Phase 2 - Real Estate 101 (How to or one big idea)

Podcast - Mastering Real Estate Cycles

Tyler Stewert
September 7, 2021
Podcast - Mastering Real Estate Cycles

Dr. Glenn Mueller, Professor for the Burns School of Real Estate and Construction Management at Denver University, joined us on the podcast to discuss how to master real estate cycles.

Download This Report Before Listening

Please download Dr. Glenn Mueller's cycle report so you can follow along as he discusses the charts: Real Estate Cycle Monitor Report.


With 35 years of real estate industry experience, including 26 years of research, Glenn Mueller is a professor for the Burns School of Real Estate and Construction Management at Denver University, one of the oldest and largest programs in the country. Mueller’s research experience includes real estate market-cycle analysis, real estate securities analysis, real estate capital markets, portfolio and diversification analysis, seniors housing analysis and both public and private market-investment strategies. He is also the real estate investment strategist at Dividend Capital Group, where he provides real estate market-cycle research and investment strategy for Dividend Capital’s Real Estate Securities, Private Real Estate Investment, Private REIT and Real Estate Debt groups. He is also the co-editor of the Journal of Real Estate Portfolio Management.


PhD, Real Estate and Finance, Georgia State University, 1990
MBA, Babson College, 1975
BSBA, Finance, University of Denver, 1974

Awards and Honors

  • Awarded Richard Ratcliff Award by the American Real Estate Society (ARES) based on his groundbreaking research on real estate market cycles, 2010
  • Awarded the Red Pen Award for editorial work on the Journal of Real Estate Portfolio Management
  • Ernst & Young Visiting Professor at the European Business School
  • Visiting Professor at Harvard University 2002 to Current
  • Graaskamp Award for Research Leadership from the American Real Estate Society in 2004
  • Graaskamp Award for Research Excellence from the Pension Real Estate Association in 2001housing and real estate markets.


Market Insights from Black Creek Group

Real Estate Market Cycle Report - Scroll down the page to locate the report.

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RealCrowd - All opinions expressed by Adam, Tyler, and podcast guests are solely their own opinions and do not reflect the opinion of RealCrowd. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. To gain a better understanding of the risks associated with commercial real estate investing, please consult your advisors.

Tyler Stewart - Hey listeners, Tyler here. Before we start today's episode I wanted to quickly remind you to head to to enroll into our free six-week course on the fundamentals behind commercial real estate investing. That's Thanks.

Adam Hooper - Hey, Tyler.

Tyler Stewart - Hey, Adam, how are you today?

Adam Hooper - Tyler, I'm doing well. We're just ripping into Season Three here.

Tyler Stewart - We are. It's been a good start so far to Season Three, hasn't it?

Adam Hooper - It has been. Joe kicked us off great, and we've got another just awesome, solid guest today with a ton of information.

Tyler Stewart - Yeah, we have Glenn Mueller, PhD in real estate finance and real estate investment strategist for Black Creek.

Adam Hooper - He's a professor at Denver University. He's taught all around the country. Real estate, finance, and market cycle is his expertise, so fair warning for listeners out there: highly, highly recommend check the show notes, download at least one of these charts that we'll reference today that shows the market cycle, because we talk about some of the different stages in there. We think it would be really helpful for you to have that, that you can kind of reference as we're talking about these different phases of the cycle, and different components of it, because there's a lot of information in this one, and it would really, really help to have that chart handy. Talk generally about the physical market cycle, how that differs from the financial market cycle, internal factors, external factors, how real estate reacts to the overall economy. Really good to kind of tie a lot of these concepts we've talked about in the last couple of seasons into how to synthesize that into an actionable look at where we're at in the real estate cycle.

Tyler Stewart - Glenn's really about what I call visual analytics, so be sure to download his chart so you can see, visually, what we're talking about when we talk about supply, and demand, and price, and Glenn will show you how the market moves.

Adam Hooper - Some of the key points, again, referencing real estate as a delayed mirror for the economy, so you'll listen in and hear what we talked about that. Talked about the pace of growth, how we've been kind of plodding along at a fairly sustainable pace, increased that a little bit last year, and still the forecast for continued growth, but maybe we're not going at 35 miles an hour. You'll hear, maybe, what speed we're going at here as you listen to the episode. Again, ton of really good information. Give us some feedback, too. Is this too much information? Is this too dense, or do you like getting nerdy with us on some of these topics? Send us a note to, and with that, let's get to it.

RealCrowd - This podcast is brought to you by RealCrowd, the leader in online real estate investing. Visit to learn more about how we provide our members with direct access to commercial real estate investments. Don't forget to subscribe to the podcast in iTunes, Google Music, or SoundCloud. RealCrowd, invest smarter.

Adam Hooper - Well, Glenn, thanks for joining us this morning. We've got an exciting episode, dig into market cycles here. Thanks for coming on today.

Glenn Mueller - Yes, thanks for having me.

Adam Hooper - You're joining us from Denver?

Glenn Mueller - I am.

Adam Hooper - Perfect. How are things out that way?

Glenn Mueller - Well, it was snowing up in the mountains this morning when I left to drop my wife off at the airport, and it is fairly clear here, which is typical for Colorado.

Adam Hooper - Nice, well, we appreciate you taking the time to spend with us on the show, rather than being on the slopes this morning. Why don't you take us back a little ways and just kind of get us some background on how you got into real estate, kind of where your career has taken you, and then how you got into more of this market cycles and research area of our industry.

Glenn Mueller - Sure. My undergraduate degree was in finance from University of Denver, where I now teach. Went east to Boston to do my MBA, and wanted to come back to Colorado. My first job was as a Loan Analyst at United Bank of Denver, where totally by chance I got put into the real estate group. I did loan underwriting for acquisitions as well as new development for a couple of years, realized that real estate developers made a lot of money, and went back east and started my own company developing and building. Did that for seven years. Got tired of the frustration of subcontractors who didn't show up on time, and tried teaching a class at DU, actually, loved it, went back to school, got my PhD in real estate, which is actually fairly unique. Most professors either have a PhD in economics or in finance. Then a job opened back up at University of Denver, so was there from '86 to '90. Then '90, along comes Prudential Real Estate Investors, the largest investors in commercial income-producing real estate in the United States, and I got offered a job as a Vice President making four times what I was making as a professor. When I arrived in 1990, for those that have been around for a while, they may remember that we had a recession and a pretty good crash in real estate as well from overbuilding, mainly office, in the 1980s. When I arrived, they said, figure out what happened, why it happened, and whether or not we can watch it, and therefore prepare for it for the future. In that research is when I started to look at real estate cycles. I was at Prudential for a couple of years as a Vice President.

Glenn Mueller - Became the head research guy for another big brokerage firm called Alex. Brown Kleinwort Benson. We basically invested money for institutional investors, and by institutional I mean pension funds like California Public Employees' Retirement System, Colorado Public Employees' Retirement Association, all the major state pension funds, and as well as endowments. Harvard has the largest endowment in the country, followed by Emory University, and Yale, and stuff like that. They all invest in real estate as well. After being at Alex. Brown, got hired as the national director of real estate research for Price Waterhouse. Couple years there. All along I'm continuing to develop my cycle expertise, and started putting out a report called the Real Estate Cycle Monitor, which I've now been doing for 25 years. Went on to another company called Legg Mason. If you're from the East Coast you've heard of them. Big stock brokerage and mutual fund firm, and there I worked with publicly traded REITs, and the cycle research still very relevant there. Then came back to Denver in 2006, back to teaching at University of Denver, and also doing investment strategy work for a company called Black Creek Group here in Denver. I've been there for 13 years, and continue to produce my Market Cycle Reports that are read by both investors and real estate brokers, and all kinds of other real estate people.

Adam Hooper - Perfect. We're going to put links in the bottom of the show notes to these resources. I will say I think I've got more printouts on my desk here today for this show than any in the show's history. Again, you are just chock-full of information, and we'll have links down there for all the listeners to get to the Cycle Monitor, specifically, is a just awesome piece of research that I think everybody would be well-served to check out. Prior to your engagement at Pru, how much work had been done on identifying cycles specifically within the real estate asset class?

Glenn Mueller - Well, I actually credit Homer Hoyt, who was a researcher. He produced what I consider to be the first idea on cycles back in 1933, by doing some research in Chicago. Actually, I'm a member of the Homer Hoyt Institute, which was started in honor of him. It's basically a small school where real estate people that are in real estate, PhDs in real estate, professors, and researchers get together and talk about what we're doing next. He kind of got things started. Real estate cycles like the economy. I'll leave it at that at the moment because you've got more questions.

Adam Hooper - Perfect. Let's get into that. How do you define a real estate cycle?

Glenn Mueller - Okay, great. As I started into it, many people tried to describe the real estate cycle by looking at total return, and that is difficult and challenging. What I found is that there's really two major parts to the real estate cycle: the physical real estate cycle, which I describe as demand and supply for space. That is very local in nature, so the demand for office space in New York City is going to be different for the demand for office space in Philadelphia. Then supply, if we've got demand then we need to put up more supply, that is, again, very local in nature. Demand and supply, when we bring the two together, will tell us what's happening with occupancy levels, or its inverse, vacancy. My market cycle research I use occupancy levels as opposed to vacancy, because the level of occupancy will tell us very clearly what kind of rent growth there might be, and the income portion of real estate that you're getting comes from increases in occupancies and increases in rent, so there's the physical cycle to start with. The financial cycle is the price of real estate, if you will, and that is very clearly driven by capital flows. If a lot of people want to buy, prices are going to go up. If there are no buyers, prices are going to drop, so we got a physical cycle and a financial cycle. They logically should follow each other fairly closely, and do much of the time, but there are times when they don't, and that's when it gets a little bit unique. That's how I define market cycles, physical market cycle and financial market cycle.

Adam Hooper - Perfect, and then, in the cycle, hoping listeners will be able to, again, maybe look at some of these resources before getting too deep in this episode. If you're listening now, and you have the opportunity to pause and go get a market cycle chart, would highly recommend that. We've got four phases of the cycle. You've got recovery, expansion, hypersupply, recession.

Glenn Mueller - Correct.

Adam Hooper - Can you maybe just, very high level, paint us a picture of what some of the main attributes of those four different phases of the cycle might be?

Glenn Mueller - Sure. One of the things I'll drop in right now is, every city is different because every city is driven by different industries. We actually use the term economic base industries. An economic base industry produces a good or service that it exports outside of that local economy, outside of the city, that brings money in to help the city grow. Easiest example: Detroit, Michigan is driven by automobiles, or historically has been driven by automobiles. New York City, obviously, the finance industry. If employment is growing, and that's really my key, if employment is growing in a city, then that creates more demand for space, and then the amount of supply coming along. If we create, as an example, 1,000 new office jobs in any given city, and the average square feet per person in office space is about 200, that means we need 200,000 square feet of office space. If there's been a recession, and there have been layoffs, then people aren't renting space, and occupancies drop off, and so at the end of a recession we start to get employment growth. That starts to create demand, and we start to soak up the existing, available space that's there. In the recovery phase we're coming from the bottom of a recession. We've got a lot of excess space available, and we start to rent that space up, and occupancies start to rise towards a long-term average. One of the things about my cycle charts is that each city has a different long-term occupancy level average, depending upon its size, and its growth rate, and everything else.

Glenn Mueller - As an example, in New York City, one of the biggest office markets in the country, and a market where it's hard to build something new, the average occupancy level over the long term has been 91%. In Denver, a smaller, faster-growing market, the long-term average has been 87%. People looking at my cycle chart from points one to point six, we're recovering and renting up all that excess space till we get to that long-term average occupancy level: 91% New York, 87% in Denver. Above that we're in the growth phases, where demand is moving up. We now start to get new construction trying to meet that new demand. Readers will notice that on point eight, that's in green, and that green dot stands for cost feasible new rents. By that I mean if it costs $400 a square foot to build a new building in Denver, Colorado today, and investors are looking for a minimum 10% rate of return, 10% of 400 equals $40 a square foot, hence rents need to be $40 a square foot to cost-justify building that new building. Of course we can't turn on the widget machine and pop out buildings overnight, so we end up making the market tighter and tighter until we get to peak occupancy, which happens in each real estate cycle. Peak occupancy might be 95, 96% in New York, and 94% in Denver, as an example, but that's also a point where demand, which has been growing, supply has caught up to it, and now they're growing at the exact same rate. If demand is growing at 2 1/2 percent, and supply is growing at 2 1/2 percent, your old Econ 101 class would call that equilibrium.

Glenn Mueller - Markets can get to peak occupancy and be in equilibrium, and they could stay there for a long time until one of two things happens. Either demand starts to drop off due to a slowing economy or a recession, or we put up more than we need, developers start to build more than is necessary. If either one of those happens, now supply is growing at a faster rate than demand, hence we're in the third phase, or the hypersupply phase. As more comes along, eventually occupancies drop back off to that long-term average. Point six on my graph and then point 14 on my graph are the same occupancy level, just that in one case occupancies are on their way up, and in the other case occupancies are on the way down, crossing that average. Once we cross the average, then we're into a recession phase. We're basically constructing above the long-term average. Typically we don't start anything below the long-term average, although in the recession phase, many times there are buildings that have been started that get completed and just add to the oversupply in the market. It's a 16-point cycle that you'll see my graph on, because historically real estate cycles have lasted in the neighborhood of 16 to 17 years. If you look at what's going on, if they followed history fairly closely, they move one point forward each year on the graph. That doesn't always happen, though. Sometimes cities sit at one point for a long time. Right now, as you go look at my reports, a lot of cities are at equilibrium, are at that point 11, the peak occupancy level, which is equilibrium,

Glenn Mueller - and they could sit there for a long time. I think that will happen in a couple of the property types. We'll talk about those, I'm sure, in a few minutes.

Adam Hooper - That's, again, an awesome overview. A couple of things that are interesting: the time that it takes to move from one of these points to the next. It's not a calendar-framed decision. This is purely a measure of both, again, like you said, supply and demand, so the question of, "Okay, hey, we're nine years into this recovery. It's got to start to turn the corner soon." That doesn't necessarily have to happen based on a time-based factor just because it has historically. Maybe we can talk a little bit about--

Glenn Mueller - Sure, well, and that's a great tee-up for me. I believe that real estate is a delayed mirror of the economy. By that I mean that if the economy is expanding, demand for real estate's expanding, hence we should be in the up cycle. When the economy is contracting, and people are getting laid off, then demand for real estate is contracting. Literally it is employment growth that is the key driver of real estate demand, in my opinion, in all the major property types. We are in an economic cycle where I could go back to 2015 and show you economists' forecasts that in 2018 we'd be in a recession. Obviously, that has not happened. Last year was the best year for economic growth, and the two ways most people measure it are either by GDP growth, which is going to be, when we get the final numbers out, is going to be above 3% for all of 2018, or by employment growth, and we were adding over 200,000 jobs a month during that time frame. A lot of people say, well, why are you using employment growth? Why not just look at unemployment? Well, unemployment has about six different definitions to it. It's collected by a different government agency. It's very inaccurate. Whereas employment growth is a very, very accurate statistic, because every time someone gets a job, they fill out a W-2 that goes to the government, and the government literally, within a week of the end of every single month, puts out an employment growth number. Last month, so the month of December is already out, it was 315,000 jobs, and yet the unemployment rate did not change at all.

Glenn Mueller - That's always a quiz question for my students: how is it possible that employment could grow when unemployment didn't change? They all scratch their heads, and I say, "Okay, how many of you in the room are on unemployment?" Nobody raises their hand. I say, "Okay, and when you get a job, does that decrease unemployment?" Answer: no. These are people coming into the workforce, and right now we've got strong workforce growth from the millennial generation getting out of school and getting their first jobs. We have about four or five more years, just demographically, of a large wave of millennials coming out of school and getting their first job, that really recreates what happened in my generation, the baby boom generation, back in the '70s. We had great economic growth because you get out of school, you get your first job, you actually spend more than you make because you got to buy clothes, and furniture, and a car, and all that kind of stuff. That just creates economic growth. 70% of GDP growth is actually consumer spending. A very easy number. Employment growth is going to decelerate. It's still going to be positive, but it's going to slow down, only because there are going to be more baby boomers like me retiring than there are millennials coming into the workforce. That's assuming that baby boomers actually do retire. More and more of them are continuing to work longer, or they may end their current career, but within a year or two they're bored, and they come back, and are doing something else, whether that's driving the shuttle bus

Glenn Mueller - to pick up your rental car. I see semi-retired people doing that all the time. A lot of my friends are now, I got a friend who's 75 years old who's a ski instructor at Keystone ski area. They're still working and earning money, so demand continues to grow for real estate as employment grows.

Adam Hooper - Now transitioning from one stage of the cycle to the next, how much is that determined by the, I guess I'm trying to get to timing here, of new construction can take anywhere from 18 to 24 months, typically, on the shorter end of that. From shovel-ready, almost. How quickly can these cycles react to either intrinsic changes or external forces coming into these factors?

Glenn Mueller - Right, well, that really depends on the property type. We've got five major property types that I cover: office, industrial/warehouse, retail, apartments, and hotel. I use the term apartments as opposed to multi-family because I don't do anything with homeownership, so single-family homes, condominiums, townhomes, are build them, sell them. That is a manufacturing process just like automobiles. I don't cover homeownership housing at all, but rental apartments are certainly part of that. If we go property type by property type, in office, if I'm doing CBD downtown office in a major city, we could be three to eight years to build a new high-rise building. In the suburbs, you're correct: in the 18-to-24-month range. Industrial, typically there are a lot of industrial parks with land available. We're talking as little as six months to put up an industrial building. Retail, if it's a grocery-anchored shopping center, we're one to two years, again, depending upon the city, and the zoning prep, and all that kind of stuff. Apartments, could be as short as nine months in the suburbs, and basically identical in length to an office building if they're high-rise downtown. Then finally, hotels: same thing. If it's suburban, it's basically a stick-built apartment building. If it's downtown, it's like a high-rise apartment or office building, so each property type has a varying degree of time to build and to construct, to get permits for, construct and finish a building. How quickly supply can react to new demand is really the key,

Glenn Mueller - and that, again, is different, city by city. As people look at my Cycle Reports, you'll notice that you could take the same city and look at the different property types, and they're all at a different point in the cycle, mainly because of the time to try and supply that new demand.

Adam Hooper - Okay. I know this is maybe a bridge between most of what we've talked about so far has been the physical cycle, not so much the financial cycle. We've done a couple espisodes around the new tax structure, with the tax cuts, Jobs Act 2017. What you're saying is employment growth is the primary driver of pushing an area through the cycle. How could something like that, with this effect of the new tax cuts, how does that affect both the physical and the financial? If that's going to improve employment growth, that's going to make a case for progressing along the cycle. If that affects the capital markets in a different way, how do those two factors come into play with these--

Glenn Mueller - Okay, great, all right. Let's start with the fact that the tax cuts should stimulate the economy, and therefore create more economic growth, hence more job growth, therefore pushing demand up, and that certainly has been the case so far. If I have income growing, that typically also means that property prices would go up if there was an equal amount of demand. Let's now flip over to the financial cycle, though, and say, "Okay, real estate is really a separate asset class, different from the stock market, and the bond market, and commodities," if you think about investing in those. The demand growth for real estate as an asset class has been going up for a couple of major reasons. The stock market's become more volatile. We've had major corrections. People don't like that volatility. They see that as risk, hence getting into a stable hard asset, if you will, like real estate, that can't vanish into cyberspace overnight, is something that people see as a long-term investment that they can hold and not worry so much about price volatility, and yet keep good income coming along as well. I think that if we were to look at the bond market, everyone knows that we're at a very low interest rate today. I benchmark everything off the 10-year Treasury because that's what most real estate people do, and 10-year Treasuries closed yesterday at 2.71%. I can show you forecasts from just a year, or two, or three ago, where they said 10-year Treasury will be at or above 4% in 2019. We did get up to 3% in 2018 for a little bit, but came back down. We came off a low, in 2013, of 1.7%,

Glenn Mueller - so we're in a unique situation. We're in a almost 70-year low in interest rates, which is really good for real estate, because if you're financing your real estate with a mortgage, you're getting a low rate that hasn't been seen in 60-plus years. The last four or five years low interest rates also mean that I can afford to pay a little bit more for the property because the yield to the equity investor is higher because of these low interest rates. As low interest rates continue going forward, and I think they will, We could do a whole series on that as well. That means that we're going to see really strong, positive pricing for real estate. As interest rates go up, bond values drop. When I turned 60 a couple years ago, my retirement fund from the university is with TIAA, Teachers Insurance and Annuity Association, which is the largest public retirement, or private, I should say, retirement fund in the United States. As I've taught at University of Denver, then Johns Hopkins, then Harvard, then back to University of Denver, I've never had to change retirement accounts because all of them use TIAA for their retirement funds. With that, I had a young advisor, actually younger than my oldest son, come and ask me, and sit down with me, and say, "Hey, you just turned 60. We think you should up your fixed-income allocation. Let's increase your bond allocation to 60% and reduce your stock allocation to 40%," and I said to him, you got to be kidding me. Interest rates are at an all-time low. As they go up, the total return that I'm going to get,

Glenn Mueller - I'm going to start with just a low interest rate, but as interest rates go up, the value of the bonds that you put me in are going to go down, so I'm going to lose money. He says, "Well, what are you going to do?" I said, well, real estate has a better income return than that, and the income, over the years, goes up, not down, whereas a bond, it's a fixed amount, and the price of real estate goes up because of increased demand and increased cost to build, so, if you will, real estate, to me, is like an inflation-indexed bond with price appreciation on the principal as well, so I am currently personally 60% allocated to real estate in my TIAA-CREF retirement account.

Adam Hooper - Do they let you, that's probably other conversation, just curious. Do they let you do that self-directed, or is that through liquid, through REITs?

Glenn Mueller - It is self-directed, and well, I should say I'm the one telling them what I want to do. TIAA is one of the institutional investors out there, and so they have a direct real estate fund. I am 60% in the TIAA-CREF direct real estate fund. Then I also have publicly-traded REITs, as well as some stocks, and a small portion to international stocks as well.

Adam Hooper - Okay, so my mind is sticking on this kind of internal versus external factors that affect stage of the cycle. As real estate people, we always feel that there's this intrinsic nature of real estate, but what we're talking about today is that the real estate cycle is almost, like you said, it's a mirror for the economy. How much of it is something intrinsic to this asset class itself that drives these cycles, versus purely a reaction to external factors?

Glenn Mueller - What is intrinsic to it is the supply of new space. When we go and look at, and now I'll do a property-type comparison for you, demand for office space, while we've got a lot of new jobs, and a lot of them are in technology, and that's office-using jobs, a lot of the tech jobs today are, you might be working from home a day or two a week, you're using some WeWork space, whatever the case may be, and so earlier I used the number, the historic number of 200 square feet per person. Every time someone's hired, that used to create demand for 200 square feet of office space. Doesn't mean everybody gets a 10 by 20 office. That includes halls, bathrooms, conference rooms, reception area, all that kind of stuff, but now they're basically squeezing more people into less space. When you first come out of school you used to get a cubicle that was six by six. Now what they do is, my students coming out of school, they get a job working at an office, and they literally sit at a bench, there's a table with...

Adam Hooper - They get a seat at a desk.

Glenn Mueller - They get a seat, even at a bench, but then they've got more rooms because they're doing more team stuff. They got rooms for four, eight, 10, 12 people to go to, but during the day they're just sitting in it, it's whatever's open when they walk in the door. They may get a locker someplace to put their purse or personal items, and that kind of stuff, but the big file cabinets that we used to have, and all that kind of stuff, everything is now just electronic on your computer. Law firms used to have monster law libraries. Now those are totally unnecessary. The square footage per person, the average has dropped from 200 to 150. A lot of new space being developed, they're expecting to squeeze people into about 110 square feet per person. That number bottomed out a year ago, and is now actually starting to go back up because companies are realizing that the one key thing is retention of employees is difficult, and expensive to have turnover, so they are enlarging the space and giving people more space and more amenities just to retain them. We've seen kind of a bottoming in trying to squeeze a lot more people into a space, and make that space more attractive: better lights, entertainment space. My firm has, as we call it, Herman's Hideaway. We've got an entertainment space where at lunch they can go down, sit down there, play ping-pong or pool, watch TV. It's set up for parties and all kinds of stuff like that. Everybody's, you might even have a free gym, whatever it might be. They're offering more amenities to attract and retain people from that standpoint.

Glenn Mueller - Office has been lagging the economy, because I actually have to have about 25% more people hired to demand the same amount of space. Industrial has been going off the charts for two reasons. Obviously the Amazon effect of more people buying stuff online and it being shipped to you. That's only 9% of all retail sales, though, still, but the other one is more stuff. When I was a kid I had a choice between Coke and Pepsi. Now Coca-Cola has to store Coke, Diet Coke, Cherry Coke, Vanilla Coke, Lime Coke, Lemon Coke, Coke Zero, et cetera, so there's more options. Grocery stores have gone from 30 or 40,000 square feet to over 100,000 square feet in size just to be able to display all these additional items and options, so industrial demand is strong, and every retailer has to build out their Internet presence. I believe we've got about a 10-year run in demand growth there, and we are barely keeping up with it from a supply standpoint. In 2018, occupancy levels went up to the highest they've ever been just to try and keep up with that demand. I see that as being at equilibrium for at least five years going forward. Retail is the surprise. Everybody thinks retail is crashing and burning, and going bad. Not true. As Sears now goes bankrupt, the owner is dancing in the streets because they're going to take that Sears space. Sears was the original anchor in some of these shopping malls, and they paid the lowest rent. Now they're repurposing that space into experience retail, a couple of restaurants, a escape room, a movie theater, et cetera.

Glenn Mueller - Those new tenants are paying double what Sears used to pay, so retail is actually doing well, and people will be surprised to find that it's at the highest occupancy level it's ever been at in any of the last four cycles that I've been researching. Apartments is the one property type where, internally, apartments, number one, easy to build. You don't have to pre-lease anything. You can't, as a matter of fact. You got to have the building done to be able to lease it out, but it's also financed by the government. You can get a permitted mortgage from Fannie Mae, Freddie Mac, Ginnie Mae, so because of the millennial demand, and it's strong, and will be for the next five years or so, there's more development than we need. We're overbuilding apartments in a majority of the markets in the country today, by in the neighborhood of 10 to 20%. If we could slow down new development in apartments, it would move right back into the growth phase, but right now, as people look at my market cycle charts, they'll find most of the markets are in the hypersupply phase. I'll give local Denver as a good example. We need 8,000 new apartments based on job growth in Denver, and have for the past four years. Three years ago we built 8,000 apartments. Two years ago we built 10, and last year we built 12,000 new apartments, so we overbuilt by 4,000. Occupancies are declining. Landlords are trying to keep the asking rent the same, but they're offering concessions, "Come here and I'll give you one month." I've even heard of two months free rent.

Glenn Mueller - I'll give you a brand-new large-screen TV. I'll give you this. I'll give you that to get them in the door, so those lower occupancy levels means that rent growth is slowing down. Hotels. Millennials love to travel. They like experiences more than they like stuff, and so demand for hotel has been very, very strong. Hotel occupancies have, on a national basis, have gone over 70%, which has, again, never happened in the last four cycles. That really strong occupancy created a lot of profit for a lot of the hotel companies. Now we're building a lot of new hotels, and there are a number of markets where they put up so much that they're a little bit oversupplied, and occupancy levels are starting to drop off a little bit there. That's the unique thing to watch is the actual new supply, and that's a city-by-city and property-type-by-property-type number. Denver is in the growth phase in office. It's at peak equilibrium in industrial. It is at peak equilibrium in retail. It is in the hypersupply phase in both apartments and hotels. Same city, different property types. It all depends upon that supply growth as to what's happening.

Tyler Stewart - It's really interesting. I'm curious. When you mentioned retail and said how that's the surprise, everyone thought retail was dead, I'm curious if you've done any research as far as what headlines you see in the news versus where we are in the cycle.

Glenn Mueller - Well, to me news headlines are all about the negative, what the problem is, because it's that shock value, and that's going to get you to listen. The true fundamentals that we look at, the economy's doing well, just came off of a conference with a great economist who said, "I am now..." He's forecasting out three or four years. He's saying, "I don't see anything really starting to really slow down in any major way "until 2022." Economists, every year, just keep pushing out their forecasts for the next recession, and on average we're at least three years before a major downturn. We're decelerating. We're not cranking along. Last year we're cranking along at, I'm going to use miles per hour in place of GDP growth. Since the Great Recession we've been cruising along at about 20 miles an hour, which is nice and sustainable. We get better miles per gallon, which means we can go further, potentially. I believe that this economic cycle, which now is in its 10th year, and people go, well that's the longest economic cycle ever. You got to have a crash. Go no, you don't. The country of Australia is in its 26th year of economic growth with no recession, so the fact that we might go 13, or 14, or 15 years is very possible, because instead of really high GDP growth, many times stimulated by the government, we have the potential to cruise along here. In 2018 we're going to hit 32 miles an hour instead of 20 or 25, like it's been for four or five years, because of that higher GDP growth at 3.2%. This year I think we're going to be right around three,

Glenn Mueller - so we're going from 32 to 30 miles an hour. Then, if you look at everybody's forecast, the following year after that it's going to go to 28, and then maybe 26. Many people are modeling that from the fact that they're seeing this slowdown in employment growth. Employment growth will be positive just from demographics, but it never goes to, just demographically it never goes to zero unless there's a recession. Right now, just based on demographics, I think it's 20, 24 when we get down to we're at the highest number of baby boomers retiring, and a slowing number of millennials coming out of school, coming into the workforce, so we get, right now, from a 2% employment growth down to like a half a percent, and then it turns back around and kicks back up.

Adam Hooper - That would, again, suggest that this big correction, or this big crash that people, again, headlines trying to get the attention, and I think, consistent with what we've talked about on the show, and what we've heard from other guests as well, is it's not going to be a 2008-type decline, barring some unforeseen external event, but more just a maybe a slackening of that growth, but it's still going to be in a positive direction.

Glenn Mueller - Correct. That's why the term I like to use is deceleration. We're going from a higher speed to a lower speed, but we're still moving forward.

Adam Hooper - You said something there about Denver apartments now currently being in hyper-supply, and you suggested maybe they can move back into an expansion phase, so the cycle isn't just a linear progression forward. What are some of the factors that could pull something from either expansion back down into recovery, or hyper-supply back down into expansion.

Glenn Mueller - Sure, well, one thing that would push any city into the growth phase again would be winning the Amazon HQ2... because that's going to create a bunch of jobs. Amazon would be considered an economic base industry, and it would, and therefore there's a multiplier effect. For every economic base industry job there's two local jobs added. In Detroit, if I add another auto worker, I also need to add two more people doing local service stuff, and that could be in health care, gas station, a grocery store, a doctor, a lawyer, an accountant, that service local people. For every economic base employee there's two local servicing employees. Could be a city worker. Could be a teacher, that kind of thing, teaching K through 12. Everybody's trying to, every city is trying to expand into multiple economic base industries so they're not stuck when an industry turns down. A great example there is, looking at my charts you'll see Houston is one city that's in the hyper-supply phase of office. Houston was growing. They're putting up some new space. The oil industry slows down because of low oil prices. They lay off a bunch of people,

Glenn Mueller - but all those new offices are being built, so all of a sudden there's less employment from the oil industry economic base, but new product coming on line. Dallas, which used to be oil-driven as well, has diversified its economy into technology and other things, and it didn't get hit hardly at all by the oil slowdown.

Adam Hooper - How can an investor use this knowledge now? Maybe before we get to that, what are some indicators? You mentioned, obviously, job growth, just kind of general economic health. Are there other indicators that investors out there might be looking at, or data sets that they might want to kind of keep an eye out, or if they see something about it that kind of pique their attention?

Glenn Mueller - Right. The two key variables are demand, so employment growth in the city, and supply of your specific property type, and--

Adam Hooper - As easy as that.

Glenn Mueller - The major companies that collect and have that data, CoStar is probably the best-known in the country, they actually cover 240 of the 366 cities of the United States, and a city or a metropolitan statistical area, MSA, as defined by the government, they collect statistics on any city with a population above 50,000 people, and there are 366 of those in the United States. CoStar has data in the five major property types on 240 of those cities, by property type, so that's a great place to go get that data.

Adam Hooper - Okay, and then as, again, as an investor, now that we've kind of laid out the basis of this property cycle, how can they use this? For someone that just listened to this episode, they need to have an idea about this. How can they, maybe, again, go to your website, get a copy of some of those reports? What are some keys for them to kind of interpret this new information? How they can kind of assimilate that into their investment strategy?

Glenn Mueller - Right, so if you've got a city that's in the recovery phase, you're going to be wanting to pay a low price because you know that occupancy growth and rent growth are going to be slow for a few years. If you're in at the beginning of a expansionary phase, you've got, potentially, good increases in occupancies and rents, and so the return's going to improve over time. If you're at the peak point 11, where the market's in equilibrium, you probably want to write longer-term leases to bridge yourself across the next downturn. If you're in the recession phase, you're obviously going to want to be buying something that you expect to see occupancies and rents fall off a little bit. Hence you should be pricing that declining income into your models to price what you think should be happening. On an acquisition basis, where you are in the cycle should help you in deciding what kind of price you're willing to pay for a property. If you're developing, getting all your predevelopment work done, getting approvals and permits in place in the recovery phase so you can get something built while the market's in the growth phase of the cycle is great. If you're trying to build something new in a market that's at peak equilibrium point 11, you need to be really careful. You should probably have most of it preleased or you're going to be in for a bad surprise as you finish that building and find that there's a lot more space available on the market. Hence your competition is up, and the rent you're going to be able to get is down.

Adam Hooper - Generally, you can look at this as a somewhat linear progression through these different phases, but not entirely predictive based off of some of the external factors we talked about, whether it's a huge employer coming in or a huge employer going out, they can move it forwards or backwards on that, independent of this kind of linear progression through these.

Glenn Mueller - Correct.

Tyler Stewart - You could kind of use the cycle as the current of that local market, and being on the same side as that current, or going the same direction as the current is a good decision, but often, or not often, but you can still find good deals even going against the current.

Glenn Mueller - Well, again, if you're thinking long term, you should be able to find investments in any market, and then it's a question of how you price them. If you're pricing on the expectation that you're going to be in the expansion phase, you're going to get increased occupancies and rents, you do your typical 10-year discounted cashflow analysis with increasing rents and occupancies. If you're buying into a hypersupply phase, you're modeling decreasing occupancies and rents. Hence the price that you're willing to pay is going to be lower from that standpoint. It's good to know. When someone says, well, the reason for me doing the 54 largest markets in the country, those are the ones that institutional investors are willing to put money into, it's every Monday morning we've got some money to invest. Where should we do that? Where does the acquisition guy buy a plane ticket for? Is he flying to Atlanta or Boston if we're looking for office? Is he flying to Cincinnati or Chicago if we're looking for industrial? Where that city is in the cycle helps us determine where we think the best potential investment returns are for what we're trying to do.

Adam Hooper - If we were to put you on the spot here and prognosticate what 2019 looks like, what is your general sentiment on real estate as an asset class here going forward this year?

Glenn Mueller - 2019 will be another good year for real estate. Again, this is under the assumption that no black swan event throws us into a recession. I work off of there's something called a Blue Chip Economic Forecast, which is the top 40 economists in the country. There's a dispersion there amongst what they think, but basically pretty much everybody thinks that we're going to have continued expansion in the United States in 2019. Based on that increasing demand, I believe that real estate will do well. The rate of return for 2019 will probably be slightly lower than it was in 2018. We're, again, decelerating the total return growth from double digits for the past four or five years we've seen 10 to 14% returns on existing properties, and that's probably coming down to the eight to 10 range for 2019, which is still a heck of a lot better than a negative six in the stock market last year. I think that 2016, or 2019, excuse me, will be a positive return year for real estate as a whole, and a little bit more moderate than the previous few years, but you can't keep growing at a high pace when the economy is starting to moderate its growth pattern.

Adam Hooper - Any diamonds in the rough, or shining stars that you guys have identified in the phases that people should keep an eye out for?

Glenn Mueller - Well, if I told you that, you should just come and invest with us at Black Creek and we'll take care of that for you.

Adam Hooper - There you go.

Glenn Mueller - If I was to rank the property types in terms of return, I believe that industrial will have the best return in 2019, because it's got just the largest amount of demand from everything that's happening, followed by, because the prices have been low, I think retail will actually do well in 2019. Hotels I put kind of in the middle. I would put office after that, and then I'd put apartment at the bottom, only because of that overbuilding. Apartments have had a historic long-term good return. As a matter of fact, if I go back in history, this will surprise people, and look at the NCREIF, National Council of Real Estate Investment Fiduciaries return, and that's all the pension funds and endowments, if you look back over, the index has been around since 1978, so when we get their final, year-end returns I'll add the last year in, but I've got 39 3/4 years worth of returns already, the best-returning property type over the last 40 years has been retail, followed by industrial. Apartments have been third, office fourth, and hotels the lowest, mainly because of their volatility. When the economy does turn down, people stop traveling, and hotel returns drop like a stone overnight, because they only lease on a day-by-day basis. That's historically how it's been. This year, I think, industrial outpaces retail, and apartments, which, if we weren't building so much, could be the number-one property type, but with the overbuilding that is going to be, that's going to mute that return.

Adam Hooper - Fantastic. That's a good spot to start wrapping it up. Is there anything else that we didn't touch on today that you think would be good for our listeners to pay attention to, or to be thinking about, as it relates to general economics, or kind of where we're at in these cycles?

Glenn Mueller - Right. Again, focus on employment growth, and then look at the supply in the city that you're investing or developing in, and that will kind of get you there. Other people say, well, prices just have to come down in real estate because they're so high, and if I looked at the highest-priced properties in the United States today, it is office buildings in New York City. By the way, New York City just had, I just read an article yesterday, New York City had the best demand growth for office space that it's ever had in it history, and now that Amazon is doing half of HQ2 there, that bodes well for the next few years for New York. A Class A New York office is going to sell at a 4% cap rate, 4% cash-on-cash return. That's just unbelievably high price to get only a 4%--

Adam Hooper - Yeah, with very low return.

Glenn Mueller - Real estate's gone from local to national to public market, with public REITs, to global over the past four decades, so property up for sale in New York's going to have 20 bidders. 10 of those are going to be international.

Adam Hooper - Right.

Glenn Mueller - A international buyer from London says, "Wow, this is a fantastic deal because the cap rate in London is 2%," so a New York office building looks like a half-off deal. In Tokyo, Japan, the cap rate is 1%, which is a 75%-off price for that New York office building. International investors and capital flowing here to the United States, the largest market, the most stable market, and the most investor-friendly laws in the world, we're seeing a lot of global money coming here, and that is going to help hold prices higher.

Adam Hooper - Do you see that changing any time soon? The international trend has been there for a while, and it seems like it, again, like you said, it's just kind of picking up pace.

Glenn Mueller - Nope. I believe it continues for a long time going forward. I get students from China who go, my family's got money to invest in the United States. One quick one for you. "Great, what does your family do?" "Oh, we're in the auto repair business," or excuse me, body shop business. Said, "Really?" Yeah, said, "We've got a bunch of locations all over China." Said, "Great. How much money you guys looking to bring to the United States?" "Oh, between 10 and 20 million."

Adam Hooper - Just a little bit.

Glenn Mueller - We get those type of things happening all the time, and all the family offices of wealthy families, et cetera, they are all looking at real estate as a major part of their investment portfolio, a way to diversify away from whatever it was the company that they put money into. Current student whose family company's in medical imaging. All the excess profits have gone into real estate.

Adam Hooper - Very interesting. Well, Glenn, how can our listeners find out more about what you're up to? We'll put some links in the show notes here, but if they want to learn more about your Cycle Monitor reports, where can they get those?

Glenn Mueller - My Market Cycle Report is now, we actually house it on our website at the University of Denver. It is the Daniels College of Business, so it's daniels dot du, for Denver University, dot edu, slash, we're the Burns School of Real Estate and Construction Management, so is where my Market Cycle Reports are posted for free. I also do a Forecast Report that we sell, or I should say give to donors who are willing to support our real estate program at DU with like a thousand-dollar contribution. You can get not only my Market Cycle Report for free, but my Forecast Report as well, and any of those people out there listening that have family members, we get a lot of undergraduate students coming from family real estate companies, real estate families. I also have a number of graduate students from that standpoint. If you're looking for somebody, we've got some very bright students who will be looking for jobs here come graduation. In addition, we have an executive online program if someone wanted to not have to come and move to Denver, and they can actually get their Master of Science, their MS in real estate, online with us at DU.

Adam Hooper - We will definitely be chatting after we cut recording, for maybe trying to pick up a couple of those new undergraduates.

Glenn Mueller - Right.

Adam Hooper - Perfect, well, Glenn, really, really appreciate your time today. This was a fascinating topic. Really good to get this information to our listeners. Everybody out there listening, as always, we appreciate your comments and feedback. Send us a note to, and with that, we'll catch you on the next one.

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