In a market defined by meaningful volatility, Shawn Lese sees opportunities.
We sat down with the Chief Investment Officer and Head of Funds Management for the Americas for Nuveen Real Estate to get an insider’s perspective on the current real estate market. While talk of tariffs and territorial infringement are giving some investors pause, Lese breaks down the fundamentals of the strengthening residential and stabilizing industrial spaces, as well as the growth potential in health-related development. He also identifies an unexpected side-effect of the current administration’s policies and rhetoric: a coming-together of European countries that bodes well for real estate investors due to a perceived strengthening of the EU’s political cohesion and increased willingness to stimulate growth.
The Trouble with Tariffs
While tariffs are undoubtedly the topic on the forefront of many investors’ minds, Lese points to them as just the latest in a series of hurdles that have slowed new construction to a crawl in many markets.
“Part of the reason new starts have fallen away across most sectors is a huge run up in labor costs, material costs and interest rates,” he explains. “It’s become incredibly expensive to develop. And why develop when you can buy at below replacement cost?”
New tariff and immigration policies aren’t creating a development problem; they’re making an existing problem worse. Take, for example, the proposed tariff on Canadian lumber. Up to 30% of all softwood lumber consumed in the US comes from Canada, and a hike in tariffs on these goods would significantly increase construction costs. The same goes for proposed tariffs on aluminum and steel.
Labor costs are another area where administration policy could increase development costs that are already high.
“Undocumented immigrants are very important contributors to the construction activity in the United States,” says Lese. “To the extent that they are either removed from the country or feel unable to go to work, the result is inflationary. It’s going to make labor more expensive.”
Overall, a lot of the new administration’s actions will have a deleterious effect on new development. However, assuming demand remains the same or increases, the rising cost of new construction will be a boon for owners of existing real estate, whose holdings will only increase in value.
“It’s going to make replacement costs rise dramatically,” says Lese, “which is a good thing for the value and performance of existing properties.”
The European Connection
Lese highlighted an unusual silver lining he’s observing as the new administration’s policies reverberate around the globe. “The administration’s actions seem to be having the effect of creating opportunities in Europe, in particular,” says Lese.
“The EU is actually becoming far more cohesive and is looking to stimulate its economies.”
In the recent past, real estate investors have shied away from the European market because it presented a number of risk factors ranging from political instability to currency fluctuations to repressed growth. However, the new administration’s aggressive posturing toward Europe, combined with recent elections in which calmer heads prevailed, have increased the stability of the market dramatically.
“We’ve seen the European Union really coming together,” says Lese. “Europe wasn’t really on the menu for a lot of international real estate investors. Now they’re taking a look at that market. We are actively getting reverse inquiries from investors, including from those in the US, which now are considering ways to access opportunities in Europe.”
Between valuations beginning to creep up, new markets in Europe becoming more attractive, and select areas like health care-related, housing and light industrial poised to deliver in the coming years, Lese is confident that the real estate market is in an attractive position and that investors should act now to secure their future.
“Despite recent GDP weakness, we’ve got an environment that remains very resilient,” he says.
“The US is still the most dynamic, most powerful, most entrepreneurial country in the world.”
Riding the Upswing
Outside of the traditional office sector, which is still finding its identity in the wake of the black swan event that was COVID, Lese believes that every type of real estate is “on a stable to growing trajectory.” The reasoning is simple pattern recognition. “Historically, after downturns, if you measure how real estate has performed for the subsequent to 15 years, it has delivered over 11% CAGRs,” says Lese. “If you can catch it at the bottom of a cycle, you’ve been able to ride strong performance for a decent period of time.”
Lese believes that real estate has bottomed out, and the best time to invest in real estate is today. He’s not the only one: what Lese describes as a “wall of dry powder” has built up over the last few years due to high interest rates, which has translated into a lot of bidder activity as valuations have begun to creep up over the last couple of quarters.
“After a stronger fourth quarter of 2024, there was a discernable pause in January, but from the middle of February up until now we’re seeing more deals being brought to market,” he says. “A robust bidder pool has been lining up to the point where strong pricing exists across the United States. The bidders are cautious and conservative in their underwriting, but they are present and active.”
Lese specifically calls out “light industrial” as one of the early winners in this upswing in valuations. And there’s one development sector that Lese remains completely bullish on.
“Despite higher development costs, new health care-related developments work,” says Lese, echoing his colleague Chad Phillips’s sentiments. “Higher end luxury senior housing developments, as well as high acuity medical outpatient buildings, those are areas where the demand is increasing. The impact of the aging baby boomer population is apparent.”
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