While we have all heard that the first rule in real estate is “location, location, location,” I also believe that it is just as important to consider “timing, timing, timing.” Market cycles should always be considered because timing can mean the difference between making and losing millions.
The best case scenario for industrial real estate is to understand and use market condition awareness in your favor by understanding where we currently are in the market cycle, and how that will potentially affect the outcome of a transaction.
To help decode the process for you, I have summarized the most common characteristics of the four distinct phases of the commercial real estate cycle: Recovery, Expansion, Hypersupply and Recession.
In The Recovery Phase, the market is improving and prices and rents begin to increase. More tenants enter the market and property owners refinance as affordable loan rates become available. This is a good time to buy because there are bargains and demand for space is increasing. New construction is generally limited to build-to-suit, with little to no spec development.
During the Expansion Phase, the market is improving and investors are plentiful. Financing is readily available and the price of real estate may increase more than seen in previous history. Vacancies move towards their lowest point and there is a general sense of well-being, prosperity, and abundance. This is the best time to sell and the worst time to lease.
The Hypersupply Phase is when vacancies are increasing and prices begin to fall. The market has become oversaturated and financing is again becoming less available and more expensive. Investors begin to withdraw and foreclosures begin to increase. These are generally uncertain times and buying, selling, or leasing decisions should be based on specific business needs, unique prime property availability, and individual opportunities.
During this period, the availability of affordable financing dries up and property prices bottom out. Properties experience higher vacancy rates and owners are challenged to sell, lease, and finance their properties. Indications that the market is moving out of recession can signal a good time to buy. Property prices fall well below replacement cost creating opportunities for investors to capitalize on bargains. This is one of the best times to lease a property.
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