Investors are particularly concerned with the real estate cycle. The various phases may provide useful information about the best times to buy, sell, or hold. The real estate cycle is made up of four distinct phases. It's compared to the overall economy and the commercial real estate market is cyclical and somewhat predictable. How long does the real estate cycle last? This is a question that some believe they can answer with a degree of certainty while others challenge the model. To most accurately predict the duration of the cycle, it's important to understand the various phases, influencing factors on duration, and a historical rendering of the trends and patterns that give us the associated timelines.
The phases of the real estate cycle
The four phases of the real estate cycle include:
- -Hyper Supply
How do the cycles relate to investing?
The progression of each phase within the real estate cycle represents critical indicators associated with real estate investments. It can lower or raise the risks and it can signal an increase in sensitivity within the market as one phase transitions into another. This is why it's vital for investors to understand the real estate cycle and approximate durations for each phase.
During the recovery phase of the real estate cycle, the demand for space is usually fairly flat with occupancies at their lowest point. Construction is generally lower and there may be low rental rate growths reported with these rates below the rate of inflation. When the latter happens it signals that the recovery phase of the cycle has begun with an environment of recession. This is when investments are the most high risk, but some opportunities represent the highest possibility of reward.As the recovery phase moves forward, commercial real estate investments become the least risky.
An upswing of the real estate market signals the beginning of the expansion phase. There are higher demands for space due to other factors taking place within the economy. It's accompanied by strong quarterly job growth and normal GDP growth with occupancy rates getting better. Rent prices generally rise during the expansion phase. New construction begins to take place with more development activity. A phenomenon occurs drug this phase where the supply and demand level off and this is considered th high point in the expansion phase. More property acquisition takes place during this phase.
The third phase is the hypersupply period. This is when supply and demand equilibrium gets tipped during the expansion wave. More expansion leads to an oversupply of space and overbuilding that necessitates a pull back on these activities. There is a decline in the degree of rent growth, there are rising vacancies and more space that there is a demand for. This is influenced by a shift in the economy.
The Recession phase is kicked off by a supply that is greater than the demand. Vacancies continue to rise and a recession of negative levels of rent growth occur below the rate of inflation.
How long in between the phases?
The four phases have no set timelines and they are not equal in duration. The real estate cycle can vary from one to another in the number of years that it takes for completion. Phases and their transitions may last for months, or even years. Research is conducted to help improve the predictability of the phases of the real estate cycle for investment purposes. While some patterns have been revealed, it's difficult to predict the length of any one period of time with accuracy.
How long does the real estate cycle last?
It has become apparent that there are patterns and events that help identify how long a seller's market will last. Research has identified the averages of the rises and falls along with durations over time. It's known that rises are longer than the falls, indicating that the seller's market is longer than the buyer's market. What the research has told us is that The falls creating a buyer's market happen over a period between 2 to 3 years. The majority of the time within a real estate cycle is spent in the recovery phase and the trends and patterns show that this is approximately 15 to 16 years in duration.
The real estate cycle has no definite time allocation. Some last for 9 years and others for 20. this is an event driven cycle that follows the broader economic conditions of a country and even a region. The length of each of the four phases within the cycle are dependent upon supply and demand which is in turn, driven by the cyclical events that include factors such as population increases, a need for increased housing or commercial space, and so forth. During the Recovery phase, rents are lower, construction is at a standstill and the market is recovering from a fall. This kicks off the next phase of the cycle in an ongoing turn of evens with indefinite timelines. This isn't a seasonal event that occurs. Natural disasters can affect the real estate cycle, as well as economic conditions, and it is even driven by public health events such as the recent coronavirus pandemic that caused mass job loss, a high mortality rate, and a cessation of construction.
The real estate cycle is a peculiar animal that is driven by the conditions of the world around the real estate market. It is sensitive to a myriad of socio-economic factors and each phase is subject to the possibility of dragging on for years, or for changing quickly, depending on the influences of the greater world around. About all we really know with regard to the duration of the cycles is that they are best predicted by the external influences that necessitate changes in the market and stimulate growth and declines in growth.
Written by Allen Lee
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