From a small northwestern observatory…

Finance and economics generally focused on real estate

3/7/09 — Time Flies When You’re Having Fun

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Sorry it’s been so long since I’ve posted.  It’s been a terrifically busy few weeks.  I will say this, I haven’t been totally incommunicado — I wrote the March issue of The Greenfield Advisor, which you can read for free by visiting here and clicking on “newsletters”.  We use the monthly G/A to summarize our thinking on the real estate economy and to look more in-depth at what’s going on around us.

One of my frequent reads is Dr. Glenn Mueller’s Market Cycle Monitor, published quarterly by the folks at Dividend Capital.  It’s based off of a journal article he wrote back in the 1990’s in which he observed that the timing of the investment characteristics of commercial real estate could be analyzed in terms of a cycle through four occupancy/supply quadrants:  recession, recovery, expansion, and hypersupply.  (After hypersupply, a market declines back into recession as supply outstrips demand.) 

From that core thought, Dr. Mueller is able to analyze real estate not only nationally, but also by subsector (apartments, suburban office, limited service hotel, etc.) and by geographic region (about two dozen or so major markets). 

In markets at equilibrium, this model works very well.  Naturally neither it nor any other model is very good at picking up “shocks” to the system.  As a result, his model shifted dramatically from third quarter, 2008, to fourth quarter, 2009, the latter of which was just published in February.  Today, of course, the model pretty much lumps everything in “recession. 

The important point is, that doesn’t at all invalidate Dr. Mueller’s work.  Indeed, his model provides an excellent launch point for investors, as we peel back the layers of the empirical onion to determine which sub-sectors and geographic markets will rebound first, and which will be laggerds as a result of oversupply and under-demand.

Written by johnkilpatrick

March 7, 2009 at 11:35 am

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