Economic cycles are periods of high and low economic activity, respectively. When economic activity is at its highest, it can have a significant impact on the commercial real estate industry.
During these times, large numbers of wealthy people look to invest in real estate. This makes it more expensive to acquire a property and sells faster, making it more desirable.
When the economy is high, it can be difficult for banks to make loans. Bankruptedcies can also affect the availability of properties for sale and purchase. If you are looking for a new property, you may have to wait until another owner gets out of the property what they need before they loan the property.
This can put a strain on your nerves and create an atmosphere that is not good enough for people to live in but good enough for businesses to ship out their employees.
Commercial real estate cycles
There are two major economic cycles in history: the Industrial Revolution and the Gold Rush. During these periods, there was a rapid growth in population and industry, which continues to influence commercial real estate today.
Today, we know that during industrialization times, there is a increase in sales and purchases of commercial real estate due to increased demand for office space and retail space. This increase in sales can be significant especially when combined with an investment boom due to improved infrastructure such as roads and schools.
The second major cycle is the Gold Rush. During this period of history, there was a large rush for gold. Because of this demand, there was an increase in sales of commercial real estate as offices were required by companies needing legal counsel during the speculation phase.
There are some critical elements that determine what economic cycle a property is in. If you see a trend toward increased spending or increased demand, then properties will go through an expansion or contraction phase.
Impact of economic cycles on CRE lending and sales
During a period of rapid growth, more than anything else, real estate professionals should be aware of their LIMITATIONS as a profession. As you can see from the preceding paragraph, there are times when real estate professionals must rely on others to complete projects for them.
As professional Real Estate Professionals, your ethics and skills are used to generate revenue for yourself and your practice. This can cause you to overvalue your own work and value in others, which can create conflict in the practice.
Overvaluing one’s own abilities can also lead to waste or improper allocation of funds between projects. When this doesn’t happen with outtopics, it creates a ceiling on how much money people make as a profession.
Long-term versus short-term capital flows
Long-term capital flows are usually term loans that have been extended for a period of time.
As the terms of the loan are not changed, the ability to refinance or repay the debt in case of a financial emergency is maintained.
This can be handy if you need money quickly, but have a long plan for paying off the debt in case of emergency. Financial institutions often find this type of debtors difficult to handle, so be aware of your rights as a borrower before needing them.
Short-term capital flows are mainly term loans that have been extended. These debts have been taken out on a short-term basis and then re-obtained on a long-term basis.
Understanding the cycle is important for commercial real estate investors
When a place reaches its peak value, it is often time to move on. This happens frequently when a place reaches a certain market rate of occupancy, but this does not mean that it will always be available.
When places reach their peak value, they may also hit a high price point in comparison to other properties in the area. This makes them more expensive to purchase than if they were vacant commercial real estate.
This can be problematic if the property does not need expensive upgrades and you are looking for an upgrade yourself. If the property needs some changes made, then you will need someone who can do those for you.
When purchasing commercial real estate, it is important to understand the cycle. Knowing what stage of the cycle the property is in can help determine whether or not it is worth investing in.
Commercial real estate investment strategies during a downturn
Most investors make two major decisions about their real estate investments during the pre- Closing Process (CP). The first decision is whether to purchase property as a revenue stream or to purchase property as an investment.
The second is how to manage and scale down your investment strategy as the economy recovers. These two decisions may seem unrelated, but they are very closely tied.
Real estate has been a touchy subject for many due to its ties to business. Some consider it too political and expensive, making it not worthy of serious consideration when the economy improves and costs decrease.
However, there are ways for highly motivated individuals to invest in commercial real estate. While there is no cure for the economic crisis, there are ways for people to respondto current market conditions by investing in commercial real estate.
Diversify your portfolio
As described in the first bullet point, commercial real estate is a sector that experiences strong cyclicality. This makes it important for property owners to be familiar and able to switch between property types and markets to meet their business needs.
When the economy is strong, more investors come into the market to purchase property. Because this market is so popular, it can be difficult to maintain original documentation of properties when it changes.
Because of this, there has been a trend of sellers moving forward with offers while taking steps to clear up any remaining paperwork. This can make it difficult for other parties to work with both parties on their asking price and owner-occupation rate.
As the economy recovers, these cycles reduce or eliminate the need for new owners. By diversifying your portfolio, you will always have quality property at low prices.
Look for value-add opportunities
Adding value to a property doesn’t just improve the value you offer as an investor, it can make a difference in the structure of your loan and the amount you receive in financing. As an investor, you should always look for ways to increase your investment value.
For example, a business owner might add retail space or additional parking to their property to draw in additional customers or members of the public. Likewise, an owner who runs a medical facility might add patient care capabilities like a hospital room or medical equipment to enhance the quality of service they offer.
Value-add opportunities can come in many forms. Some of the most common ones include adding amenities such as sitting areas or recreation areas; constructing an addition onsite or moving forward with existing parking arrangements; and acquiring other business operations like parking facilities or catering services.
When searching for value-add properties, you should look for obvious signs of additions such as new rooms or spaces, but also consider whether these added assets would improve customer service or quality of life for patients.
Prepare a plan for your business during a downturn
During a economic downturn, businesses should have a plan in place for what they will do with the remaining funds in their business. This includes having a plan for obtaining additional funding and/or continuing business operations if your credit is not good enough to obtain financing.
Businesses that operate on a daily basis can easily demonstrate whether or not they need additional storage space or an expanded product line. Having the ability to continue to operate your business without new financing is another part of the plan that must be in place.
It is important to have this plan in place before the economy changes, so that all parties are prepared. If new leaders are needed, they can be called out of office by creditors and new leaders respectively.
Many times, tips like this are included in real estate course materials.