Real Estate Cycles: The Local Cycle – Part 4 of 4
By analyzing property type and geography, incorrect investment decisions may be avoided.
In this fourth and last edition of a four-part series, we will analyze where we are in the cycle and how you may use this information to make investment choices.
Part 1: The extended financial cycle of commercial real estate that pushes prices.
Part 2: The shorter physical cycle generates rental revenue via vacancy and price fluctuations.
Part 3: There are indicators that a recession is imminent.
Part 4: Where are we inside the local housing market cycle?
In What Phase of The Cycle Are We Currently?
As we discussed in the last section, assuming history repeats itself, we are so far from the conclusion of the financial cycle that it will have minimal effect on your existing investments if it occurs.
The physical cycle, however, is a different matter and is always a danger. So, where do we stand?
This question cannot be answered definitively. The answer depends on the kind of property under consideration. Then, local circumstances further refine the formulation.
Using graphs from Dr. Glenn Mueller, the study below incorporates employment, vacancies, rent, and new supply into its analysis. There are several such charts available from numerous different sources. None of them, in my view, are flawless since they all include substantial guesswork or estimate about matters that nobody can know for sure, such as:
- How long and how high/low will the current cycle last?
- Whether the market can successfully absorb fresh supply
So I always view them with skepticism. Nonetheless, I believe individuals provide vital information to assist me in determining if it is likely wiser to be aggressive, cautious, or somewhere in between.
Condition Of the Nation
Several areas’ office assets were still recovering from the previous slump and performing poorly at year’s end in the first quarter of 2015. And apartments had just reached the tipping point of overheating and hyper supply in several regions. Here is their standing on a national scale:
Keeping Things Local
As previously noted, a national perspective is a fine starting point but insufficient. All real estate ventures are strongly reliant on the local environment. These circumstances may be much better or worse than the national average, which can be advantageous or detrimental to your investment.
For instance, if you examine the graph from the previous section, you will see that the flats are located at step 11. Nationally, this is situated between growth and hyper supply. This is somewhat concerning, but if correct, it is not yet a total red signal.
However, the apartment situation in my hometown of Tampa, Florida, is somewhat different.
During the Great Recession, we were one of the worst cities in the country, but we have since recovered significantly. But today there are too many flats. The graph below (which depicts where 50 cities are in the apartment cycle) reveals that Tampa is on the fourteenth possibly hazardous phase.
As additional apartments are erected in Tampa, occupancy rates and rentals might be threatened. Perhaps demand will exceed supply, and everything will be OK. If so, the cycle may reverse, which would be desirable. However, there are no guarantees; nothing is guaranteed. So this may be a time for a conservative investor to be extra careful with Tampa apartment investments (especially downtown where new supply is high).
How to Get the Information
This can only be determined by examining the surrounding area. There are several sources for this information; it is wise to investigate more than one to verify your preferred origin.
Summary
Understanding the various real estate cycles is essential for avoiding unprofitable investments. After confirming that the time of the cycles is appropriate for the property type and location, you may move on to other concerns such as strategy.
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