Bob - Walt, the real estate cycle? Can you explain that a little and in general where are we in the current commercial real estate cycle?
Walt - Good morning Bob, the real estate cycle consists of four stages: recession, recovery, expansion and oversupply.
In the recession phase, sales activity slows, rents and prices continue to decline and there is virtually no new construction. Eventually the rate of decline begins to decrease and bottoms out, which leads to the next stage.
Recovery, in recovery the market shows signs of stabilization, pricing begins to recover, excess space begins to be absorbed and eventually the vacancy rate begins to approach equilibrium were supply equals demand.
Bob - Walt, are we even close to getting out of the recovery phase? I know we’ve had discussions about supply and demand; supply is still strong and demand weak, correct?
Walt - Yes, I believe we have a ways to go before supply equals demand, but if things start to turn in this economy, recovery could happen quickly, since we still have virtually no new construction at this time.
So, I will be brief on the last two stages. The third stage is expansion.
In expansion we see a tightening market, rising prices, strong employment, and maybe some changing business dynamics and this all leads to the fourth stage, which is oversupply.
In oversupply, the market becomes overbuilt, prices begin to drop, vacancies begin to rise, and new construction continues because projects are set in motion and difficult to stop. In the oversupply phase, builders and lenders may not perceive that the market is saturated and capital is continued to flow into new buildings, thereby increasing the oversupply of real estate product in the market.
So there’s the Cliff Notes version for the real estate cycle of recession, recovery, expansion, and oversupply.
Bob - Walt is there any data on how long these cycles last?
Walt - There are many theories out there about the real estate cycle, but one that you can read about is, “The great 18 year real estate cycle”, by Homer Hoyt and later refined by Fred Foldvary.
Their 18 year cycle would put the next peak around 2025 and that gives us another 13 years before the bubble to take advantage during the down part of real estate cycle.
Bob, here’s a good plan for retirement, buy as much property as you can right now, ride out the next 10 years enjoying your cash flow, and then sell when the market starts to peak in the mid-2020s. Sure beats working till you are 80!
Bob - How can people contact you to discuss commercial real estate?
Walt - Thanks Bob call me, Walt Arnold, Sperry Van Ness, at 256-1255, website Walt Arnold.com. You have any questions regarding commercial real estate, let’s talk. Thanks Bob have a great week!