This quarterly Must Read report for commercial real estate professionals was just released. Dr. Glenn Mueller’s Real Estate Cycles Q3 2019 report provides a concise overview of office, apartment, retail, and industrial commercial real estate markets across the country for 54 major metros based on almost 300 models tracking occupancy and rental rates. Hotels were included in prior issues but an interruption of data has caused this segment to be suspended from the report at this time. 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.
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. Ideally, Phase 2 is the sweet-spot in for real estate investor performance.
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 2019 report shows the current cycle stage from a national perspective. Apartments, with ongoing new deliveries in the past five 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.
The following table shows the 54 markets for Industrial properties. A number of metros moved into the Hypersupply stage, denoted by the +1 suffix.
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 download the full Q3 2019 Real Estate Cycles Report and view the results for the other Apartments, Offices and Retail along with other details click https://daniels-pull-universityofdenv.netdna-ssl.com/assets/Cycle-Monitor-19Q3.pdf
To learn more about Dr Glenn Mueller click https://daniels.du.edu/directory/glenn-mueller/