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Commercial Real Estate Corner

Real Estate Cycles & Opportunity

IT'S OPPORTUNITY TIME!

The Summer is over and owners are frustrated! This is the best time to buy Real Estate.

In addition, it was a slow summer and alot of commercial space is still vacant.

Some of the pressing concerns of the day are 1) Pre-election uncertainty 2) Banks' future lending directions and directives 3) Dodd – Frank Regulations 4) Future Capital Gains and Personal Tax Rates.

Real estate cycles may take a few or as many years to build (10 to 18 years), but the “crash” may occur over a short period of time (3 to 5 years).

There are four distinct phases to the commercial real estate cycle:

1.  Expansion.
2.  Contraction.
3.  Recession.
4.  Recovery.

The phases of the real estate cycle are always in the same order; the only variables are the depth and duration of each phase.

THE EXPANSION PHASE (2005-2006)

1.  The economy is rolling – job increases, new construction.
2.  The real estate market is progressing and expanding and equity investors are plentiful.
3.  Financing is readily available and the price of real estate may increase more than seen in previous history.
4.  Vacancies are at their lowest point and there is a general sense of well-being, prosperity and abundance.
5.  Everyone is talking about buying real estate. This is the time to sell.

CONTRACTION STAGE (Hypersupply) 2007-2008

1.  Vacancies are increasing and prices begin to fall from the peaks of the Expansion Phase.
2.  The market has become oversaturated and financing is becoming more difficult or expensive.
3.  Employment slows.
4.  Investors begin to withdraw from the market as vacancy and delinquency rates rise and prices decline.
5.  Buying and selling decisions should be based on need, prime property availability and specific sub-market and individual opportunities.

RECESSION STAGE (Last 5 years)

1.  Properties experience higher vacancies, lower rents and lower net income – property values fall.
2.  Unemployment increases - shrinking the buying pool.
3.  Availability of financing become scarce.
4.  New construction halts.
5.  Owners have difficulty refinancing, selling or leasing.
6.  Foreclosures increase.
7.  Property sellers become motivated.
8.  The end of this stage is the absolute best time to buy.

RECOVERY STAGE – Starting Now

The market levels off (it has bottomed out). The market is improving and prices begin to slowly recover.

1.  Vacancy stabilizes and slightly declines, due to a restart of new construction.
2.  Slow rental growth.
3.  Property owners refinance as affordable financing becomes available.
4.  Owners tend to improve their property and work to maximize rental rates.
5.  This is a very good time to buy.

FOR BUYERS

1. Today we are moving from recession to recovery.
2. It is the best time to buy.
3. Educate your customers about the market cycles and why they should buy now!

FOR SELLERS

1.  We have a long way to go before we reach the next Expansion Cycle.
2.  Values have declined in some parts of the US by as much as 25%-30%; growth will be slow.
3.  Maybe they should sell now, consider a 1031 tax deferred exchange and buy something with a positive cash flow?

For more information, contact George Bakes, Coldwell Banker, 2651 via de La Valle, Del Mar, CA 92014, (858) 602-2799, george.bakes@coldwellbanker.com.

This post is contributed by a community member. The views expressed in this blog are those of the author and do not necessarily reflect those of Patch Media Corporation. Everyone is welcome to submit a post to Patch. If you'd like to post a blog, go here to get started.

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