Real estate follows four definite phases: (1) Recovery; (2) Expansion; (3) Hypersupply; and (4) Recession. In 2008, the real estate market went through the period known as the Great Recession which lasted nearly four years. In 2012, we began the Recovery phase and made the long climb out of recession. The Recovery phase is the bottom of the barrel. Occupancy rates and rental rates are low due to tepid demand.
For the last several years, we have been going through the Expansion phase. During the Expansion phase, the market is on an upswing due to growing demand. In this phase, occupancy rates and rents are on the rise generally due to a strong economy and job growth.
Due to regulatory changes in the banking industry to prevent another recession and changes in the tax code to promote economic growth, the real estate market has been on a prolonged period of expansion. How long this will continue, no one can predict precisely.
This phase following Expansion is known as the Hypersupply phase. It occurs when balance between supply and demand tips into oversupply, caused by overbuilding. Hypersupply is marked by rising vacancy rates. Rent growth may remain positive, but at declining levels. This is happening in some property types where the market seems to be saturated.
As the current real estate market matures, watch for Hypersupply. It can occur in both residential and commercial markets. Residential markets tend to be a leading indicator of commercial markets. If you see a residential market begin to be overbuilt with supply exceeding demand and prices falling, pay close attention to the real estate cycle. It may indicate we are entering the Hypersupply phase where supply outweighs demand.
When Hypersupply begins to occur among many property types causing higher vacancy rates and an overall decline in prices and rents, we may be entering the Recession phase. It is likely that we won’t see another Great Recession over the next several years because regulators have tightened up underwriting requirements to purchase real estate and financial institutions have become more financially sound. Prior to the Recession phase of the real estate cycle, you may want to shift some assets from the stock market to cash so that you can take advantage of bargains that occur in real estate during the Recession phase.