Commercial Real Estate Cycles — Q2 2018

This is the Must Have quarterly report for those in commercial real estate   For me this is the most timely read quarterly information regarding Commercial Real Estate — Dr. Glenn Mueller’s Real Estate Cycles Q2 2018 report from Black Creek Group – Black Creek Research.  The report contains valuable data spanning major commercial real estate markets across the country based on almost 300 models tracking occupancy and rental rates.

Dr. Mueller’s analysis of commercial real estate markets covers 54 Metropolitan Statistical Areas’ (MSAs) across five property types.  This is the one report that shows how property types are performing today in a supply and demand framework.  Have already received several requests for the summary of Dr. Glenn Mueller’s quarterly report on commercial real estate cycles well in advance of the quarter end.  The Cycle Monitor – Real Estate Market Cycles is an excellent resource for checking the pulse rate and blood pressure and relative health across major commercial real estate markets nationwide.

The following table summarizes the latest findings for each of the property types in the study.   Even though demand is absorbing more space, new construction deliveries saw vacancy rates remain flat for all groups except retail, which was up 0.4 percent in Q2.  (I call the 0.1 percent Q2 increase in industrial  and apartment occupancy rates and the 0.1 percent decline in hotels essentially equal to flat).   Hotel properties topped the quarterly rent growth rising 4.0 percent, with industrial properties posting the largest year-over-year gain at 6.2 percent.   No doubt cheap energy and deregulation are benefitting the industrial sector.

Dr. Mueller defines four distinct phases in the commercial real estate cycle providing decision points for investment and exit strategies. Long-term occupancy average is the key determinant of rental growth rates and ultimately property value. Across the cycle, Dr. Mueller has described rental behavior within each of the phases, using market levels ranging from 1 to 16. The equilibrium market level is 11, where neither demand nor supply drive rent changes.

Recovery Declining Vacancy, No New Construction

1-3 Negative Rental Growth
3-6 Below Inflation Rental Growth

Expansion Declining Vacancy, New Construction

6-8 Rents Rise Rapidly Toward New Construction Levels
8-11 High Rent Growth in Tight Market

Hypersupply Increasing Vacancy, New Construction

11-14 Rent Growth Positive But Declining

Recession Increasing Vacancy, More Completions

14-16, then back to 1 Below Inflation, Negative Rent Growth

These are illustrated in the following graphic from Dr Mueller’s report.

The following graph (from Dr. Mueller’s Q2 2018 report) shows the current cycle stage from a national perspective.    Apartments, given continuing material new deliveries in the past four years, are the most mature property type across the cycle and are in the Hypersupply Phase with rents still increasing but at a declining rate.

To download The Cycle Monitor to view the same data as above for 54 MSAs across the five property types, click  then click market cycles report. 

Pay attention to each of the property types in the report focusing on cities that have excess supply, and also those with supply trailing demand.

To learn more about the Black Creek Group click

Dr. Glenn Mueller, in addition to being a real estate investment strategist for the Black Creek Group, is also a professor at the Burns School of Real Estate and Construction Management at the University of Denver.

Kudos to Dr. Mueller and the Black Creek Group.



  1. Commercial Real Estate Orange County

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