Posts Tagged ‘Glenn Mueller’
Mueller’s Market Cycle Monitor
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.
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Mueller’s Market Cycle Monitor
Dr. Glenn Muller of Dividend Capital Research has one of the more intuitive “takes” on the commercial real estate market. His Market Cycle Monitor is based on a piece he wrote for the journal Real Estate Finance back in 1995. It notes that a given type of real estate (office, industrial, etc.) in a particular geographic market (New York, Seattle, etc.) moves through a cycle which can be broken down into four phases: expansion, hypersupply, recession, and recovery. The driving force through these cycles is property occupancy — when occupancy levels rise, developers are encouraged to build new product, which leads into a hypersupply situation where occupancies fall and properties go into recession. For a more detailed look at his model, click on the link above, which will take you to the Dividend Capital website where you can view the 3rd Quarter report.
In short, he finds that as of the 3rd quarter, 2011, most property types in most markets are in the early stages of recovery. The office market nationally, as well as in about a third of the cities he follows, is still in the late stages of recession (except Sacramento, which is in the early recession stage). Austin and Salt Lake seem poised to break out into expansion.
In the industrial market, every region is in recovery, with Pittsburgh, Riverside, and San Jose the furthest along. However, none of these markets evidence being close to expansion at this time. As for apartments, every market is in some stage of recovery, with Austin close to breaking out into expansion. Lagging the recovery are New Orleans, Norfolk, and Richmond. Nationally, the apartment market is right in the middle of recovery, with expansion still a few steps in the future. The retail market is in about the same position as apartments, but with Long Island, San Diego, and San Francisco furthest along. Nationally, we’re still close to the beginning of a retail recovery and not very far along. Hotels seem to be slightly further along than regail, with Honolulu, New York, and San Francisco leading the pack (and poised to break out into expansion).
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Mueller’s Market Cycle Monitor
Dr. Glenn Mueller’s Market Cycle Monitor just hit my desk from the folks at Dividend Capital. To access it, or some of their other great stuff, just click here.
I’ve written about Dr. Mueller’s work before — while his model isn’t able to forecast really major moves (like the “fall off the wagon” move of 2008/2009), his Market Cycle synopsis does a great job of assessing how various property types and submarkets are moving through the normal stabilized cycle of business. In short (and I’m sure he’d do a better job of explaining this than I could), at any given point in time, a market or submarket is in one of four investment states: Recovery, Expansion, Hypersupply, and Recession. The way market participants react to one situation drives the market forward to the next situation. For example, in the recovery phase, no new properties are coming on-line. Natural expansion of the market drives up occupancy, and with it rents. The subsequent shortage of space leads to expansion. Too much expansion leads to hyper-supply, in which too much property is competing for too-few tenants. This leads to recession. (In a very macro sense, that’s more-or-less what happened in 08/09, with the added problem that too many banks were trying to loan too much money and thus not properly pricing risk.)
The nuances of his model and report are too numerous to synopsize here. In short, he finds that on a national basis, every property type (e.g. — apartments, industrial, suburban offices) are in various stages of recovery, with the health facilities and senior housing being the closest to breaking out to expansion. Intriguingly, both limited-service and full-service hotels are following in close order.
He also tracks most of the top geographic markets in the country, and all of these are either deep in recession or in the earliest stages of recovery. No markets are close to break-out into expansion. The worst two markets (and “worst” is just relative here) are Honolulu and Sacramento, while the best (again, relative) are Austin, Charlotte, Dallas-Fort Worth, Nashville, Richmond, Riverside, Salt Lake, and San Jose. My home city of Seattle is ranked — along with a dozen others — deep in the heart of recession.
From a small northwestern observatory... 