Predicting Long-Term Trends and Market Cycles in Commercial Real Estate

Glenn R. Mueller

Zell/Lurie Center Working Papers from Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania

Abstract: A major cause of volatility in American real estate market cycles is the lag between demand growth and supply response. Cycles can be separated into four distinct phases based upon the rates of change in both supply and demand. Data of demand, supply, vacancy and gross asking rates were used to determine rental growth from 54 office markets and 54 industrial markets. The data supports the theory that office and industrial rental growth rates will be above inflation when markets have occupancy levels above their long term occupancy average (LTOA) and below inflation when markets have occupancy levels below their LTOA. In the first decade in the new millennium most economists predict moderate but stable demand growth. The supply of space will be more restricted than in previous cycles. This real estate cycle is driven by declining demand, not oversupply. High profits may no longer become available as real estate markets become more efficient.

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