In prior snippets I frequently mentioned that real state goes through cycles. And while real estate is also regional, i.e. one market may be expanding while another one may be in decline, the core four stages of a cycle usually carry similar characteristics. In today’s quick snippet, I will demystify these four real estate cycles.
Source: David Monroe, CCIM
1. Recovery. At this stage of the cycle, it may not always feel as recovery. Some investors may still be on the sidelines and new construction starts may be nominal. Properties may be operating below the long term average market occupancy rates. Rents are still subdued but starting to grow as demand starts to recover. This is a god time to buy. Given the early stage of this cycle, taking on value add Class B or C+ properties creates a tremendous opportunity to capitalize on upcoming appreciation in the next stage of the cycle.
2. Expansion. At this stage of the cycle investors are feeling more optimistic and are jumping back in. New construction starts and completions are ramping up. Rents and occupancy are climbing above the long term historical average. It is a great time to buy a Class B value add property to force further appreciation.
3. Oversupply. Due to overbuilding or due to economic factors, rents and occupancy levels start to decline. There may still be frenzy in the market and some investors believe the recession is farther away or that “it will be different this time”. It is a good time to sell non-core or non-performing assets before it is too late.
4. Recession. At this stage of the market, investors are sitting on the sidelines and feel doom and gloom. Rents are continuing to decline and occupancy rates are below the long term average occupancy and declining. Valuations are near the bottom too. It may be a good time to purchase distressed assets at more reasonable valuation, especially if the goal is to hold such assets long term and wait out the next cycle as long as there is cash flow.
It is important to understand which part of the cycle you are in in order to position accordingly. As each market or asset class may be at a different stage of the cycle, it is important to have a diversified portfolio to manage through such cycle fluctuations. Lastly, as transition periods between cycles may be difficult to spot when they occur, it is important to underwrite conservatively at all times, as a way to mitigate such fluctuations.
Should you have any questions or want to learn more about real estate investing or for an overview of our target markets, please reach out to info@dbacapitalgroup.com.
Disclaimer: The information presented does not constitute legal, accounting, tax, or individually tailored investment advice. Past results do not represent or guarantee future performance.