Tracking the hot markets

Oakland's East Bay region tops industrial and retail markets, while Cincinnati leads office development, says this forecaster
August 11, 2010

The forecast of Glenn Mueller, Ph.D., a professor at John Hopkins University's Real Estate Institute, should prove useful to Building Teams in their 2003 strategic planning.

The graphs depicted here show a skewed bell curve, a model developed by Mueller, based on a 30-year economic cycle, that is fairly reflective of the nation's economic ups and downs. It is comprised of 16 points that indicate various stages of economic growth and decline on a time-versus- building-type occupancy curve. On the charts, "1" indicates the absolute bottom, with the country in full recovery with no new construction and declining vacancies. On the other hand, stage 6 indicates the start of growth and stage 11 represents the peak of the economic cycle. Stages 12 through 14 represent continued construction, but increasing vacancy, with 14 and beyond indicating decline and movement toward the bottom of the cycle.

Mueller's model forecasts where the major construction market sectors — industrial, office, retail, and hotel construction — will lie come the second quarter of this year, as well as where the nation's major cities will stand in respect to these markets. To gain an accurate feel for when such growth spurs might begin — around position 8 on the curve — one has to be aware of where these markets are in the cycle.

Mueller estimates that in the second quarter of 2003, hotels, suburban offices, senior housing, and outlet-oriented retail will be at stage 2. R&D and industrial will fare slightly better at stage 3, as will power center retail (stage 4) and downtown offices (stage 5). But all will still be below any real growth phases. Warehouses, first-tier regional malls, and multifamily housing should begin to see the light of day. Healthcare should remain the strongest market and continue to wax. On the wane, however, will be second-tier malls, says Mueller.

Mueller notes that, on the demand side, there's a projected U.S. population growth rate of 2.4 million per year for the next 10 years, due primarily to immigration and the "echo boom." At this rate, he says, a city the size of Denver would need to be built every year.

'Echo Boomers' drive rental demand

The college-age echo boomers will soon be entering the workforce, meaning a need for new apartment space. On the other hand, their parents — the baby boomers — are at their highest income-earning years, meaning there may be a wave of second-home purchases, according to Mueller, especially with favorable mortgage rates and uncertainty about the stock market. Toward the end of this decade, Mueller adds, baby boomers will start to hit retirement age, possibly creating another new market for more sophisticated senior living facilities.

On the supply side, Mueller notes things appear to be in a constrained mode. Capital for construction will be economically driven, which means a low amount of speculative building; there are more research watchdogs on the lookout for bad investments; and construction labor is increasingly becoming hard to find. Combined with increasing material cost and infrastructure problems constraining growth — roads in the East and power and water in the West — not much of a building boom can be expected, says Mueller.