Where are we in the latest real estate cycle | Msucatalyst.com Where ...

Where are we within the latest real estate cycle

Using the current economic expansion moving ahead in 2005, the key issue for real estate is: will the normal relationships between overall business activities, interest in space, increasing demands for money, and rising levels of property development prevail as in past cycles

Or will be unusual curt flood of capital into real property markets cause different cyclical outcomes

In the normal business cycle, because the economy moves out of recession into expansion, growing levels of business activity raise demand for both money and commercial space. These increases put upward pressure on rates of interest and occupancy levels in commercial space. Rising rates of interest, plus current high vacancy rates minimizing rental rates, continue to inhibit new commercial property construction. Also, investors are drawn from real estate investments into competing asset forms for example stocks of successful companies.

These conditions produce only gradual absorption. Vacancies are falling and rates are stable or rising, but neither holding far enough to justify a brand new development, especially since interest rates rise as well as other competing investments.

With the accelerating general expansion, increased competition for existing space drives vacancies lower and rates higher. Eventually, these changes stimulate developers to start a new construction projects, in spite of higher interest rates. This starts the expansion phase of the cycle. New projects start just as the overall business cycle peaks. Then with the growth of available space, combined with a fiscal slowdown, the result is another overbuilt phase just as the economy slips back into a recession.

Presently most commercial finance industry is in the gradual absorption phase, rich in amounts of vacancies declining and rents stabilizing. Downtown office vacancy rates have dropped slightly while national industrial vacancy rates remain unchanged. However, bold office and industrial vacancies are more than double the lower rates they?d at the end of 2000.

Consequently, new office construction dropped off. New industrial development also fell on. However, the demand to purchase well-occupied properties of all types remain high due to the flood of cash starting real property investment.

Most experts predict this case cannot last. Some claim rapidly rising interest rates can make a real estate less attractive to invest in and cause some values to fall. Others think with so much cash still trying to invest in real estate that rising rates of interest will not dampen investor enthusiasm.

Still others believe that the demand for property will not fall off unless the stock exchange makes dramatic increases. Enough uncertainty remains about world economic conditions to inhibit investor enthusiasm to get back to stocks. In addition, underlying market conditions are slowly improving, supporting positive investor attitudes toward property.

The flood of money has not stimulated an enormous move into new property development which previously would have happened if funds were available so easily. Also, the ability of real estate to pay cash incomes which are higher than most stocks or bonds make property increasingly appealing to pension funds that are facing rising payouts and retiring baby boomers in need of good incomes.

Therefore, there may not be a not too distant future call apps of real property values except in some condominium housing markets were speculative purchasing could lead to sudden shrinkage of occupancy. Todays huge investor appetite for properties get this to a perfect time to sell property. But these conditions will not last forever.

Interest rates will certainly increase in the near future with the Federal Reserves need to raise rates coupled with a growing expansion in the financial system. If current favorable borrowing conditions continue, more developers is going to be tempted to start building new projects that lead to a different boom. That would undermine improving market conditions, because it has previously, and may dampen investor interest in properties.

The moral: once the sun is shining, you better make hay.

Good luck to you,

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Source: http://www.msucatalyst.com/2011/09/where-are-we-in-the-latest-real-estate-cycle/

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