Q2 2022 Market Cycle Monitor Reports
All commercial real estate markets tracked by Glenn Mueller, Ph.D, were in expansion mode nationally at the end of Q2 2022. Dr. Mueller reported his findings during the October 6, 2022 RealNex Webinar Series Session, hosted by RealNex CEO Jeffrey Finn. Dr. Mueller’s Real Estate Market Cycle Monitor has been tracking each primary commercial real estate sector since 1990. It monitors the supply and demand fundamentals of each sector in the top 54 markets nationally. The study analyzes how supply and demand drives occupancy, rental growth and income growth and then plots each market along a continuum from Recovery, Expansion to Hyper Supply and Recession.
Markets in Recovery are characterized by negative to below inflation rental growth; Markets in Expansion rents are rising to and through market feasible new construction levels: Hyper Supply is when things start to get overbuilt, rent is still positive but in decline; and finally Recession is when rental growth is moving from below inflation to negative.
While all market sectors were in expansion mode nationally, not every market fared as well. The 54 Office Markets tracked plotted fairly evenly across the continuum, with markets like New York, Chicago, Boston and Atlanta and Dallas in Recovery; Las Vegas and much of Florida in Expansion; Baltimore, Washington DC and Phoenix in Hyper Supply; and Nashville, Charlotte, San Francisco in Recession.
The picture for Industrial, the shining star of the industry was much different. This sector was much more tightly grouped with 50 of the 54 markets in Expansion mode. Not only were they in Expansion, 48 markets were plotted at Peak Expansion. And, those not at Peak were just below it or in the case of Austin, Columbus, Indianapolis, and Oklahoma City had moved into Hyper Supply.
Just behind Industrial from an overall health and performance standpoint, 40 Apartment markets were at Peak Expansion and 14 had moved into Hyper Supply.
Surprisingly all Retail markets were experiencing Peak Expansion. In this case though, rather than the balance coming from robust demand, the limited new supply and the conversion of obsolete retail property to other uses has created the equilibrium. Similarly, 52 off the 54 Hotel markets were in Expansion. Only Stamford and St. Louis were found to be in Recovery mode. This again is explained by poor performing hotels being converted to Residential or other uses and the robust recovery of tourist travel. The slower return of business travel has muted the overall performance of this sector.
Dr. Mueller expects markets to continue to remain healthy with steady if not robust growth going forward, and strict lending, high material and building costs, slow approvals and limited shovel ready land, keeping supply in check.
Even in the new era of rising interest rates, with fundamentals sound and a world awash in cash, Dr. Mueller was optimistic about commercial real estate as an investment class.