Market Cycles
The Four Phases of the Real Estate Cycle
Understanding where the market stands in its cycle can be a game-changer for investors. Whether you’re eyeing quick flips or thinking long-term, it’s all about positioning yourself to make the most of the growth while keeping your risks in check. Think of the real estate market cycle as your roadmap. Each phase—recovery, expansion, hyper-supply, and recession—comes with its own set of opportunities and challenges. By knowing where the market is in this cycle, you can better spot trends, make smarter investment choices, and steer clear of potential pitfalls.
What are The Four Cycles?
Recovery: This is where the market starts to pick up after a rough patch. Demand begins to climb, but there’s still a shortage of available properties. Occupancy rates begin to rise, and prices start to stabilize. If you’re looking to buy, this is a great time to get in before things really take off.
Expansion: During this phase, the market really starts to grow. More people are looking for properties, and occupancy rates go up. You’ll see new buildings popping up, and prices are on the rise. This is the perfect time to both buy and hold onto your investments.
Hyper-Supply: Sometimes, the good times can lead to a bit too much of a good thing. When there’s too much building going on, we end up with more properties than buyers. This oversupply can cause vacancy rates to rise, and price growth to slow down. As an investor, it’s important to be more careful and selective during this phase.
Recession: Here’s where the market takes a turn. There’s more supply than demand, which causes prices to drop and vacancy rates to go up. However, if you’re willing to look for opportunities, this can be a great time to find distressed properties at a bargain.
Why Cycles Happen?
Real estate cycles don’t just happen randomly. These cycles happen because of several key factors. Interest rates play a big role—when they’re low, more people can afford to buy, which increases demand; higher rates can slow things down. The balance between supply and demand is also crucial—if there are more properties than buyers, prices drop, but if properties are scarce, prices rise. Government policies can influence the market too, with incentives or subsidies either boosting or cooling demand. Demographics like population growth and urbanization drive the need for more housing and commercial spaces. Economic indicators such as GDP growth and employment rates affect how active the market is, and finally, market sentiment—how people feel about the market—can push trends in one direction or another. Understanding these factors helps explain why real estate cycles happen and how they impact investments.
Adapting to Market Cycles
Market cycles are a natural part of real estate and can stretch for years, influenced by various factors. The duration of each phase is unpredictable—just because the last phase lasted seven years doesn’t mean the next one will follow the same timeline. The tactics you use during expansion versus recession in managing or choosing an investment will differ. There are many different types of investors—some prefer to position their investments at the tail end of the recession phase, so their properties are poised for recovery and expansion, while others choose to make investment decisions when the market begins showing signs of recovery or expansion. Each phase—whether it’s recovery, expansion, hyper supply, or recession—presents unique opportunities for growth and profit.
The key is always to find the golden property amidst many options. It’s crucial to weigh both the upsides and downsides. For example, if a property has been recently renovated to command higher rent, but the current demographics don’t support those prices during a hyper-supply phase, it’s wise to reconsider. At Pacific Capital, we rigorously evaluate each property through due diligence, assessing factors like price, demographics, competition, market conditions, the team behind the deal, and negotiation strength—no matter where we are in the market cycle.
For most investors, they prefer the following strategies:
Recovery Phase: During recovery, focus on buying undervalued or distressed properties in prime locations with strong growth potential. Hold onto these investments to capitalize on the upswing as the market improves.
Expansion Phase: In the expansion phase, invest in new or renovated properties that benefit from high demand. It’s also a great time to consider selling properties that have peaked in value, allowing you to reinvest in stronger opportunities elsewhere.
Hyper Supply Phase: As the market enters hyper supply, it’s wise to sell off properties that are vulnerable to declining occupancy rates and rents. Hold onto assets with stable cash flow and be selective with new investments, focusing on those that can withstand the downturn.
Recession Phase: During a recession, hold onto properties with solid fundamentals and look for chances to buy distressed assets at significant discounts. Avoid selling unless absolutely necessary, and position your portfolio for the eventual recovery.
It’s important to remember that while these strategies are practiced by many savvy investors, every investment carries risk regardless of the market cycle. Understanding the cycle helps you position yourself for the best exit strategy depending on your investment strategy. And in every phase, there’s always an opportunity to be found. One of the best ways to mitigate risk is through diversification—spread your investments across different markets and asset classes to safeguard your portfolio.
What Cycle Are We in Right Now in 2024, and What to Expect in 2025?
In an Outlook and research paper published by Colliers, it said: “Generally, the markets with the most development also exhibit strong, long-term demographic trends. As new groundbreakings become scarce and the current development cycle finishes, Jodka forecasts a shortage of new properties entering the market. This shift will enable markets to rebalance, leading to a resurgence in rent growth. “History has shown that investors that acquire assets at or near the bottom of a real estate cycle outperform their peers during their hold periods,” Jodka says. “Investors are able to find deals where the cost of acquisition is below replacement cost. The thesis for a multifamily investment strategy remains sound. The U.S. is under-housed, and that is not going to change anytime soon.”
As of 2024, the real estate market is navigating a complex phase that blends characteristics of both hyper-supply and recession. We’re seeing pockets of oversupply in certain sectors, leading to increased vacancy rates and slowing price growth. However, this environment also presents opportunities for savvy investors. Distressed properties and foreclosures are becoming more common, offering the chance to acquire assets at lower prices with potential for substantial future gains as the market stabilizes. Looking ahead to 2025, the market may gradually transition towards recovery, but it’s crucial to stay cautious.