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2020 Commercial Real Estate Forecast

Updated: Dec 21, 2020

With all the volatility in the market this summer, it is increasingly difficult to gauge where the real estate investment cycle might be headed from here. That being said, one of the best forecasting resources available for commercial real estate is Dr. Glenn Mueller's Real Estate Cycles Analysis from the University of Denver - Burns School of Real Estate & Construction Management.

The report is produced quarterly, and it contains a wealth of data spanning major commercial real estate markets across the country. It is based on almost 300 models, tracking occupancy and rental rates, and it covers 54 Metropolitan Statistical Areas’ (MSAs). Essentially, it is the "gold standard" that shows how property types are performing today, and how they are predicted to perform in the near future, within the context of supply and demand. It is an excellent foundation to examine how the economy is affecting rental rates locally, regionally, and nationwide.

The Commercial Real Estate Cycle

Every competent investor knows that the real estate market is cyclical; what goes up, will eventually come down, and up and down again, as it has done consistently throughout our modern economy. What's interesting about this analysis is that it demonstrates the relationship between supply and demand.

When there is demand for a real estate product, the supply will increase until there is a supply and demand equilibrium. Alternatively, lack of supply will drive rental growth until equilibrium is reached.

However, as demand is met, new supply will enter the market at an accelerating pace, and will continue to do so past the equilibrium point. This eventually creates a period of hypersupply, followed by an inevitable recession.

In the case of Dr. Mueller's real estate cycle, he has partitioned the graph into 16 points, roughly translating into a 15 year cycle, which can be longer, like it was between 1980 and 2000, or shorter, like the cycle in the 1970's.

Referring to the graph above; if an investor were to time the market perfectly, that investor would be building, or acquiring, new properties at or near the end of a recession, at the position #6 of the graph, or in recent times, say 2013. Alternatively, if one considered selling, or diversifying, the best time to do so would have been near position #11 or #12, perhaps 2007.

It's also important to understand that while each commercial sector (office, industrial, retail and multifamily) generally correspond to the health of the overall economy, certain sectors tend to lag behind others, and subsequently reach their own peaks at different times. In addition, individual metro markets are unique, and they have their own local cycles for each sector.

National Commercial Real Estate Forecast - By Property Type

For example, demand for office space has generally failed to keep pace with all other real estate sectors during the current economic expansion. As a result, Dr. Mueller's report predicts that the Suburban Office market will only be at position 7 nationally at the end of the first quarter for 2020. However, demand for multifamily has been red-hot for the past several years, and supply has been steadily increasing, even as the cost of building materials has skyrocketed. As a result, the report predicts that this sector will be past the point of equilibrium, at position #13.

Alternatively, the forecast for Orlando during the same period has the Office sector at the perfect equilibrium point of position 11, but the multifamily sector is predicted to be at position 14, and teetering into the recession faze.

How does this translate to what's happening on The Space Coast? While one could say that we have a unique, and rapidly diversifying economy, we are still a tertiary market to Orlando. Therefore, one could see the current state of Orlando as a reasonably accurate representation of the future of our own position in the market, which appears to be past its prime in all sectors, except office.

However, if you have real estate investments in your portfolio, and you acquired them right, the current market may be of little importance to you. There are few investments that hedge against the ups-and-downs of the market quite like commercial real estate. On the other hand, if you've considered cashing out, or diversifying into another sector in before the next cycle, 2019 might offer you the best opportunity.

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