... using proprietary Costar data, Professor Glenn Mueller of Denver University explains how to tell what stage of the real estate cycle we are in across five major real estate food groups – office, retail, industrial, residential, hospitality - in 54 metropolitan areas across the country, and discusses the background to how the studies were originally conceived.
Click here for a copy of the Q4 2016 Cycle Monitor Report
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.
Reasons to Be Bullish
Dividend Capital Group produces a quarterly 54 city report examining the cyclical performance of the five major real estate sectors; office, retail, industrial, residential, and hospitality. Mueller is bullish about real estate industry growth in the US over the next few years as the industry is likely to enjoy considerable stimuli with the incoming administration that could lead to an extension of the current cycle. In fact, with all three branches of Government being so business friendly, there is a good chance that the next recession could be pushed out from earlier predictions at 2019/2020 to 2021/2022.
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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, Mueller started to monitor what was going on and predict where the market might be going in the future. He uncovered two types of cycles. One is the local demand-and-supply cycle which led him to cover 54 different MSAs concurrently, together with their localized industries, using proprietary Costar data. Employment drives the need for space, and supply fulfillment will vary depending on the city - developing new office buildings is going to be different from city to city. So the interaction between employment and supply are the key drivers of occupancy levels and rents. Since 1992, the Cycle Monitor started has analyzed these phenomena.
The Cycle Monitor Report looks to identify new demand that has been created in metros nationwide on a quarterly basis. Specifically, it considers 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 are derived occupancy rates in each city, and this is compared to prior quarters. This leads, in turn, to rent growth analytics determining whether or not rents have risen or fallen in the quarter. Long term averages are used to generate predictive analyses of where individual cities and industries are in their natural growth cycle, and where they are headed. Is an individual city's market in recovery, expansion, hyper-supply, or recession, on an asset class basis – office, retail, industrial, residential, hospitality.
Government Impact - Extended Bull Run for Real Estate
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. 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”.
The potential for economic stimulus, therefore, is currently very high. Exactly how this may take place is difficult to predict yet, though the key mechanisms are likely to include infrastructure projects, relaxation of regulations, and making our tax system more competitive with those of overseas will all contribute to boosting the real estate industry. Many economists have been expecting 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.