Avenue Realty has experienced many cycles in our 15 years as a real estate agency.
The real estate cycle comprises four main phases: recovery, expansion, hyper supply, and recession. This implies that historically, there has never been a sustained expansion or hyper-supply period without an eventual recession, followed by recovery. This may induce some anxiety for you as a real estate investor, but do not fear! The great news here is that investment strategies make it possible to invest successfully across these cycles.
1. Recovery
Identifying the recovery phase of the cycle can be tricky, as most of the nation will still be feeling the effects of a recession and have a bleak outlook. Rental growth will remain stagnant, with no signs of new construction. But this is where real estate investors must keep a close watch and act quickly at any signs of recovery. This is a great time to pounce on below-market value properties that are in various states of financial or physical distress. You can wait out the rest of the recovery period by adding value to these properties so that they are ready to sell or rent outright as the economy shifts into the expansion phase. Timing is the key.
2. Expansion
The general economy is improving, job growth is strong, and there is an increased demand for space and housing. The expansion phase is when the general public will start regaining their confidence in the economy. Thus, the real estate market and individual renters and homebuyers will start generating demand once again. While the market is on an upswing, it’s advantageous to invest your efforts into developing or redeveloping properties that cater to the current market’s tastes and sell for more than market value.
3. Hyper Supply
Investors and developers get into a frenzy during the expansion phase to ensure that supply meets a growing demand. Inevitably, there will come a tipping point at which supply begins to exceed demand — either from too much inventory on the market or because of a sudden shift in the economy through which demand pulls back. As an investor, this is a time to hold strong. Property owners will often liquidate their inventory out of fear that their properties will go vacant or unsold. This is a great time to take an opportunistic approach; identify properties that you feel confident will perform well in the next real estate cycle. This is a great time to enlist the buy and hold strategy so that you have promising properties already in stock when it becomes an ideal time to sell again.
4. Recession
The recession phase is one we’re unfortunately all too familiar with. The great financial crisis of the early 2000s, followed by a sustained recession, left the entire nation reeling for many years. During the recession phase, supply exceeds demand by a wide margin, and property owners suffer from high vacancy rates. Also, not only is rent growth not present, but some landlords are forced to offer reduced rental rates to attract renters who are also suffering from the economic downturn. As an investor, it’s a great idea to save up a rainy-day fund for the next recession – this is not the time to sit back and feel sorry about the economy’s state.
A recession provides the opportunity to purchase distressed properties at a deep discount. There will be an increase in real estate-owned properties, which are properties that have been foreclosed upon and repossessed by lenders. This is your opportunity to buy great properties with great savings. You can hold these properties (or add value if you see fit) so that they are ready to hit the market just as the economy begins to recover.
Contact Avenue Realty today to learn more about our current cycle and your specific market!
