The 54 City Monitor Cycle Report

Want to know what stage of the cycle we are in across five major real estate food groups – office, retail, industrial, residential, hospitality? Then listen to how the 54 City Monitor Cycle Report is compiled and produced.

With 35 years of real estate industry experience, including 26 years of research, Glenn Mueller is a professor for the Burns School of Real Estate and Construction Management at Denver University, one of the oldest and largest programs in the country. Mueller’s research experience includes real estate market-cycle analysis, real estate securities analysis, real estate capital markets, portfolio and diversification analysis, seniors housing analysis and both public and private market-investment strategies. He is also the real estate investment strategist at Dividend Capital Group, www.dividendcapital.com, where he provides real estate market-cycle research and investment strategy for Dividend Capital’s Real Estate Securities, Private Real Estate Investment, Private REIT and Real Estate Debt groups. He is also the co-editor of the Journal of Real Estate Portfolio Management.

At the Dividend Capital Group, professor Mueller, produces a 54 city report examining the cyclical performance of the five major real estate food groups; office, retail, industrial, residential, and hospitality.  In my conversation with Professor Mueller he discusses why he is bullish about real estate industry growth in the US over the next few years and why his experience analyzing industry cycles over the last nearly 30 years, leads him to believe that the industry will enjoy considerable stimulus with the incoming administration that could lead to an extension of the current cycle.  In fact, he talks about predictions for the next recession being pushed out from 2019/2020, to 2021/2022.

In 1990’s when at Prudential as a research analyst, at a time when the markets were headed down during the savings and loan crisis, they wanted Mueller to monitor what was going on and predict where the market might be going in the future.   In this work, he uncovered two types of cycles.  One is the local demand-and-supply cycle.  This led him to cover 54 different MSAs concurrently, together with their localized industries, so for Detroit the automotive industry, and for New York the financial industry for example.  Employment drives the need for space, and as supply varies, where as developing new office buildings is going to be different from city to city, so it is the interaction between these two things drives occupancy levels and rents.  The Cycle Report that Prof. Mueller started in 1992 deals with this phenomena.  The second cycle is the capital cycle flowing to real estate which used to be national in nature but is now global – and this is what drives prices.  The two should work together but do not always.

The way in which government can impact the real estate cycle is by influencing economic growth through stimulus actions, whether that be through lowering taxes, creating new jobs, making life easier for businesses to conduct business etc.  Professor Mueller notes that, “this is the first time in a very, very long time, and only the fifth time in history, that we have had a completely coordinated business friendly government where all three branches of our government are interested and focused on the same thing which is business growth”.  Consequently, the potential for economic stimulus is high.  Exactly this may take place is difficult to predict yet, though infrastructure projects are likely to move forward, reduction in regulations, and making our tax system more competitive with those of overseas will all contribute to boosting the real estate industry.  A lot of economists expected a recession in 2019, 2020, but now projections are pushing that out to 2021, 2022.  Indeed, US economic cycles typically never last longer than 10 years but we could be in one that is going to last as long as 14 or 15 years.

The impact on individual cities may be influenced depending on which industries are strengthened within those cities.  Manufacturing, for example, if it can be repatriated to the US, could have a big impact on those cities with a strong manufacturing base – though this would be a very long term change, and we cannot expect to see much in the short term.

Professor Mueller’s MSA study utilizes data primarily from Costar where they look at new demand that has been created in the marketplace on a quarterly basis.   They look at how much new office, retail, industrial, residential, and hospitality space has been rented, as well as at new supply in the prior quarter.  From this they are able to determine occupancy rates in each city, and compare that to prior quarters.  This leads, in turn, to rent growth analytics determining whether or not rents have risen or fallen in the quarter.

Using this data, Prof. Mueller determines long term averages and then uses that to generate predictive analyses of where the individual city and industry is in its natural growth cycle, and where it is headed.  Is the individual city’s market in recovery, expansion, hyper-supply, or recession, on an asset class basis – office, retail, industrial, residential, hospitality.  Download the Q4 2016 Cycle Monitor Report here. Prof. Mueller also does a predictive report on a subscription basis that looks out one year.  Please email us at info@nreforum.org if you would like to know more about these predictive models. That said, one can reasonably assume that as the general US economy moves forward, so will the real estate markets in the individual MSAs.

As far as the current cycle, we saw the bottom of the market in 2009, recovered all lost jobs by the first quarter 2014, and since then to now we have been in the growth phase.   We continue to grow and add new jobs so we continue to be in the expansion phase of the cycle.  Even if the growth rate slows down – not go negative, but decelerate – we could still be looking at expansion.  We have seen slower economic recovery and growth in this cycle than we have in previous cycles, and consequently we are seeing a longer cycle than previous ones.  Layer on to this the additional stimuli that this government is going to bring, then what normally would be a 10 year cycle, could end up being, as noted, a 14 or 15 year cycle this time around.  This would keep the real estate cycle going in the same direction, unless we start to overbuild – which we have, in a minor way, been doing for apartment buildings.

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