How Do Market Cycles Influence Commercial Property Value?

Commercial Real Estate Markets have predictable Cycles that can be divided into four parts or phases: Recovery, Expansion, Hyper-supply and Recession. We are in Recession as of this writing, for better or worse, and is a direct result of the availability of employment, your local market, asset class, and the financing structure of the property.

Employment is a major accelerator of the Market Cycle. Rapid changes in available jobs can drive rapid changes in Market Cycle. Employment drives population growth which drives demand for all Commercial Real Estate Asset Types.

The Market Cycle is an unchangeable aspect of ALL Real Estate Markets. The Four Phases follow – one after the other in the above order and will continue to do so over and over, Ad Infinitum. It is important to note that Commercial Property asset classes do not cycle at the same time, because job growth is subject to change.

Rent pricing is a direct function of the market’s position in the real estate market cycle as expressed by market occupancy.

Commercial property value is based on the net operating income produced by the property.

Rental growth is a function of occupancy of the property and is compared to the Long Term Occupancy Average (LTOA). Rental growth rates will be higher than inflation when market occupancy is above the LTOA for any given location.

In the Recession Phase rental growth rates should be below inflation levels and continue to be negative as the lowest point of the cycle is reached. This is a good time to purchase is you have cash and/or the ability to finance a purchase. It is just a matter of time before the Market cycles back to Recovery and High Yield Return on Investment.

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