06/02/2024

TECHNICAL UNIVERSITY OF KENYA

SCHOOL OF SURVEYING AND SPATIAL SCIENCE

DEPARTMENT OF GEOINFORMATION AND EARTH OBSERVATION

BACHELOR OF ENGINEERING (GEOSPATIAL ENGINEERING)

EEGQ 5174: REAL ESTATE ECONOMICS

LESSON 4
Mr. Linus K. Korir
[email protected]

THE BUSINESS PROPERTY CYCLE

• As a real estate investor, it’s essential that you keep a pulse on the real
estate cycle, both on macroeconomic and microeconomic scales, and
know where we are in said cycle.
• The housing market cycle is closely tied to the general economy. Still,
one can’t assume that the housing market is doing well just because
the general economy is doing well or that the commercial property
market has remained strong.
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What is the Business Property Cycle?

• The real estate cycle is a four-phase series that reports on the status of both
commercial and residential real estate markets.
• The four phases are recovery, expansion, hyper supply, and recession.
• The origin of the term dates back almost one hundred years, as analysts first
began to study trends within the housing market.
• This cycle can be used by a variety of real estate professionals to predict the
right time to buy, hold, or sell.
• Investors commonly use the real estate cycle, but agents, buyers, renters,
and others throughout the industry may find it helpful as well.

Importance of the Business Property Cycle

• The real estate cycle can provide reliable information about the possible
returns of an investment property.
• As an investor, you should determine if your property is in the recovery,
expansion, hyper-supply, or recession phase of the real estate cycle.
• Doing so will allow you to make a more accurate assumption for the length
of time the property must be held and the proper exit strategy to take.
• Additionally, the real estate cycle can predict the income and appreciation
performance of an investment property. This will allow you to better decide
when to make capital improvements.
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The Four Phases of the Business Property Cycle

• The real estate cycle comprises four main phases: recovery,

expansion, hyper supply, and recession.
• This implies that historically, there has never been a sustained
expansion or hyper-supply period without an eventual recession,
followed by recovery.

Recovery

• Identifying the recovery phase of the cycle can be tricky, as most of the nation will
still be feeling the effects of a recession and have a bleak outlook.
• Rental growth will remain stagnant, with no signs of new construction.
• However, this is where real estate investors must keep a close watch and act
quickly at any signs of recovery. This is a great time to pounce on below-market
value properties that are in various states of financial or physical distress.
• One can wait out the rest of the recovery period by adding value to these
properties so that they are ready to sell or rent outright as the economy shifts into
the expansion phase. Timing is the key.
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Expansion

• The general economy is improving, job growth is strong, and there is an

increased demand for space and housing.
• The expansion phase is when the general public will start regaining their
confidence in the economy.
• Thus, the real estate market and individual renters and homebuyers will start
generating demand once again.
• While the market is on an upswing, it’s advantageous to invest your efforts
into developing or redeveloping properties that cater to the current market’s
tastes and sell for more than market value.

Hyper Supply

• Investors and developers get into a frenzy during the expansion phase to ensure
that supply meets a growing demand. Inevitably, there will come a tipping point at
which supply begins to exceed demand — either from too much inventory on the
market or because of a sudden shift in the economy through which demand pulls
back.
• As an investor, this is a time to hold strong. Property owners will often liquidate
their inventory out of fear that their properties will go vacant or unsold.
• This is a great time to take an opportunistic approach; identify properties that you
feel confident will perform well in the next real estate cycle.
• This is a great time to enlist the buy and hold strategy so that you have promising
properties already in stock when it becomes an ideal time to sell again.
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Recession

• The recession phase is one we’re unfortunately all too familiar with. The great
financial crisis of the early 2000s, followed by a sustained recession, left the entire
global population reeling for many years.
• During the recession phase, supply exceeds demand by a wide margin, and
property owners suffer from high vacancy rates. Also, not only is rent growth not
present, some landlords are forced to offer reduced rental rates to attract renters
who are also suffering from the economic downturn.
• A recession provides the opportunity to purchase distressed properties at a deep
discount. There will be an increase in real-estate owned properties, which are
properties that have been foreclosed upon and repossessed by lenders.

Factors Affecting the Real Estate Market Cycles

• Several factors affect the real estate cycle, so much so that it’s nearly impossible to
provide a concrete list. However, the following factors are some of the main contributors:

 Demographics: The makeup of the population, and major shifts in this population
makeup, can drive a market significantly. For example, the baby boomer generation’s
retirement is expected to cause major shifts in the housing market, as many choose to
downsize or move to vacation areas.

 Interest rates: Interest rates greatly influence potential homebuyers’ buying power.
When interest rates are high, it could serve as a deterrent for many would-be buyers from
buying. Conversely, when interest rates are low, it could encourage a spurt in home
buying activity, as the long-term cost of financing a home is cheaper.
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 General economy: The overall health of the economy is also a heavy-hitter when it
comes to predicting the housing market cycle. Generally, when the economy is doing
well or is in an upward trend, consumers feel more encouraged to buy residential real
estate. They feel that their personal wealth will improve while placing a bet that their
property’s value would continue to increase. Generally, if the general economy is doing
well, the real estate market is also doing well. If the economy is sluggish, the real estate
market also tends to follow suit.
 Government policies: The government will occasionally intervene with policies to help
boost a market that is particularly sluggish or in a prolonged recession. Policymakers
have the ability to implement tax deductions, subsidies, tax credits, and different
homebuyer programs to incentivize consumers to purchase real estate. These types of
governance mechanisms can greatly influence the housing market cycle.
 Consumer confidence: Consumer confidence is simply the outlook consumers have of
the economy, both in real-time and for the future. Investment deals and spending will be
higher when consumer confidence is high, and it will be lower when consumer
confidence is low.

The Economic Cycle

• The economic / business cycle also has four phases, and the length of each phase
can be drastically different. Calculating and predicting the economic cycle can be
difficult due to seasonal changes, short and long-term trends, and other
uncertainties within the economy.
• The four stages of the economic cycle are:
1. Peak
2. Recession
3. Trough
4. Expansion
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How Long is the Average Real Estate Cycle?

• Researchers have found that the average real estate cycle spans 18
years.
• However, the word “average” in this case is loose – real estate cycles
are unpredictable, and some can last much longer than others.

How To Invest Based on the Real Estate Cycle

• The real estate cycle does correlate with certain investment trends. That being said, there
is no rulebook saying which strategy you have to follow (or noting exactly which strategy
we are in, for that matter).
• Here are some common investment types based on the real estate cycle to consider:
 Recovery: Wholesale, rehabilitation, buy and hold, multifamily investments, private
money lending
 Expansion: Buy and hold, multifamily and commercial acquisitions
 Hyper supply: Buy and hold
 Recession: Private and hard money lending, investing in foreclosures and bank-owned
homes
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Summary

• The real estate cycle is a concept that any real estate investor must
understand if they strive for long-term success.
• All four phases of the cycle – recovery, expansion, hyper supply, and
recession – cause the real estate market to shift significantly, so
investors must stay on top of their toes if they hope to find
opportunities in each.