The first thing that catches the eye when speaking to Green Street’s Director of Research is the surfboard in his Zoom background. The board – which is unlikely to be getting much use on a rainy day in June – is an apt metaphor for a career that has brought him from California’s sunny Newport Beach to London. While he is based in Europe, his outlook is multinational; Mr Lachance is responsible for Green Street’s global research function.
Cedrik is certain that the last 16 months will have a profound and lasting effect on the European and Global REIT markets. “What happened is going to have a material impact in the long run,” he explains, adding that this will be driven by lasting lifestyle changes accelerated by the pandemic.
He is candid about how a long-term trend towards greater homeworking will have particularly profound changes: “At the moment, we haven’t really had the ability to go back to the office yet, so we can’t be certain about how the future will look” the French-Canadian explains. However, what is abundantly clear is that there is a strong desire for hybrid working.”
The most obvious place where this will be felt will be in the office sector. According to Mr Lachance: “The US could see a fall of around 15% in demand for office space, and the early indications suggest that London would experience a similar fall. However, the fall in continental Europe will be somewhat softer.”
From Newport Beach to London
Investors listen to what Mr Lachance has to say, which is part of the reason why Green Street has become a REIT-research powerhouse. He has spent his entire career analysing the market, and the French Canadian’s first introduction to the category came during his MBA internship while studying at Dartmouth. He says: “I had been told that Green Street was a top product in the category, and then got a position working in the firm’s headquarters in Newport Beach during the second year of my MBA.”
Since then, he has grown with the firm: “We went from a strictly-US focused REIT shop with 25 employees to a global firm employing 275”. Green Street expanded into Europe and opened a London office in 2008, and 18 months ago, Cedrik moved to London to lead the global REIT team from Europe rather than Newport Beach as a step to further integrate US and non-US research. Under his leadership, the firm’s research offering “aims to provide the gold standard of actionable research and analysis, with a direct focus on providing actionable insight”.
So how does Cedrik think that this longer-term pivot to homeworking will affect the real estate market? He starts with the assertion that people will not need to live as close to work as they have done. According to the research director: “Living centrally will no longer be as critical to people as it once was, and as such, the commuter belt will become much bigger.” He is clear about the challenges that this will present REIT investors – where things get really interesting are the opportunities.
Firstly, Cedrik believes that larger European urban areas will offer investors better returns than smaller ones over the next decade: “People – particularly younger people – will still pursue living in larger metropolitan areas for a variety of reasons that will be unaffected by the pandemic.” He adds that: “Suburban areas within these metropolises should be winners, as people will look for more outdoor space, which is a natural reaction to lockdowns.”
Furthermore, he believes that this shift in living will have a profound impact on the leisure category. While business travel volumes will probably decline, affecting returns in cities that had large numbers of business visitors pre-pandemic, enormous pent up demand for leisure travel will drive opportunities in cities like London and Paris. He adds that “leisure destinations and resorts will also benefit from high public demand as people get back out into the world and enjoy themselves”.
Finally, he explains that the pandemic-induced shift to e-commerce is also a trend that alpha-hungry investors will be able to capitalise on and that there are ten years of high growth ahead in this category. “A lot of purchases have moved online, and this has been particularly pronounced in Continental Europe where e-commerce will finally become a more important part of consumer spending,” he explains. Cedrik also suggests that this will contribute to a growth in demand for industrial real estate closer to population centres, where returns will be further supported by the fact there is naturally less opportunity to build and, therefore, more competition for assets.
One very interesting point raised during the conversation is Green Street’s view on how societal inequality could affect investment opportunities. Cedrik says that countries with lower Gini coefficients – i.e., those that are more economically equal – when combined with good government fiscal positions will be in a better place to cement future growth than those with higher Gini coefficients. He mentions that “the Nordics, the Netherlands and Switzerland are better positioned than average countries to sustain economic growth under this scenario”.
Part of this will be due to a better vaccine rollout, but he also explains that “lower Gini countries will also do better because they are put in a position to do well. There is less risk of negative government intervention, and ultimately less temptation to burden real estate with more taxes”. This is part of the reason Cedrik thinks that the Nordics – particularly Sweden – will perform very well in the coming years.
While more twists and turns in the pandemic story could obviously present challenges to the recovery, Green Street would undoubtedly rise to them. “It’s been a hectic and demanding year from a research point of view, but in many ways, it’s been incredibly intellectually rewarding,” Green Street’s man in London tells me. He continues that “as a team, we actually spent more time together collaborating than we usually do, and this – coupled with our need to be nimble – resulted in some fantastic stock picks”. How ever market conditions play out, Cedrik and Green Street will surf the waves with aplomb.