The CRE Market Cycle

by CoyDavidson on September 22, 2010

Where is your Market in the CRE Market Cycle?

Yesterday my post “A Long Road Back for the Office Market?” discussed the fact that the most recent recession had been officially declared as having ended in in July of 09. However, at this point the labor market has yet to show any significant improvement. As a result of facing the prospect of a jobless recovery for some time, the road back for the office market could be long.

A Look at the Market Cycle

Recession Phase: The phase following contraction, characterized by very low demand and high levels of supply that were added during the previous two phases. Typically involves high vacancies, negative rental growth and high overall cap rates.

Recovery Phase: The phase following the market bottom, characterized by tightening market conditions and a shift in supply/demand balance leading to reduced vacancy rates, more balanced rental growth, and a stabilization of overall cap rates.

Expansion Phase: The phase following recovery, characterized by strong demand and increasingly tight market conditions leading to low vacancy rates, robust rental growth and decreasing overall cap rates.

Contraction Phase: The phase following the market peak, characterized by softening market conditions and a shift in the supply/demand balancing leading to increasing vacancy rates, slowing rental growth and rising overall cap rates.

So Where is the Office Sector in the Market Cycle?

Historically the office market lags any shifts in the general economy by 2-3 quarters. So while a modest recovery may very well have begun, it has yet to appear in the office employment numbers in any significant way.

Employment performance is mixed among major office markets and as a result some have performed better than others over the last year. In some markets rents and vacancies are bottoming out while in others rents are still falling with vacancies rates still creeping upward. We will be seeing the 3rd quarter market reports soon, but I think it is an accurate statement to say that office markets around the country are either still in the recession phase or in the early stages of recovery. In either case given the employment outlook, the expansion phase does not appear to be on the horizon anytime soon.

How would you label your office market? Stay tuned for our 3rd quarter office market reports.

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