Unbeknownst to many who aren’t involved with commercial real estate, the market actually follows a fairly predictable pattern. This real estate cycle can be broken down into four distinct phases—recovery, expansion, hyper supply and recession. Knowing which of these phases the market is currently in can help you make the best decision regarding your investment properties. While there is no real ‘start’ to a commercial real estate cycle, we’ll begin with the recovery phase.
Recovery begins at the cycle’s lowest point. Property in this phase is generally highly-undervalued, but financing may be hard to come by due to financial institution’s wariness after trudging through the recent recession. This phase is generally marked by high foreclosures and unemployment. As well as an oversupply of inventory. As recovery begins, these unoccupied properties will begin to fill.
If you can secure financing during this phase, you’re likely to return a healthy profit when the market swings up.
Most industry experts now say the US is currently in the expansion phase following The Great Recession of ‘08.
During this step, vacancy declines and construction rises. Rent spikes commonly accompany the growth, as do home prices as demand outraces supply. Unlike the recovery and recession phases, the populace is generally optimistic and many decide purchasing property is more advantageous to them than paying rent every month.
Trouble begins boiling into a real estate bubble when speculative investors enter the scene. These investors begin pricing property not at it’s current market value, but what it may be worth in the future. Forecasts like this lead to unrealistic property valuations and exorbitant rents.
When supply equals demand, equilibrium has been achieved and the expansion phase begins winding to an end.
As the number of properties being built begins to race ahead of demand, the market enters the hyper supply phase. Vacancy numbers are growing, but expensive land is still being bought by people overly optimistic about future returns.
Intelligent investors will plan accordingly for this phase. Commercial real estate projects take years to complete, so the ability to see long term and predict when the market will stabilize is crucial for success. You don’t want to have several projects running when the demand is no longer there.
Everyone, from first timers to professionals, wants to be involved with real estate in this phase. It’s a bull market, but the bubble is set to burst.
The Great Recession of ‘08 is still fresh in many American’s minds.
During the recession phase, all the glitzy construction of the last few years is suddenly unable to sell and prices come crashing down. Rents decrease as vacancies rise, leaving investors unable to pay their bills. Homeowners too struggle to meet their mortgage payments and foreclosures become commonplace.
While recessions are not pleasant experiences, investors who see them coming can make profitable deals during them. People and companies will be looking to offload investments for whatever price they can get, meaning those with capital saved can gobble up affordable properties. As the supply begins to level out, recovery begins again.