Commercial real estate cycle

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Can anyone give some insight into the commercial real estate cycle? Are we in the peak of the cycle? The record highs in the market seem un-sustainable and we are approaching the 8-10 year period where hypothetically we could see a correction on the market. I'm a new investor and want to learn as much as I can.

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It Depends, that is the crazy thing about markets. You can be a genius yet can only give an educated guess about what the market will do. Crazy thing is your neighborhood is one market, which is different from the market in the neighborhood 50 miles away, which is different from the state economy, and the national economy.

Best way I say start is look at your area that you want to get into, while reading a bunch of political/business/economic articles about national/state news. If they area you are looking at might be an area where a huge multinational corporation, that has very good financial health, is opening up an office, you might want to consider several apartments in that area. If the neighborhood is lacking a bar/beagle/coffee place, consider buying property that would fit that type and lease it out to someone wanting to start a bar/beagle/coffee place.

I am a beginner as well in terms of real estate but I have a couple years experience following various markets and making my own expectations and following up on them. Follow what other Real estate pros are telling you but deff look into buying general economic history books as well as getting a subscription to WSJ, Money Magazine and such.

Mike G.

Originally posted by @Douglas Dowell :

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This is matching up to what I have been doing.  Moving out of apartments and into retail in Phoenix.  A lot of money has actively been seeking retail now as well.  I am revising my plan again at this time.  This document is very helpful.

Great question @Bok O. Was talking about that just last month in a Multifamily Executive piece Cap Rate Limbo: How Low Can They Go?. At least on the coasts and across the sunbelt (the 'smile' markets, visualizing them on a map) multifamily seems to be nearing the peak if not there in some markets but... I believe there are forces at play that will stretch or extend the peak. See my post here for the chart and details: The Multifamily Market Cycle Peak Is Here, It’s Just Not Evenly Distributed Yet

@Douglas Dowell I too am a believer in Glenn Mueller's methodology but not a fan of his Cycle Monitor reports because they are based on where he thinks markets should be in their cycle rather than where his published methods would indicate they actually are. I started noticing back in 2012 that his reports and what was going on in certain markets was diverging and earlier this year published two posts on my research: Widely Followed Apartment Market Cycle Research Misses Widely and 3 Things I Learned Charting Multifamily & CRE Market Cycles

For different ways to visualize the market cycle have a look at the charts here: Market Cycle Charts with a little more detail

Good hunting-

@Bok O. Warren Buffett famously has stated don't look at the market because you can't predict it. No one can, not even himself. what he does is look for "undervalued" deals. Take the same approach in multifamily and real estate investing. Before the crash in 1970s he wrote a letter to his shareholders explaining why they were selling off their investments because everything had inflated too much and there were no undervalued stocks. Switch to real estate, how easy is it to find a multifamily building at a 10 cap? Or even an 8? I can find any deal I want for a 5 or 6 cap but that's not a very good investment for most people. I had a guy the other day wanting to sell his apartment complex at a 4 cap. You just have to have strict criteria, be a disciplined investor and stick to it, don't follow the herd just because you want a deal

There is no question cap rates are at an all-time low. Multifamily investing is expensive in terms of return. There is very little because the market perceives risk to be low. To understand the market, look at where we are at now and look at what the future holds. Everyone kept saying multifamily cap rates would rise in 2011 and then in 2012 and then in 2013 and then in 2014. They have all been wrong. You can't predict the market, but can make educated guesses.

Here are my two cents, each asset has a different demand generator for it. Multifamily is seeing demand due to renters not being able to qualify for mortgages. Housing prices are also skyrocketing, which means they are not able to even look at home buying yet. However, when the trend switches, and believe the trend will switch at some point, the renters will start buying homes again vacating these multifamily buildings. Over the last couple years, developers have went in headfirst with apartment development. Some cities have seen unit growth of 30%-50%. Eventually occupancy will fall when renters start buying. I don't know when this will be, but it will happen. It could be 3 years from now, it could be 10 years, but it will happen. Its tough for people who have liquidity and need to place it somewhere, but don't ever doubt your investment criteria and stick to your guns. Those that do will survive, those that do will get burnt.

Having been through a number of cycles during my career I believe we still have a couple of years left. Since we are in a number of different states throughout the country we see the market starting to move to new construction due to a lack of supply of product. It has been my experience that this trend starts to initiate the change of a cycle and if interest rates move up the construction will slow. I do think we can build an adequate supply of inventory before rates move. We will also be affected by the loan maturities coming due in the next few years and that will trigger more involvement from the banks.

I can tell you that the senior housing trend is exploding in commercial real estate.  There is a baby-boomer turning 67 years old every 10 seconds for the next 10 years or so.  I worked a deal with a guy who has 45 years in the commercial lending field and he says he's never seen it this busy.  I think (and hope) the commercial real estate market will continue to grow rapidly for a good while. 

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