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Has the Market Peaked?

Updated: Apr 28, 2020

When I'm analyzing the current health of the multifamily market, an invaluable resource for me is Dr. Glenn Mueller's Real Estate Cycles Analysis from the Black Creek Group – Black Creek Research.

The report 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 in the context of supply and demand, and an excellent foundation to examine how the economy is affecting rental rates here in Central Florida.

Every competent investor knows that the real estate market is cyclical; what goes up, must come down, and up and down again, as it has done consistently throughout our modern economy. What's interesting about Dr. Mueller's analysis, is that it demonstrates how supply and demand drive occupancy, which in turn, drives rental growth.

However, once rental growth pushes ahead, new supply enters the market at an accelerating pace, and continues to do so past the point of supply and demand equilibrium. 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. However, it can be longer, like it was between 1980 and 2000, or shorter, like the cycle in the 1970's.

Referring to the graph, 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. 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.

According to Dr. Mueller, the suburban office sector was at position #6 nationally at the end of the first quarter for 2018, whereas the multifamily sector was at peaking at position #12. Alternatively, in Orlando during the same period, the office sector was at position #10, and the multifamily sector was at position #11.

How does this translate to what's happening in Central Florida? 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 our own position in the market, which appears to be at, or near, its peak.

However, if you have multifamily 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 multifamily residential. On the other hand, if you've considered cashing out, or diversifying into another sector in before the next cycle, 2018 might offer you the best opportunity.

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