Published on: March 03, 2020
BY TED C. JONES, PH.D.
This quarterly Must Read report for commercial real estate professionals was just released. Dr. Glenn Mueller’s Real Estate Cycles Q4 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 for the second quarter in a row. 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 shows national occupancy changes for Q4 2019 and rent changes in Q4 2019 on a quarterly and annual basis.
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 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 Q4 2019 report shows the current cycle stage from a national perspective. Apartments, with ongoing new deliveries in the past six 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. Four metros moved into the Hypersupply Phase in Q4, 2019 -- Stamford, Cincinnati, Ft Lauderdale and Orlando -- and are denoted by the +1 suffix. Three metros moved from Phase 3 HyperSupply back to Phase 2 Expansion – Austin, Orange County and Tampa as indicated by a -1.
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 Q4 2019 Real Estate Cycles Report and view the results for apartments, offices and retail click https://daniels.du.edu/assets/Cycle-Monitor-19Q4.pdf