JLL

[lockmat]

The Jones Lang LaSalle office clock shows where each market sits in its real estate cycle. Markets generally.

http://www.joneslanglasalle.com/ResearchLe...alysis_Q408.pdf

edit: here is an explanation on understanding the clock (at the bottom)

http://www.us.am.joneslanglasalle.com/Unit...pertyClock.aspx

[TheNiche]

I don't like their office clock methodology. You'd think that JLL would take a more professional approach to this kind of graphic.

Commercial real estate vacancy can be thought of in much the same way as any kind of capacity utilization metric, as typically applied to analyses of industrial production. The business cycle can be broken out into six phases: Growth, Expansion, Overheating, Falling, Bottoming Out, Recovery then repeat.

The Growth stage is characterized by slow and steady demand growth, increasing capacity utilization (corresponding to diminishing commercial real estate vacancy), and relatively slow expansion of gross production capacity (corresponding to commercial real estate inventory).

The Expansion stage differs from the Growth stage because the the rate of expansion of gross production capacity catches up to the rate of growth of economic demand. Capacity utilization (or real estate occupancy) typically peaks during this stage. During the latter part of this stage, some significant fraction of production capacity becomes demanded by firms whose business is to increase production capacity.

The Overheating stage occurs as investors respond to the type of economic growth which is itself only supporting economic growth and continue to add to production capacity on the premise that the especially rapid aggregate demand growth of the recent past will be characteristic of future demand growth. Capacity utilization during this stage is stable or declining at a rate that is barely noticed, however the rate of new production capacity being added is not sustainable because the industries whose business is to expand the capital stock can only actually grow in size when demand is not only increasing, but accelerating.

It's pretty obvious what happens in the Falling stage. This is where a shock to the economy causes a reduction in the demand for production capacity. However, since projects that expand production capacity typically occur on a timeline ranging from several months to two years or more, new capacity continues to be added. Capacity utilization plummets.

As the economy Bottoms Out, capacity utilization stabilizes at a low level as new production capacity stops being completed. The broader economy has found an equilibrium level of production given the circumstances of the economic shock, however the parts of the economy that support economic growth essentially shut down in anticipation of another year or so of low capacity utilization.

As Recovery occurs, economic demand is still well below the previous peak, capacity utilization is still very low but is rising, and there is no need for any new production capacity because the existing capital stock is more than sufficient to satiate demand.

Repeat.

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Within this cycle, different cities are most definitely not acting with synchronicity, nor is their velocity around the "clock" occurring at a constant rate. Detroit has been stalled out in the Falling stage since 2001; certainly this was not always the case. I'm not entirely clear that it ever became symptomatically Overheated in the way that I described, either.

Houston's role is as a city that is predicated on the acceleration of global economic growth. The energy industry is to the world what a commercial real estate sector is to a city.