Real estate investments come with both risks and rewards. When you understand how real estate market cycles work, you can better strategize to maximize returns. When it comes to commercial real estate, knowing the four phases of the CRE cycle may help you prepare to achieve your goals, whether determining the right exit strategy, sacrificing returns in favor of security, or seizing opportunistic investments. Let’s go into detail about the four main phases of the CRE cycle:

1. Recovery

The recovery phase of the CRE cycle begins at the low point of a recession and is characterized by falling demand and prices. There is an excess supply of properties on the market as there is no new construction because it is too expensive. This is a time when construction workers struggle to work because new construction has become stagnant. Unemployment peaks, and bank foreclosures are on the rise.

The recovery phase may seem like dark times. But for the investor, the recovery phase may present opportunities. During this phase, core properties may prove to be profitable, and it can be the best time to buy value-add properties as it’s time they are poised to appreciate significantly. And if you act early enough, you may get distressed properties now being sold at bargain prices and find an opportunistic property that is ripe for development.

2. Expansion

During the expansion phase, the market is on a rebound, and we see a balance in supply and demand in housing. Rental rates and investment properties are at their lowest but begin to increase slowly. We see an increase in job growth. New construction also increases.

Because this is when the demand for built spaces and new construction is on the rise, it’s the ideal time to develop or redevelop properties. Known as the “buyer phase,” the expansion phase of the CRE cycle is generally the best time to buy because prices are expected to heat up as we enter the hyper supply phase.

3. Hyper Supply

Time on the market is at its lowest point as properties sell fast. Property prices and rents are increasing. Job growth and interest rates are now more stable. At the hyper supply phase, demand for real estate may be at its highest point; however, there are more properties for sale than the market demands, causing prices to slowly decrease as we enter the next phase.

As investors recognize the hyper-supply phase as a period in which their property is worth the most, it can be the ideal time to sell and avoid the coming decline in property values. If you’re looking to acquire assets, strategize and look for low-risk opportunities to help you survive the impacts of the imminent recession.

4. Recession

During a recession, business and job growth begin to slow. Prices for materials rise, and new construction becomes expensive. Rental demand plummets. Time on the market begins to increase along with the number of properties on the market. With supply overshadowing demand, prices start to decline.

Investors may consider this phase the best time to consider opportunistic strategies, such as purchasing distressed properties that sell at their lowest.

For more information, or questions on what type of properties and assets are best for investors during each Phase of real estate cycle, please reach out to info@cbi-commercial.com