Explore the Real Estate Cycle: 4 Phases of the Real Estate Cycle

The real estate cycle is a four-phase wave pattern through which commercial real estate and housing markets move. The four phases of the real estate cycle are recovery, expansion, hyper supply, and recession. Understanding the real estate cycle can help you predict upcoming trends and make informed decisions about your investments, whether you’re a home buyer, renter, home seller, landlord, real estate agent, or real estate investor.

The real estate market cycle follows a four-phase process:

1. 1. Recovery: While the recovery phase is often listed as the first phase, the real estate cycle is circular, meaning that the recovery phase occurs after the recession phase. In the recovery phase, the real estate market begins at a low point from the recession phase—occupancy and rental rates are low, and new construction slows—and gradually rises in strength. If there is any rental growth, it occurs below the rate of inflation. For individual homeowners or renters, the recovery phase can be challenging to differentiate from the recession phase because the market will look much the same; experts look at trends like gradual occupancy increases or growing demand to identify when the recovery stage has begun. The recovery phase is a popular time for real estate investment and speculation since prices of properties are low (especially for distressed properties that need renovations), so the potential eventual return on investment from operation or resale is high.
2. 2. Expansion: In the expansion phase, the real estate market is completely recovered from the recession phase and is very strong. When the real estate market expands, vacancy is low, rent rates are high (and rising), property values are high, and new construction is typical to see. The expansion phase is a standard time for real estate investors to buy new rental properties or renovate old buildings since the demand is high and new tenants are usually easy to find.
3. 3. Hyper supply: In the hyper supply phase (or oversupply phase), the supply will finally catch up and exceed high demand as previously started construction projects continue to wrap up. Vacancies will rise, and rent growth will slow. During this phase, some real estate investors will buy properties from companies that are nervous about the impending recession and eager to sell at a more attractive price. These investors will then wait until the expansion phase to sell (often called the buy and hold approach). Another common investment strategy is to invest in a tenant building that’s at capacity and has long-term leases in place since it will continue to bring in a steady cash flow during the coming recession.
4. 4. Recession: In the recession phase, supply has over-exceeded demand, and demand plummets—causing high vacancy rates and negative rent growth (or rent growth below the rate of inflation). Some opportunistic investors will look for accessible investment opportunities during this phase since properties will be at rock-bottom pricing (especially foreclosures). They then wait until the real estate cycle circles back, and the downturn is over—as the market begins to recover and eventually expand.

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