Real Estate Cycle Conditions & Their Main Economic Driver

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Commercial real estate in the Memphis area is weathering a recession, as are markets nearby and across the nation. Integra Realty Resources (IRR) provides an annual real estate market cycle analysis (free to download at http://www.irr.com) that listed the Memphis, St. Louis, and Tulsa office markets as being in that company's stage two of recession at the beginning of 2011, while Nashville had moved into stage three--the last and lowest point of recession. Recession in their taxonomy is characterized by high-and-increasing vacancy rates and moderate-to-low new construction. Construction being completed generally would not have been deemed feasible if conditions had been anticipated as construction began. Recession definitions also include low absorption, where new sales and rental rates may be so low that there is negative net absorption.

The IRR real estate market cycle description also includes a non-real estate statistic. "Low-to-Negative Employment Growth" is a formal part of a standard real estate cycle definition of recession. Other real estate perspectives give employment trends the highest status in explaining real estate demand. For example, candidates for status as Certified Commercial and Investment Members (CCIMs) of the Realtors learn to forecast demand in every sector of commercial real estate by forecasting local area employment in their required course, "Market Analysis for Commercial Real Estate, CI 102." Real estate brokers learn how to identify base industries for local areas by studying employment proportions across industries, to compare those proportions to national figures (for "location quotients"), and to study trends in employment that show local area industry strengths and weaknesses relative to overall national trends in employment and trends within industry categories.

This article describes two sets of real estate market cycle reports for the various commercial real estate sectors from Professor Glenn Mueller's Cycle Monitor--Real Estate Market Cycles (downloadable free from its sponsor Dividend Capital at www.dividendcapital.com) and from Integra Realty Resources' IRR-Viewpoint. IRR Memphis data come from Walter Allen, noted member of the Appraisal Institute and a member of the Board of Integra Realty. Since the labor market is recognized as the key demand driver for all real estate, this article also shows how Shelby County labor markets have developed over the last ten years, applying the analysis now learned by many CCIMs.

Real Estate Cycle Conditions

The IRR-Viewpoint 2011 showed stage two recession conditions in not only the Memphis office market, but also the retail market, as well as the St. Louis retail market. Nashville was deeper in recession, at stage three, but the Tulsa retail market had moved from recession into the first stage of recovery. The Memphis apartment market was rated as having moved through the recession trough to the first of three steps of recovery, along with Tulsa and St. Louis. Nashville was still in stage three recession. The Memphis industrial market was the only one of these four regional markets to show the first signs of recovery at the start of 2011.

The most recent Mueller report is for the third quarter of 2011. The Dividend Capital Cycle Monitor rates national markets in one of sixteen stages of his model of the real estate cycle, where stage one is at the trough between the low point of the recession and the first onset of recovery, and stage sixteen is just before the end of recession. Stage sixteen comes just before stage one. Across the U.S., office markets were in the trough at stage one, including Memphis, New Orleans, Oklahoma City, and St. Louis. Nashville was one step out of the trough at stage two. Retail markets in Memphis, Nashville, St. Louis, and the overall U.S. market had just moved from stage one to stage two, joining Oklahoma City, but leaving New Orleans. …