Real Estate Market Cycle Monitor: First Quarter 2019 Analysis – The Property Chronicle
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Real Estate Market Cycle Monitor: First Quarter 2019 Analysis

The Professor

The Physical Market Cycle Analysis of 5 Property Types in 54 Metropolitan Statistical Areas (MSAs).

The economic expansion has been solid with 1Q GDP growth at 3.1%, which also drove continued job and wage growth so far in 2019. Trade uncertainty moved investors toward safety and drove the 10-year treasury down to a 2.16% yield in May, which should help to keep mortgage interest rates low and real estate’s positive financial leverage position very favorable. Demand and supply growth are in equilibrium balance in more markets and property types than ever before. We expect the moderate economic expansion to continue for a few years.

Office occupancy decreased 0.1% in 1Q19, rents grew 0.5% for the quarter and 2.1% annually.

Industrial occupancy decreased 0.1% in 1Q19, rents grew 1.1% for the quarter and 5.6% annually.

Apartment occupancy increased 0.1% in 1Q19, rents grew 1.3% for the quarter, but grew 3.2% annually.

Retail occupancy was flat in 1Q19, rents grew 0.1% for the quarter and 1.4% annually.

Hotel occupancy increased 0.3% in 1Q19, room rates grew 2.5% for the quarter but grew 3.6% annually.

The cycle monitor analyses occupancy movements in five property types in 54 MSAs. Market cycle analysis should enhance investment-decision capabilities for investors and operators. The five property type cycle charts summarise almost 300 individual models that analyse occupancy levels and rental growth rates to provide the foundation for long-term investment success. Commercial real estate markets are cyclical due to the lagged relationship between demand and supply for physical space. The long-term occupancy average is different for each market and each property type. Long-term occupancy average is a key factor in determining rental growth rates — a key factor that affects commercial real estate income and thus returns.

Rental growth rates can be characterized in different parts of the market cycle, as shown below.


The national office market occupancy level decreased 0.1% in 1Q19, but was up 0.3% year-over-year. Continued GDP and employment growth are driving moderate office demand growth. More landlords are adopting short term rental programs to compete with WeWorks and other flex rental companies.

Daily rental rates cost as much as four times long term lease rates, but include furniture and support equipment. They are offering additional services as well to increase profitability. It has become the favoured option for start-up companies and large firm expansions. New York has the highest amount of short term office lease space in the United States. New office supply continued at reasonable rates and six markets moved to peak/equilibrium occupancy levels. Only one market, Austin, had too much supply growth that pushed it into the hyper-supply phase of the cycle. Average national rents increased 0.5% in 1Q19 and produced a 2.1% increase year-over-year.

Note: The 11-largest office markets make up 50% of the total square footage of office space we monitor. Thus, the 11-largest office markets are in bold italic type to help distinguish how the weighted national average is affected.

(Markets that have moved since the previous quarter are now shown with a + or – symbol next to the market name and the number of positions the market has moved is also shown, i.e., +1, +2 or -1, -2. Markets do not always go through smooth forward-cycle movements and can regress or move backward in their cycle position when occupancy levels reverse their usual direction. This can happen when the marginal rate of change in demand increases (or declines) faster than originally estimated or if supply growth is stronger (or weaker) than originally estimated.)


Industrial occupancies declined 0.1% in 1Q19 and were flat year-over-year, as equilibrium occupancy levels continued in almost all markets. Only three markets experienced too much supply, moving them into the hyper-supply phase of the cycle. Expansion for internet fulfillment delivery by many retailers continues to be the top driving force in demand. We also see more demand in secondary markets for internet fulfillment and last mile delivery strategies. Building layout and location for last mile delivery has not yet become standardised, so many options are being tried. Industrial national average rents increased 1.1% in 1Q19 and increased 5.6% year-over-year.

Note: The 12-largest industrial markets make up 50% of the total square footage of industrial space we monitor. Thus, the 12-largest industrial markets are in bold italic type to help distinguish how the weighted national average is affected.


The national apartment occupancy average increased 0.1% in 1Q19 and improved 0.4% year-over-year. Moderate and stable demand growth continued with the expanding jobs market and increased GDP growth. Assuming no major challenging events, we expect this demand to continue for at least the next four years as the demographic wave of millennials graduating and getting jobs continues. However, the recent lower interest rates in May 2019 may allow more renters to purchase homes, putting a drag on demand growth. Supply growth moderated slightly in a number of markets, allowing them to move back to peak equilibrium occupancy levels. Average national apartment rent growth increased 1.3% in 1Q19 and national average rents increased 3.2% year-over-year.

Note: The 10-largest apartment markets make up 50% of the total square footage of multifamily space we monitor. Thus, the 10-largest apartment markets are in bold italic type to help distinguish how the weighted national average is affected.


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