October 21, 2021

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Understanding Four Phases of Real Estate Cycle

Four Phases of Real Estate Cycle

Four Phases of Real Estate Cycle

Real Estate Cycle

Four Phases of Real Estate Cycle

The commercial real estate and housing markets are in a four-phase cycle. During recovery, the four stages of the real estate cycle include growth, hyper supply, recession, and finally, recovery. Real estate cycles and trends may help you anticipate future events and make educated choices when it comes to buying, renting, or selling real estate.

Despite the fact that the previous recession took many people by surprise, it is feasible to detect housing patterns and predict when and if the next real estate bubble will emerge by monitoring real estate cycles.

Four Phases of Real Estate Cycle Four Phases of Real Estate Cycle

Four Phases of Real Estate Cycle

Phase 1 - Recovery

The bottom of the dip is marked by the recovery phase. With little demand for property and modest lease velocity, occupancy is expected to be either tepid or weak. Most times, no new building projects are ongoing, and rental rate growth either is flat or slightly negative. During the latter stages of development, however, rents may increase but at a slower pace than inflation. It is difficult to pinpoint the commencement of the recovery phase since the market is still in a recession-like state.

Strategies:

  • Timing is important: If you enter the accumulation phase before the recovery phase has begun, you may take advantage of bargain-priced distressed properties and position them to be stronger during the recovery period. A holding term of two to four years is often included into a business plan to provide time for the purchase to become profitable as well as to allow the property to improve to a core-plus to value-add profile before moving out of distress and into a period of continued growth.
  • Careful thinking and patience are required in order to implement value-add initiatives while in a recovery period. Consider an example, in the early to mid-recovery period, a well-priced asset with a high return on investment may form the backbone of a value-added asset, but in the early stages of growth, planning should incorporate contingencies to execute.

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Phase 2: Expansion

The real estate market has recovered from the recession and is now at its strongest point. The vacancy rate is low when the real estate market is expanding, the rent is high, and the value of property is high. When construction is common, as it is during a real estate market expansion, you can also expect to see increasing rents and high property values. Investing in new rental properties or renovating existing buildings is a common practise for real estate investors during a growth period, since the demand is strong and new tenants are easily found.

Phase 3: Hypersupply

At the time of hypersupply, when building projects are almost finished, the supply will finally catch up with demand and surpass it. The number of vacant positions will increase, and rent growth will decrease. Investors who are particularly fearful of a recession but who want to acquire homes at a more appealing price may purchase these properties during this period. Until the growth period is through, these investors will sit on their investments (often called the buy and hold approach). Investing in a tenant property that is full, as long as the leases are long term, is another popular investment option during downturns since it will provide consistent cash flow throughout a recession.

Phase 4: Economic Recession

Supply exceeds demand, resulting in more vacancies. Rent increase is either negative or less than the rate of inflation during a recession. Additionally, operators often provide additional concessions like rent discounts in order to attract and keep tenants.

Strategies:

Opportunistic: This is an excellent opportunity to acquire distressed assets at significant discounts to replacement cost. Buyers will also have the best chance of purchasing distressed assets during the recession period, such as specialized servicers and lender foreclosures, which are generally referred to as real estate owned or “REOs.” This approach is absolute in nature, with a conservative and very well business plan that, once the recovery phase starts and the sun shines again, the buyer will begin reconfiguring the asset with the aim of selling it at the conclusion of the recovery period or during the early growth phase.

Four Phases of Real Estate Cycle

Four Phases of Real Estate Cycle Four Phases of Real Estate Cycle

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Four Phases of Real Estate Cycle Four Phases of Real Estate Cycle

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