estate investments or real estate funds. In addition, investors are increasingly requiring that fees paid to investment managers be more closely aligned with investment performance. As a result, we believe that investment managers with co-investment capital, such as LaSalle, will have an advantage in attracting real estate investment capital. In addition, co-investment may bring the opportunity to provide additional services related to the acquisition, financing, property management, leasing and disposition of such investments.
We expect institutional capital to continue to flow into real estate as many institutional funds are currently under-allocated to real estate as an asset class and as interest rates have remained at historically low levels. We are also seeing institutional investors begin to consolidate their real estate portfolios, moving away from the spread of smaller managers assembled over the last cycle to larger managers such as LaSalle.
Industry consolidation and other trends. We believe that consolidation in our industry will continue as the larger, more financially and operationally stable companies gain market share and become increasingly capable of servicing the needs of global clients. We also believe that developed countries will be favored for new investment as the risk appetite of investors remains conservative. Additionally, selecting service providers with the best reputation for sustainability leadership, governance, enterprise risk management and ethics will become increasingly important. Operators and investors seeking efficiencies from developing their supply chains will want to avoid the significant potential costs and reputational issues associated with compliance missteps, such as violations of the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act or anti-money laundering regulations.