Tips for Reading and Reacting to the Real Estate Cycle

Real estate operates in a cyclical market, consisting of four key phases: Recovery, Expansion, Hypersupply, and Recession. These phases move in a continuous wave, and investors can thrive in any phase with the right strategies. However, understanding whether a cycle is climbing closer to a market peak, or starting down the slippery slope towards a market low can affect a variety of factors, such as:

1- Pairing investment strategy to the phase

2- Holding periods and exit strategies

3- Return expectations

4- Performance in terms of income and appreciation

5- Timing of capital improvements

Phase 1: Recovery The recovery phase is the market's lowest point, characterized by weak demand, low occupancy, and minimal rental growth. It can be hard to identify, as the market may still feel like a recession. Strategies:

• Opportunistic: Invest in distressed properties early, targeting a 2-4 year holding period, repositioning for sale during the expansion phase.
• Value-Add: With slow lease-up, patience and careful execution are required to realize returns later in the cycle.
• Core: Invest in prime properties with lease rollovers to capitalize on growth in the next phase.

Phase 2: Expansion Demand for space increases, occupancy rises, and rents grow steadily. New construction activity picks up, and the market experiences growth. Strategies:

• Development: New construction or redevelopment is ideal as strong demand stabilizes properties quickly at higher rental rates.
• Core-Plus: Acquire stable properties with high tenant retention and consistent rent growth.
• Value-Add: Buy properties with existing deficiencies at a discount, reposition them, and benefit from strong market absorption.
• Opportunistic: Rare opportunities may remain in distressed properties, potentially offering short-term gains through refinancing or quick sale.

Phase 3: Hypersupply Supply exceeds demand, causing rising vacancies and slower rent growth, though rents may still increase. Strategies:

• Core: Some investors may sell properties anticipating a downturn, while others focus on core assets with high occupancy and long-term leases that can withstand the downturn.
• Opportunistic: Distressed assets may be available at low prices due to panic selling, offering opportunities for strategic acquisition and future performance.

Phase 4: Recession Demand falls below supply, resulting in higher vacancies and slower or negative rent growth. Operators often offer concessions to retain tenants. Strategies:

• Opportunistic: This is the best time to acquire distressed properties at significant discounts, particularly through foreclosures or sales from financially strained sellers. Investors must be patient and hold assets until the recovery phase begins.