Real Estate Market by Sector

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One of the most common questions that I am asked is, “So, how is the real estate market doing these days?” Although I work in the real estate industry, it’s a big world out there and property management is one small part of it. Rather than stumble through an answer or, worse yet, provide no answer at all, I have learned to keep up with a real estate expert by the name of Dr. Glenn Mueller. Dr. Mueller is a professor at the University of Denver but also provides a quarterly report on the state of the U.S. real estate market. He includes data from the 55 largest metropolitan areas, including Cleveland, and further breaks the data down by property sector – industrial, office, retail and apartment, as well as hotels. Mueller uses his version of the real estate cycle to provide the framework for all of this data and defines four phases of the cycle. The “recovery” phase is characterized by no new construction, declining vacancy and flat rent. The “expansion” phase is characterized by declining vacancy, new construction and increasing rent. The “hypersupply” phase is characterized by increasing vacancy, new construction and slowing rents. Finally, the “recession” phase is characterized by increasing vacancy, more completions and falling rents. The first quarter 2017 report was just released so let’s try to answer that common question.

OFFICE

Nationally, Mueller has the office sector just entering the expansion phase. This means that office vacancy has, at worst, stabilized and, at best, began to decrease; there has been a scant 0.3 percent increase in the average occupancy rate year over year. Rents are flat, increasing only 0.4 percent during the first quarter and absorption is only moderate, with a little over 6 million square feet absorbed nationwide. Looking at Cleveland specifically, the office market is right at the transition point between these two phases. In comparing our market to the other primary Ohio cities, the Cincinnati office market is at the same point as Cleveland while the Columbus office market is a few steps ahead in the cycle and clearly in the expansion phase. Houston is the furthest along in the office sector, well into the hypersupply phase, with Nashville and San Francisco a few steps behind but still in the expansion phase.

INDUSTRIAL

The nation’s industrial sector is clearly ahead of the office sector and firmly in the expansion phase. Occupancy increased 0.3 percent during the first quarter but there was significant space absorption – approximately 50 million square feet. As a result, rents increased an average of 1.7 percent during the first quarter. Cleveland’s industrial market mirrors the national average and is in the expansion phase but not as far along as Columbus, which is one step ahead, and Cincinnati, which is two steps ahead. Metro areas the furthest along include Austin, Denver and San Jose, all of which are just entering the hypersupply phase.

RETAIL

The nation’s retail sector is very similar to the industrial sector, also firmly in the expansion phase. Occupancy for the first quarter was flat and absorption was fairly low. In the face of significant store closings by several national retailers, two things are helping this sector maintain its position. First is limited new construction and second is the continued strength associated with grocery-anchored retail centers. As a result, rents have increased 0.5 percent during the first quarter. Looking specifically at Cleveland’s retail market, we are in the expansion phase but just barely and trailing most of the major metro markets. However, Columbus and Cincinnati are both in the same place as us. Honolulu and San Jose are the furthest along, just entering the hypersupply phase.

APARTMENT

This sector is clearly the furthest along in Mueller’s real estate cycle, with the national average in the early part of the hypersupply phase. National occupancy was That for the first quarter but actually decreased 0.6 percent year-over-year. New construction remains strong across the nation, which will result in a continued oversupply. Rent growth during the fist quarter was 1.1 percent but this represents a clear deceleration as compared to the 2 percent-plus achieved for the past several quarters. Cleveland is square in the middle as compared to other metro markets, situated right at the transition between the expansion and hypersupply phases, as is Columbus and Cincinnati. Furthest along are Houston, Nashville and Oklahoma City, all of which are at the transition point between hypersupply and recession phases.

Tony Vain Investigations

Dr. Mueller’s quarterly reports are packed with information and use a format that is easy to understand. These reports aren’t the easiest things to find – I usually just Google “Mueller real estate cycle.” But the information is free and will allow you to always be able to answer that question– “So, how is the real estate market doing these days?” Jill Dzina

Alert Communications

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