From a small northwestern observatory…

Finance and economics generally focused on real estate

Mueller’s Market Cycle Monitor

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I was giving a brief presentation on real estate two weeks ago, and mentioned Glenn Mueller’s great Market Cycle Monitor, which is actually owned and produced by Dividend Capital Research in Denver.  Dr. Mueller is a professor at Denver U, and the Market Cycle Monitor stems from a paper he wrote back in the 1990’s.  The Monitor basically examines commercial real estate across four phases — recovery, expansion, hypersupply, and recession.  It then examines real estate subsectors across these phases (suburban offices, downtown offices, factory outlet retail, etc.) and then examines the top markets in the top 55 geographic markets.  If all of this seems massively complicated, Dr. Mueller makes it relatively easy to understand, with great explanations of his graphical presentations.

By the way, the four phases are determined in the context of rising and falling occupancy, rents, and new construction.  Thus, a property type or market in recovery evidences declining vacancy rates and no new construction, which leads to rising rents and values.  The expansion phase is marked when the market or property type occupancy rises above  the long term occupancy average, and that phase evidences continued declining vacancy and some new construction.  After occupancy peaks, and begins to decline, the market or property type enters the hypersupply phase, marked by increasing vacancy yet continued new construction.  A property type or market enters the recession phase when occupancy falls below long term averages, and yet increasing vacancy rates are met with increased completions of new properties.   The report goes on to explain the impacts on rents, rent changes, and how rental rates interact with construction feasibility at different levels of the cycle.  Simply reading the Market Cycle Monitor is a great primer on how commercial real estate markets work.

Simply collecting the data is a bear, so there is usually a 2 month delay producing the report.  The most recent report covers the 3rd quarter, 2016, and was produced in late November.  While the report covers 55 markets and 12 different property type sub-markets, the data generally spans five major property types — office, industrial, apartments, retail, and hotels.  Three of the five sectors (office, industrial, and retail) had improving occupancy in 3Q16 and improving rents.  Hotel occupancy was flat, but room rates actually increased, albeit at only 2.2% annually.  Apartment occupancy actually declined 0.1% in 3Q16, but room rates increased at an annual rate of 3.2%.

The remainder of the report is packed with great information, and extremely readable.  Check with Dividend Capital for a copy, or send me an e-mail.

Written by johnkilpatrick

January 11, 2017 at 9:33 am

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