This is the latest installment of 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 Q3 2018 report. The report contains valuable information for office, apartment, retail, industrial and hotel 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 report that shows how property types are performing today in a supply and demand framework. 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.
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. This is also the peak occupancy level.
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 Q3 2018 report) shows the current cycle stage from a national perspective. Apartments, given ongoing 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. Many of the individual hotel markets in the 54 metros are also in the Hypersupply quadrant.
To download The Cycle Monitor to view the same data as above for 54 MSAs across the five property types, click https://daniels-pull-universityofdenv.netdna-ssl.com/assets/Cycle-Monitor-18Q3.pdf
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.
Dr. Glenn Mueller is a professor at the Burns School of Real Estate and Construction Management at the University of Denver. To learn more about him click https://daniels.du.edu/directory/glenn-mueller/
Thanks again Glenn for this great research.