Commercial Real Estate Cycles for Q1 2021 -- Dr Glenn Mueller's Must-Read Quarterly Report

While housing markets turned hot after the first four months of the pandemic last year, commercial real estate still struggles. Even prior to the pandemic there were growing trends of e-commerce migrations out from the higher-tax, greater density markets and growing work-from-anywhere jobs negatively impacting commercial property. The pandemic magnified and accelerated these trends. Detailed insight is needed to help ascertain where the individual real estate markets are at and heading.

Dr Glenn Mueller’s quarterly Commercial Real Estate Cycles report gives just that perspective on what is going on in commercial real estate across the country. 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 values. Ideally, Phase 2 - Expansion is the sweet-spot for real estate investor performance as shown in the following two graphs and discussion.

Across the cycle, Dr. Mueller has described rental behavior within each of the phases, using Market Levels ranging from 1 to 16. Equilibrium occurs at Market Level 11 in which demand growth equals supply growth – literally the sweet spot. The equilibrium Market Level 11 is also the peak occupancy level.

Phase 1 - Recovery Declining Vacancy, No New Construction

1-3 Negative Rental Growth

3-6 Below Inflation Rental Growth

Phase 2 - Expansion Declining Vacancy, New Construction

6-8 Rents Rise Rapidly Toward New Construction Levels

8-11 High Rent Growth in Tight Market

Phase 3 - Hypersupply Increasing Vacancy, New Construction

11-14 Rent Growth Positive But Declining

Phase 4 - Recession Increasing Vacancy, More Completions

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

Dr. Mueller’s Q1 2021 report shows the current cycle stage from a national perspective across property types. Apartments, Industrial (Research & Development and Flex Space), Downtown Offices and Retail (Neighborhood/Community), with growing ecommerce, ongoing new deliveries, and a pipeline of construction, are in Phase 3 - Hypersupply with rents still increasing but at a declining rate. Phase 4 – Recession contains Retail Power Centers, Retail Factory Outlets and Regional Malls where rents are declining.

Industrial warehouse property continues to be the big winner in real estate driven by ecommerce needs and growing refrigerated space requirements, is resting at Equilibrium Market Level 11. Also in the desired Phase 2 - Expansion are Suburban Offices near the midrange of the Phase 2 at Market Level 8.

Office is shown in the next table for 54 individual Metros across the country. More than one-half of the Metros in Mueller’s study (53.7 percent) are in Phase 3 – Hypersupply or Phase 4 – Recession for retail. Slightly more than one-third of the office markets (37.0 percent) are in Phase 2 – Expansion, the sweet spot for rising rents. As described in Mueller’s full report, the number following the Metro shows how that specific market changed from the prior quarter across the stages. Markets that are shown in bold italic font (11 of the 54 office markets) make up 50 percent of the total space monitored by Mueller’s report.

Mueller’s quarterly report, which is based on almost 300 individual econometric models, also includes these metrics for apartments, industrial and retail properties across the 54 metros. Unfortunately data for hotels are no longer available.

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 current and historical quarterly reports click and scroll down to the REAL ESTATE MARKET CYCLE REPORT section on the Website. For the Q1 2021 report click Microsoft Word - Cycle Monitor 21Q1.docx (

To learn more about Dr Glenn Mueller click ­

For commercial real estate practitioners, Dr Mueller’s is essential reading each quarter.