Working Capital The Real Estate Podcast

Real Estate Market Cycles with Glenn Mueller|EP23

Oct 14, 2020

In This Episode

With 44 years of real estate industry experience, 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.

In this episode, Glenn shared his knowledge on research, analysis, and development in real estate. We also talked about real estate market cycles, growth statistics, employment growth, retail, how COVID affected different industries, supply and demand in commercial real estate and industrial population growth. Glenn also showed us visual data and graphs to make his presentation more understandable and informative.


Resources and Links:

Real Estate Development: Principles and Process

Connect with Glenn

Mueller’s chart



Jesse Fragale (1s):

Welcome to the Working Capital The Real Estate Podcast my name’s Jesse Fragale. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate, whether you’re looking at your first investment or raising your first fund, join me and let’s build that Portfolio one square foot at a time. Okay. We have Glenn Miller on the show today Glenn with 44 years of real estate and industry experience. Glenn 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. Glen research experience includes real estate market cycle analysis, real estate, securities analysis, real estate, capital markets, portfolio, and diversification analysis, senior housing analysis, and both public and private sector Market investment strategies.

Jesse Fragale (50s):

He is also a real estate investment strategists at Dividend Capital Group where he provides real estate market cycle research and investment strategy. Glenn how you doing? Good. Awesome. Glenn well, listen, thank you so much for coming on the show. I’m excited for every guest that comes on, but specifically yourself, you know, I think I reached out a little while ago. It’s great to finally have you on, I just see that you have a wealth of knowledge when it comes to real estate and for myself kind of on the academic side Market Cycles and a lot of the research that you do, I think listeners will get a lot out of. So what I thought we would do today is talk a little bit about Market Cycles from a general point of view, and maybe that could guide our conversation into the 20, 20 reality that we’re in today and maybe a little bit of prospecting for the future.

Jesse Fragale (1m 39s):

How does that sound? So that was good. Awesome. Okay. Glenn well, I think you have some slides here, so if you’re listening on iTunes, Spotify, wherever you listen to podcasts will try to do what we can to a, to give you the visual. But a if you’re, if you’re watching, then you’re going to be able to see Glenn slides here. So you can definitely check that out on YouTube. So why don’t we get started? Glenn

Glenn Mueller (2m 0s):

Sure. Great. Thank you. Yeah. So I’ve been doing a cycle of research since basically in 1991. I left university of Denver, whereas a professor and went to work at Prudential real estate investors. Obviously the market crashed back in 1990. They asked me to figure out why it crashed, whether we could monitor that, figure it out and even potentially forecast it going forward so that they could make better investment decisions. At that time, Prudential was the largest inter in real estate in the United States, not only for the insurance company, but also as a manager for pension funds and endowments, or as we call them institutional investors on the really big buildings around the country, in the world.

Glenn Mueller (2m 49s):

And so we managed money for CalPERS, California, public retirement system, which is the largest public pension plan in the United States with a 390 billion of assets stay on our Management about a 12% or $40 billion investment in, in, in real estate. Whereas at Prudential, probably the one thing is we actually own the empire state building.

Jesse Fragale (3m 11s):

That’s unreal. And, and just for a little bit of background, I guess we’d be remiss not to talk a little bit about the fact that you’re not just a, you don’t just do research. I think the last time I listened to you speak, you mentioned you were a, you’re building a property number 58. Maybe you could talk a little bit about that. I think you’re son is involved in some capacity.

Glenn Mueller (3m 29s):

Mmm. Actually property 58 has done it. It is a mixed use building that Neri office for my son on the first floor and a couple of apartments above ease in and opened up in may. And as you might guess, a lot of people bought pets during COVID. So he has been out straight. He figured he need one employee for his first year. He already has four employees help helping him a run that veterinary practice and a Saint Paul, Minnesota. So, wow, that, that was a fun for me to go back is add a lot of work and get that building done as the general contractor

Jesse Fragale (4m 13s):

On that. And I guess just one last thing before we get started here, a one thing, one of my colleagues, I said I was having you on the, the show tonight. And when I talked a little bit about your background, you know, PhD in real estate and finance, you know, I can only think of a few programs that have a program similar to this at the university of Denver. Is it an outliner outlier in that sense from a, you know, if you’re going to take your academic, the, you know, career up to the PhD level for real estate,

Glenn Mueller (4m 42s):

Right? Well, so I’m actually a, if he wanted to get a PhD in real estate itself, I’m the original place that had, it was a university of Wisconsin. Hmm. And James grass camp was the main famous professor there. And if you, if you’re reading about research and things going on, you’d see the grass campaign, different places, a and a Georgia state university had its own separate real estate department. Most people that have PhD’s that teach real estate either I’m a finance or economics background, however, a year ago at university of Denver. We have the second oldest real estate department in the country.

Glenn Mueller (5m 24s):

Umm, it’s the Franklin El Burns school of real estate in the new business school started a, a PhD program a year ago. It’s an executive PhD program. Or you can do it from any place. You don’t have to actually come to Denver and reside there. And I’m actually the dissertation adviser for the first two students who will be majoring in the real estate in their, in their PhD. So that was great in interesting times, but a yeah, yeah, for sure. Undergrad and grad I’m program and, and now a PhD program at DEU, both on campus and on

Jesse Fragale (6m 4s):

Yeah, that’s great. Well, you know, S a few of my colleagues I’ve always heard have a Colombia, Colombia is a master in Real Estate Development, but a, not so much at the PhD level, but that’s interesting. Alright. You know what Glenn let’s yeah, let’s get started. I’m excited.

Glenn Mueller (6m 18s):

Right. So to me, the real estate goes through cycles just to look at the economy has a matter of fact, were real estate is just a delayed mirror of the economy. And so as the economy goes, so that goes real estate I’m. And the two key things that every real estate professional should be watching are demand and supply and demand for real estate. The best thing to look at is employment growth. Cause every time someone’s employed, they’ve gotta be working in someplace. You go Abbott that can work from home now true. But then there has to be a server someplace. That’s align them to work on their computer. And only certain professions actually have that as our real honest opportunity.

Glenn Mueller (7m 1s):

So employment growth is key. Obviously we just had the largest drop in employment that we have ever seen in history. And of course it is starting to bounce back that I sing is that employment is a very accurate number because the day you start a job, you fill out a w two form and the government comes out with employment numbers every single month. So that’s, you know, that’s a real, a real positive and makes that easy. You can then also do it by Citi to watch what’s going on in your local markets, which is something that you should all be doing. And you should also know what the major economic base industries are in that city and economic base industry produces a good or service that it exports outside of the local economy that brings money in.

Glenn Mueller (7m 50s):

So Detroit, Michigan was auto as a photo is did well. Detroit did well. Now it’s diverse. Find a way with technology. And so are a lot of other things, obviously in New York city is finance. Chicago is trade and transportation as well as finance because of the Chicago board of trade for commodities is there. And so each city is driven by different things in Houston by oil. There is another example. So that’s demand on a supply side, its the existing space available in any property type plus new construction in, in that property type less anything that’s being demolished or changing use.

Glenn Mueller (8m 32s):

And I throw that in because that’s obviously becoming important in retail today. So we’ll talk a little about, about that. What I look at is basically demand and supply when we put them together is going to drive the occupancy level and a cycle chart that you see here is the cycle chart I developed back in 91 and it has 16 positions on it because historically real estate Cycles I’ve lasted 16 to 17 years phases, a recovery and expansion, a hyper supplier recession phase. And at the middle there, you see a dotted line the way through 0.6 and 14, that’s kind of the longterm average occupancy for any Citi example.

Glenn Mueller (9m 13s):

New York city has office average. Number of six, 14 will be about nine and a half a percent vacancy rate or a 90.5% occupancy. Right? And see just cause it’s easier to talk about things are getting better and occupancies are going up and things are getting better and vacancies are going down. So, and Denver it’s its average, a longterm average occupancy 0.6 a and point 14 is actually a 7%. So a 13% vacancy rates so different for each city and as occupancy rates go. So those red growth. So if you have low occupancies, landlords are potentially dropping rents versus raising them.

Glenn Mueller (9m 57s):

So if we look at this chart at points one and two on the chart, if cities are there, we would expect to see a red growth as a negative going down, same thing potentially at points 15 and 16 in the chart, as things get better points three, four, and five, you’re coming towards that longterm average, you start to get rent growth that took clear at a rate that’s below the rate of inflation. When you get to 0.6 in your, at that longterm average occupancy. Now the rent is start to rise and they arise rapidly. As we get to 0.8 on the graph a and point a to his green because that’s the, that’s the point at which I call it cost feasible rents. And by that, I mean, if it costs $400 to build a new office building in Denver, Colorado and investors are looking for a 10% or rate of return, which is high today, but it’s an easy, easy math.

Glenn Mueller (10m 48s):

10% of 400 means rents have to be 40 bucks to cost justify building in, in, in Denver above that rents, keep a occupancies, keep rising and rents, keep growing until we get to the peak point, there a point 11 on a graph. And that’s a point at which demand and supply are growing at the same rate or for me that’s also economic equilibrium. We would love all the market’s to sit there all the time. If there’s more demand We, if we could instantly put up the, the space we needed, we would a, you know, mache it and stay at that occupancy level longterm. But one of two things happens either we oversupplied, which people might remember, we did back in the eighties, we built way too much office space for what we needed and that cause I can see as to start to cook decline.

Glenn Mueller (11m 37s):

So that is a, that’s a, that’s a supply driven hyper supply phase of the cycle. That’s actually what you see here now happening with apartments, we are building slightly more apartments than we need. There’s good demand in the millennial generation is coming out of school, getting jobs and that type of thing. And so that has driven demand up and a very strong level, but we are oversupplying it because it’s the easiest property type to get financing for us. If he can get finance or financing a builder’s going to build. The other way it happens is when we have a demand decline, typically coming from a recession. So as we just saw, COVID take over and drop, we saw employment drop, hence demand for space started to drop off and especially in retail and you can see I’ve got retail down there at the bottom, a regional malls, factory outlets and centers.

Glenn Mueller (12m 33s):

However, if you looked at the actual data and I, I use CoStar and I assume most people know CoStar largest data provider of income producing real estate today in the United States and their occupants, they’re still showing very high occupancy, right? And I say, Oh, a Hawk in the Atkins behind. He said, because the Leesa is still in place and they aren’t trying to lease it to someone else. They may have stopped. The, the tenant may have stopped paying in rent, but their Lisa’s still in place. And they’re working out with that landlord as to whether they eventually come back or leave for good or whatever. So until at least it’s broken in some form or fashion, that space is not available for a rent to someone else.

Glenn Mueller (13m 17s):


Jesse Fragale (13m 17s):

And would that, would that take into account the sublease Market we’ve seen a tripling if not quadrupling in our market a bit,

Glenn Mueller (13m 25s):

Right? Yes. Yeah. Yeah. And, and so, and so availability includes a sublease if you will. And so, and so from that standpoint, you see things kind of on the way down. So here a second quarter of 2020. So the end of June a suburban office kind of at that 0.6 downtown office at point a eight industrial, obviously in the growth phase and neighborhood and community centers anchored by a grocery stores, barbershop, beauty shop liquor store, all doing well. And at very high occupancy levels apartments, we talked about being a little bit over the top. So what I do is I look city by city at the 50 for and largest cities in the United States and where they are and their, the national average being at a 0.8 is OK, but where are we in different markets while that depends on the industry is driving, driving those markets and, and where they’re going.

Glenn Mueller (14m 25s):

So here we look at office and you can see that the majority of the markets are in the growth phase. And so you say, but wait a minute, Oh, is it a lot of people didn’t go back to work. Sure. But you know, you have a 10 year lease on your office in space. You don’t cancel it just because you can’t go in and now people are coming back. I also a do investment strategy, works for black Creek Group and Denver now two months ago, we started going back into the office ever. He says, yeah, a lot of companies are saying, they’re not going to need office space any more. I’m going to let people work from home.

2 (15m 1s):

Yup. That’s a

Glenn Mueller (15m 4s):

Fairly small percentage of companies that are actually able to do that. People are social animals. You want to be in for coaching to help your career are and everything else, but we’ve got a social distance. So at black Creek in what a lot of other people who’ve done is we’ve got at a green team at a blue team, not a year, one, two, just cause we don’t want someone to feel better than someone else. And the green team comes in one week and the blue team comes in the next week. Yep. And so you work from home two weeks a month and, and your at the office in two weeks because we had, you know, been, we had gone from when I first started the, from a lot of offices and cubicles to fewer offices and what we call benching, where you’re sitting in about three feet away from someone you could wear your headphones and not be disturbed on that.

Glenn Mueller (15m 55s):

He got to be six feet away, which is minimum a cubicle. All of a sudden we only have half the space. We need to meet social distancing requirements. Hence only half the team work in there. So, and we know a lot of firms that are talking about moving up. So if a social distancing becomes the norm, no, you know, but half the people work at home, no change in office demand is a social distancing, becomes a norm and a, everybody wants to be back in the office. We just doubled the demand. So I think it’s some mixture that happening. And if you look at some markets, we’ll take a look at there in Houston, which you can see is a down at, at point 14, Houston’s main industry driving it’s growth is oil while the price has been down for a couple of years.

Glenn Mueller (16m 49s):

So that demand for oil has not been strong. They’ve been laying people off exploration has down, et cetera. So in industrial population,

2 (17m 1s):

Obviously using goods, a dry

Glenn Mueller (17m 4s):

Demand locally, and then there are a national warehouse market’s that distributes are the places like Chicago being in the center of the, of the country and all the port markets, et cetera. So again, in two things, driving demand here, online sales, and the other thing is more stuff. You know, when I was a kid, I had Coke or Pepsi as my choices. Now it’s Coke, diet Coke, cherry Coke, Sonoco, you know, F and, and we’ve got a store, all that stuff to be able to bring it out for PE. So the, the, the, the options available have grown so much that we need a lot more storage space. We’ve gone from about 40 square feet per person to we’re just approaching 60 square feet per person of warehouse space in the S and

2 (17m 51s):

That growth, I think continues. You can see it’s the markets that are in the hyper supply phase are there mainly because they have overbuilt just a little bit. And I’ll give you one interesting little factoid, which is Denver, you know, where I teach. And that is, Denver got a new economic base industry is six years ago when they legalized marijuana, all that, all of the warehouse space, all a sudden got leased up to be used for growing. And umm, so the big boom, we went from $3, a square foot to $6, a square foot and rent rates in Denver a very quickly over a year and a half period of time.

2 (18m 36s):

Well the cost feasible leveled to build is about five, four 50 a square foot and were at six. So it’s really profitable to build. So that pushed some of the rebuilding in the Denver space. And now that industry is starting to fall off in Colorado because it was part of our tourism. If you will, people coming to Colorado as one of the first States to legalize marijuana. Now that more and more States are legalizing the people that have to fly to Colorado to do it. And S and S we’ve actually seen closures in bankruptcy because of some of the marijuana companies go on. And so had some students who, as they saw this take off in my capital markets class, do a, a business plan to start a REIT that invested in state’s in, in, in, in industrial properties and States that were going to legalize marijuana.

2 (19m 34s):

Cause they knew that they’d get that jump rent from that new, from the new domain. If we go onto apartments again, maybe a little more than half the markets over the top there’s supply phase, namely you to building COVID if anything has created increased demand because people are at home. Although one of the things that I think we’re going to see, and we’re starting at the C and I I’ve seen him, some of my grad students, especially yeah, living downtown in a really small micro units are and how the near term, 400 square foot, you know, efficiency, apartments, et cetera, in a building with lots of amenities, you know, big, a commercial kitchen, social area is everything else.

2 (20m 18s):

All of those are shutdown and they’re stuck in they’re a little, 400 square feet. They’re now thinking, okay, if that’s going to be the case, I might as well get a lot more square footage out in the suburbs, either renting a, a, a house or getting a, a, a apartment out they’re, that’s a lot larger for the same amount. And, and so I think we potentially see a movement out of downtowns to the suburbs, you know, for that, for that more space and those that can’t afford it, or even thinking about, okay, I was going to be a few years, but maybe now’s a good time to go by a home. And the demand for housing as I’m sure you well know is just off the charts.

Jesse Fragale (21m 1s):

Yeah. You know what, maybe just, just on a question about that, cause I have heard, I think it was on Bloomberg or a master’s in business. One of the Podcast where they were talking about even a 1% stay in Manhattan and 1% exitus, if you will, from a, the downtown core into the suburbs, a wood have a substantial or a meaningful impact on Construction in the suburbs and, and the demand for that. What are you seeing in maybe some of the major cities? I know I’m in Toronto, in Canada. I know we’ve had exactly what I think a lot of other downtown cores have had a huge demand for single family homes. We, you know, we have a lot of condos in the downtown area and it just seems like people are just worried to be caught in the same four walls.

Jesse Fragale (21m 43s):

If there is, you know, fingers crossed another shutdown.

2 (21m 47s):

Yeah. I can’t go out to a bar or a restaurant or to a show. Why am I living downtown? Yes. And as a matter of fact, that I actually live in the mountains in Colorado West to the city and they had coined a new term, umm, people that had second homes of in the mountains, 70 miles away from Denver decided to move up to their place in the mountains, take their kids up there. The School just opened. And a lot of new kids we’re a registered that he used to know that came, came from front range, cities like Denver. And the new term is it’s a zoom town as opposed to a BoomTown cause, Hey, I, I can, I, you know, I can work remotely and zoom my meetings so I don’t have to be in Denver.

2 (22m 34s):

So why not? Why not live in the mountains where, you know, it’s nicer and there’s a lot more things to do outside. So that makes sense. But the trends we’re seeing where, where I live up near a Breckenridge and Keystone on a ski area is a home prices or a 14% so far. Wow. That is so big, big, a big jump from that standpoint. So a year demand demand is off the chart so that I think we’re going to see that kind of trend change happening. We didn’t see rent collections go down much because you know of government assistance will have had jobs had, had to leave, you know, had had to work from their apartment.

2 (23m 18s):

So they weren’t gonna start paying rent without a new government assistance. Now we may see B and C class apartments. It start to see a harder, you know, rent collections going forward. But you know, that remains to be seen as to how that, and of course we’re having a much retail that’s being taken out and repurposed a for last mile distribution, we’re taking retail and turning it into space, you know, Rhea. So, so retail is obviously the biggest challenge out there, but potentially also the biggest opportunity out there as well. And of course, a lot of stuff gets solved if we, you know, if we get a vaccine that a, that works in allows us to go back to previous normal.

2 (24m 11s):


Jesse Fragale (24m 11s):

You see the retail component as kind of a secular trend that you know was going to happen regardless of COVID. And the kind of just got shoved into a, an accelerating a phenomenon or, or is it something that you, is that that’s your a take on it?

2 (24m 27s):

Well, when I was a REIT analyst, my retail analyst’s to a guy named a fig, very smart once said, retail is creative destruction. Yup. You will come up with a new concept and it works and it kills off somebody else. So little local, a sporting goods store is a long came, you know, along, came in a national chain and killed off all the little guys and a with a specialization or in the else, you know, specialists are coming back, you know, instead of buying your bicycle at Sears, you know, I’m going to go to a local store. That’s gonna hand fit you for a really nice bike that you’re gonna spend two or three grand. So, you know, REIT retail, isn’t dead.

2 (25m 10s):

There only certain things that I think you can really buy online. So a stores aren’t going to go away. They’re, they’re still going to be necessary. Got it. And hotel, actually, he can see, or this is 2018, lost a hotel that a CoStar stop, stop supplying it after the fourth quarter of 2018. And although they bought Smith travel, which is the big company that does all that stuff. So they’re still working on getting that back in place. Hotels, literally, obviously a lot of them shut down ones that are car accessible will have reopened and in many cases are a full and everybody’s trying to figure out what to do.

2 (25m 57s):

I sit on a, the board have a opportunity fund. We own a hotel where we quickly went out looking for any way we could talk to hospital is about using that as a place for COVID patients to recover, ended up doing a lease with the Marines that when they came to base that he had a quarantine for 14 days. So they put them in a hotel. So, so a hundred percent occupancy here for six months kind of thing.

2 (26m 38s):

So it’s a interesting time in hotels as well. So that’s kind of, you know, what, what I see happening and I do a forecast as well. And at the end of 2021 here, you can see that they, most of the property types except for our industrial are, and either a hyper supply or a recession as we truly get people to the point where they go, okay, I guess I really can’t survive. Yep. And I’m going to break my lease in the least gets broken and, and that space actually comes back online.

Jesse Fragale (27m 12s):

Got it. So, one thing before we get into that, I’m just curious about when you talked about, you know, if somebody’s listening to this, you know, the, the chart, basically a kind of like a rollercoaster going up to a peak at 11, and then coming back down into a phase for, at that, that peak Market where you’d talked about the equilibrium, you know, real estate has been a, has been doing while for a number of years, has that peak been a plateau for us for the last, you know, whatever amount of years in different markets and, you know, cause we have seen asset prices continue to increase for quite some time. And maybe that was fueled by the fact that there was pretty, pretty cheap money out there from the feds.

2 (27m 55s):

Okay. So you just flipped from asking me about my cycle chart, which has only occupancies and rants to the pricing side. And that’s where I wanted to make that transition because of pricing should follow the line, right? I mean, as occupancies get better price should go up, et cetera. Most of the time that is true, but real estate is an asset class just like stocks and bonds and is competing for money, you know, competing for investors Capital against those others. So if a real estate’s looking okay, but stocks look even better, people that are gonna pull their money out at real estate and go to stocks and hence real estate prices, aren’t going to go up even though their occupancies or higher.

2 (28m 43s):

And we also know when we had the tech boom of 1998 burst as the tech bubble in 2000, 2001, what we saw was people taking money out of real estate and putting it into tech stocks. So even though tech demand was creating more demand for office in everything else and driving the economy and that kind of thing, it was good real estate prices flattened out and REIT stocks. And that an example dropped off, which made no sense because their earnings were going up. They’re on consumers that were arising and their rents were a license. So we have to think about the financial cycle as real estate versus the alternative investments and over the past decade or so, the stock market’s had its and volatility than up and down.

2 (29m 35s):

It has not the least a used to be years ago, 30 years ago, you’d say know, stock market produces an 8% return on a six month and your triggers are below 1% and a good quality a bonds or in the two to 3% range mortgages, you know, are sub 3%. So, so yields are lower and people are looking for yield. So real estate prices have been driven up and yields have come down. A cap rate are the cash on cash return on real estate. Again in three decades ago he used to be a 9% cap, right? And so I, you know, high quality class, a buildings at a nine cap rate today, pick the property type.

2 (30m 19s):

We’re talking industrial in the four to 5% range. REIT apartments, we’re in that range as well. And in some cases still are. And you know, if you’re going to a lower quality or a smaller city or whatever the case may be, that cap rate yield gets higher as the prices lower. But, and you would expect with COVID for everything you to shut down on people and figure out what’s going on. And the answer is, if you look at a company called Real Capital in an analytics, R S the I’m and look at their reports, they monitor every real estate transaction in the U S over a $2.5 million.

2 (31m 1s):

And since COVID started to volume dropped off, but the average cap rate went down, I, the prices went up, you know, why is that? Well, because the louder, the, the more risky class, a, B and C properties transaction stopped class a properties where I’ve got good tenants that are paying rent and things are doing well, are still desirable. And capital is out there because of the stock market problems and everything else. So they, they have gone, you know, prices have gone up. And so for industrial, as a matter of fact, that industrial properties, 20 bitters on any, on any problem, that’s a, you know, that’s already at least, so you’ve got to look at, you know, can you see further ahead than the pack?

2 (31m 54s):

If you’re going to try and buy something to a property that will come back or that you can turn around or whatever the case may be. So, you know that right now, there are, you know, distressed hotel funds being started. There is that, you know, owner’s have hotels that he had to shut down on. Our S are stuck and, and need to sell and sell at a big discount. And of course, banks won’t even take the hotel back to the hotel owners, call the bank and say, okay, we can’t pay our mortgage for the next, who knows how long three, six months. So, you know, give us for Barron’s or take the hotel, your choice.

2 (32m 36s):

And, and the bank says, okay, you, you keep taking of the place. And, you know, let us know when you can pay us again,

Jesse Fragale (32m 44s):

In your view, like, eh, for myself, I am an investor in a In like many listeners are vestors in the multi residential side, but, you know, my day to day is in the office world. And what I’m curious, what I’m curious about is at what point, you know, we talked to institutional owners and a lot of them are really holding tight on rates. And going back to your point about CoStar, when we call co you know, our colleagues at CoStar, and there’s just too few data points in, in a lot of cases for them to give us where the data is. So, you know, the, this kind of call this fairytale, a vacancy that we’ve had at our major cores, like 2.8%. And people keep saying that number, even though, even though we know the real number is not, is not in that place, but on the price side of things with, with what we’re talking about now, it seems that all these landlords are just holding on as long as they can until they eventually Mark to market.

Jesse Fragale (33m 35s):

So w you know, what does that look like? Say from an office perspective of the institutional owners, at a certain point, they realized that they’re going to have to write down some of the, some of the actual net effective rent’s for their buildings.

2 (33m 50s):

I think so. And again, you’re sitting with a company that has a 10 year lease in your five years in, and they haven’t been able to use the office for a few months, but their planning to come back, unless they change their complete, you know, strategy as to how, how to have their employees work. A what do they do? A at the, and the answer is, you know, if they break the lease, there is an ILT clauses and everything else of that puts them in a bankruptcy. That’s one thing. But if it doesn’t, yeah. Where do you go from there?

Jesse Fragale (34m 22s):

Yeah, for sure. And just kind of pivoting to back to apartments. I know that in the States, you know, there has been stimulus a for, for people, and I’ve talked to investors that have had tenants. They’ve had payments, you know, at 90, 95%, where typically they’d be around 90. I know for us in, in Canada, we’ve had economic, a relief packages from the feds $2,000 a month. And even my tenants, you know, I’ve, I’ve seen tenants that are usually, you know, a few weeks late every month that have been able to pay consistently, you know, at what point, at what point. And, and in addition to that, similar to the U S and Canada as well, there’s been the, a moratorium on evictions. And for us actually next year, they, they’re not allowed for not allowing any rental increases.

Jesse Fragale (35m 6s):

So, you know, putting all this together, you know, from an academic perspective, what does that look like? You know, in the next six to 12 months, you know, at a certain point, I’m assuming that the stimulus will be reduced and we don’t know what world that is, but, you know, how would you look at that, that type of a prospect,

2 (35m 25s):

Right? Well, if the economy is improving, the stimulus should go down a and M we are in totally uncharted waters. Normally what you do is you go back, look at, okay, so the last time this happened, what, how did it all work out? And the answer is we really don’t know cause this, this has never happened before. I mean, after nine 11, you know, we shut down, right? The country shut down, hotels shut down, airlines shut down, but it only lasted a couple of weeks. Right. And then we went through some changes and, you know, we got to the new normal of a, you know, with security and all kinds of other things like that, obviously, which costs some money created literally some new industries out of it.

2 (36m 9s):

But, you know, the, the same does the same thing happen with, with COVID. I don’t know, actually. And when you think about it, you know, we have a pandemic every 100 years, we had the Spanish flu black back in the back in 1919. And, and then a century before that, you know, we had, well, it started out, there was a plague then in the 17 hundreds, and then in the 18 hundreds was a, a I’m forgetting that the disease, but every a hundred years or something, now the problem is we don’t have good data to go back and see what happened there.

2 (36m 53s):

One of the only stories I heard was there were two cities st. Louis and Philadelphia in the st. Louis went ahead with their 4th of July parade in Philadelphia, did, and, and thousands, and thousands of more people died in st. Louis for the Spanish flu than they did in Philadelphia. Wow.

Jesse Fragale (37m 10s):

So another, another thing, you know, we, we rely on either, you know, our research groups or The the economist’s that, that focus on real estate. But I think that, you know, without the pandemic, if this never happened, a lot of people watching the real estate market, you know, it was the same thing almost every few months, you know, we’re going to be going into recession soon, you know, asset prices, cap rates, can’t just keep compressing. Do you think that we would have been in a recessionary, a position in real estate? And if, if so, whatever way you answer that coming out of COVID tech, technically we’re in a recession, but it was kind of, you know, it was a forced recession coming out of this. Do you see us going through that part of your chart of actually entering phase four?

2 (37m 55s):

That’s a good question. Because in the past we’ve had it go from expansion and phase two to hyper supply phase three back to expansion is the kind of thing picked up and a new Construction backed off a little bit, most likely because it’s been so severe. I think we probably do go through a recession phase, how quickly it happens is, is the real key, you know, and you notice that there are twice as many, you know, if it is, if it is a 17 year cycle, there’s twice as many points in a recovery and expansion as their own hyper supply in a recession, because, you know, historically we’ve had eight to 10 years of economic expansion and one to two years of a recession.

2 (38m 40s):

So following, you know, following that pattern, I would think we’d be back okay,

Jesse Fragale (38m 49s):

Without getting you to, to do too much, you know, prognostication on the market in terms of what that looks like for real estate. If we did enter kind of a recessionary territory, you know, you know, with, with cap rates at historic lows and, and the Fed’s basically signalling that their going to keep rates low for the foreseeable future, you know, does that mean from the investor point of view that you’re actually going to be able to find deals even in a, even in a recessionary, a position, or do you think just a, a institutional or maybe even a private will just kind of weather the storm and, and hang tight. And there may not be as much activity in, you know, in previous recessions or opportunities?

2 (39m 32s):

Well, I think that there have always been everyone, everyone’s got a different idea of what’s going to happen. Hence there is always going to be sellers and there’s always gonna be buyers. And a volume of that is what you know is potentially different. And since real estate is a heavily financed asset, you know, a lot of times it’s a financing is not available. You can’t do anything. Right. So, so it all depends upon how the banks come out of all of this as well. Right now, right now you expect bank earnings to be down because they’ve got loans in place that are, you know, that were where they are being paid now to.

2 (40m 18s):

So, you know, its it’s a waterfall or a domino effect that we’ve got going on here.

Jesse Fragale (40m 25s):

For sure. Well, Glenn, I’m going to edit out some of this part here. I we’re we’re, you know, we just, I think we’re at over a hour and 10 here, so we’re going to have to wrap up, you know, I’d love to have you back on, you know, maybe later at later this year or early next year, but if it’s okay, if it’s okay to wrap up now, I’m just going to I’ll do that. Sure. Okay. So, you know, we, we typically asked a few questions to everybody that has come on the show being an academic. I’d love to hear, you know, what you would say to whether people that want to get into a real estate, whether it’s an institutional or investing or just interested in the real estate market, are there, is there a book one or two books that, that you would recommend

2 (41m 9s):

A good question? So, ah, the urban land Institute puts out a book called Real Estate Development by a and the author on that as Mike Miles, I use it My development and feasibility class, a great book. If you’re gonna invest in the public markets REITs, I actually just finished. And a actually it will be available next week, a book educated

Glenn Mueller (41m 34s):

REIT investing with Stephanie, Chris and Kelly, who is work’s at a corporate office, property’s re in Washington, D C and actually sorta like a second edition. But I came on as a coauthor and we turned it into a, as opposed to just book on how to invest. It’s it’s got a little more depth than breadth. And so it’s a going to use it as a textbook by many universities around the country.

Jesse Fragale (42m 4s):

Okay, great. So we’ll put a, will put a link to that. Something that you know today about a vesting that you wish you knew 30 years ago,

Glenn Mueller (42m 18s):

30 years ago. I know I knew to buy low and sell high, and

Jesse Fragale (42m 23s):

That’s why you’re at this for 44 years.

Glenn Mueller (42m 25s):

REIT doing, doing, doing a really good underwriting, trying to think of what was not said or what was missed in a property you’re buying because pretty much every property ends up with some kind of little surprise that you said, Oh my God, if I had known that I would’ve offered less and I’ve done this, or I’ve done that, that, you know, due diligence, you know, just deeper due diligence is probably the most important thing you can do.

Jesse Fragale (42m 50s):

Sure. And a, in the spirit of master’s in business, Podcast we got a softball here for you. What was your first car make and model

Glenn Mueller (42m 58s):

That I, wow. My grandmother gave Mary her in 1969, Plymouth fury for DOR that I drove to college.

Jesse Fragale (43m 8s):

That is unreal. That’s fantastic. That’s probably the best one so far. I think we had a Ford Fairlane, a couple, a couple of weeks ago, but that, that takes it. Well, the first car I purchased, however,

Glenn Mueller (43m 18s):

Was a Porsche nine 11, because that I’ve been in

Jesse Fragale (43m 21s):

Oh beauty. I’m a, I’m a huge Porsha guy. I actually track. I’m a big car guy. My dad that owns a garage. So that’s, that’s awesome. All right. Glenn listen, I thanks again for coming on the show. Really appreciate it. That was a great deep dive into, into Cycles and, and where we’re at today. If, if people want to, you know, Google U for a little more information or what your up to, where is the best, a best place to reach you

Glenn Mueller (43m 49s):

Go to REIT Denver and we’re we’re in the Burns school of real estate and construction. As a matter of fact, my Market cycle reports are available for free I’m on the website.

Jesse Fragale (44m 4s):

My guest today has been Glenn Mueller Glenn thanks so much for coming on, work in Capital.

Glenn Mueller (44m 9s):

All right. Thank you. Take care.

Jesse Fragale (44m 16s):

Favre. Listening to the work in Capital Podcast. My goal is to help individuals break into real estate investing as well as educate experience investors. If you enjoyed the show, please share with a friend subscribe and give us a rating on iTunes. It really helps us. If you have any questions, want to learn or light

4 (44m 32s):

Me to cover a specific topic on the show, please reach out to me via My name is Jesse Fragale and I’ll see you back here for the next episode or the working capital real estate podcast.