Commercial real estate and the housing market go through a four step cycle: recovery, expansion, hyper-supply, and recession. Understanding the real estate cycle is important to make sure you are making smart and informed decisions regarding your investments. Here are the 4 phases of the cycle in a little more detail:
Recovery: The recovery phase takes place after the recession phase, meaning that the market will look similar to a recession, and any growth that occurs will happen below the inflation rate. However, if you keep a close eye on the market and are able to determine if we are in a recovery phase, you can jump on the opportunity to buy cheap property an
d add value. Investing during this stage allows for a greater return on investment. This stage of the cycle is difficult to spot as many are still reeling from the impact recessions bring; but here are some tips:
- There will be low occupancy rates and rental growth will be sluggish
- The housing market will not be completely dead, but will be fairly listless
- There will be no new construction and declining development projects
Expansion: This phase is pretty self- explanatory, the real estate market expands. This means that there will be steady job growth, rental prices will rise, and demand for properties will also rise. If you invested during the recovery phase then you should consider selling here as prices will peak during this stage. An important aspect of this stage is the ability for real estate developers to attain low-cost financing. With this financing, and the momentum gained from the previous phase, you can get your investors a good return on their investments.
Hyper-supply: This stage of the real estate cycle is characterized by the supply of real estate outdoing the demand present. As a result, the prices of real estate will go down. This phase usually lasts for an extended period of time before the economy reaches a recession. During this stage, it is important to take a hard look at your financial position and prepare for what the next stage of the real estate cycle will bring.
Recession: This stage of the economy is the most dreaded: a recession. Investment activity plunges, unemployment rates go up, and property investors + owners suffer alike. This phase is characterized by supply outdoing demand, leading to real estate prices to plummet. This phase of the market is extremely high-risk, but there are opportunities to purchase foreclosed real estate properties.
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