Green Street’s Managing Directors of the Market Analytics Team, Joi Mar and Seth Laughlin, recently sat down to discuss how Green Street identifies commercial real estate opportunities at the market-level across the United States. Joi outlined both positive and negative market grade changes across several core sectors in the first half of 2023, providing an inside look at how our analysts observe market data and update grades accordingly. 

Our Methodology 

Green Street assigns letter grades to our top 80 U.S. and European markets. Grades range from A++ to D and are meant to represent long-term rent growth potential as a spread to inflation. Market Grades are based on ten variables, with three components specific to each sector; human capital, fiscal health, supply barriers, desirability index, climate event risk, business friendliness, and analyst adjustment pertain to each grade in addition to sector specific metrics.  

The Logic Underpinning the Approach 

• Focus on the Relative: Macroeconomic variables that are difficult/impossible to predict will impact absolute NOI growth rates over the long run. Green Street's aim is to predict relative winners and losers across markets. 
• History only a Guide: Historical private and public market operating track records are used to inform estimates when the future seems likely to resemble the past. If there is conviction a market is undergoing a structural change in demand drivers or supply barriers, time series are less useful. 
• Greater Weight on Demand: A good demand profile can cure most supply issues. Conversely, little or no supply won't help a market with declining demand (e.g., the mall sector). Demand variables garner a disproportionate weighting in our approach. 
• Markets Matter more than Submarkets: Divergences in long-term NOI growth are likely to be wider across markets given 1) neighboring submarkets often draft off similar employment drivers; and 2) supply responses often balance out submarket growth rates. More time is spent handicapping MSA winners and losers.