US real estate market cycles, 4Q2020 – The Property Chronicle
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US real estate market cycles, 4Q2020

The Professor

A physical market cycle analysis of four property types
across 54 metropolitan statistical areas (MSAs) for 4Q2020.

GDP ended 2020 at a negative -3.5% annual growth rate, after the largest decline (2Q20) and bounce-back (3Q20) in history. Covid revenue growth, while covid ‘have-not’ firms continued to struggle and downsize, close or go bankrupt. Government stimulus was important for company and individual family financial survival. Real estate owners negotiated rent deferrals, amendments, and modifications to assist tenants. Lenders also worked hard on mortgage modifications to help borrowers survive. Low interest rates were the largest saviour in the covid economy. The future is harder to predict than any post-recession recovery in history.

Office occupancy declined 0.5% in 4Q20, and rents declined 0.2% for the quarter and were down 1.1% annually. Industrial occupancy improved 0.1% in 4Q20, and rents grew 1.0% for the quarter and 3.6% annually. Apartment occupancy declined 0.5% in 4Q20, and rents were flat for the quarter, and down 0.1% annually. Retail occupancy declined 0.3% in 4Q20, and rents declined 0.4% for the quarter and were down 0.6% annually.

Source: Mueller, 2021
Note: Graph shows relative positions of the sub-property types.

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.

Market cycle quadrants

Source: Mueller, Real Estate Finance, 1996

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


The national office market occupancy level declined 0.5% in 4Q20 and was down 0.9% year-over-year. Many markets had occupancy declines pushing them closer to their long-term occupancy averages. The covid paradox continued to create ‘decision delay’ by many office tenants. Sublease space listings doubled in 2020 and many tenants with lease expirations extended leases short-term, as they tried to envision what a post-covid office environment and floor layouts might look like. Technology and internet sales companies expanded creating space demand, while other users made the decision to stay mainly work from home in the future. The size and magnitude of office demand is very much a guess until vaccination levels allow for a more normal in-office work environment. Average national rents decreased 0.2% in 4Q20 and produced a negative 1.1% asking rent decline year-over-year.

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