If you’re new to commercial real estate, or investing in real estate period, you may not be aware that there are four market phases that you need to get to know quite well. Fortunately, they aren’t difficult to understand, but they play a tremendous role in what’s hot, what’s not, and what type of real estate is successful at what time. Many new business owners or investors may not take the market phases into consideration, but you’ll find you will understand the market and make sound business decisions when you do.
4 Market Phases You Must Know For Real Estate Investing in 2020
Recovery, or Phase One, is when there is no new construction happening and declining vacancy. It can be difficult to secure a business loan when the market is in this phase, but this is a phase that most areas of the country are not in, or emerging from. Many new investors are afraid to invest during this phase, but with a good financial planner and some good demographic data and study, you could potentially do very well during this phase.
Expansion, or Phase Two, is where many markets hover – one of them being multi-family units, and there’s no real sign of that ending because the United States has become a nation of renters, particularly in some locales. This is again where you need to pay special attention to demographics and know a little something about how generational attitudes affect the real estate market. Baby boomers and Millennials are more likely to rent than Generation Xers, who are more likely to buy a home. Get to know your area’s demographic as well as you know a family member. If you’re in an area of many Baby Boomers (Florida in general may fit here), multi-family unit investment may be a great business venture.
Hyper-Supply, or Phase 3, is generally happening vacancies abound, but new construction continues. This is generally not a great time to buy or build commercial property. Take a careful look at your locale at understand that a failing economy can have a tremendous hand in keeping a market at this level. Understand that just because the economy is doing better on a national scale may not mean the local economy is. Did a major supplier of jobs just shut down in your area, such as a large factory? If so, you may see the local market quickly fade into Hyper-Supply, no matter where it was before.
Recession, or Phase 4, means there’s not a great cash flow and it’s going to hit the real estate market hard. Properties can lose value, vacancy rates are increasing, new construction comes to a halt, and Wall Street may not be doing very well. True national recessions happen rarely, but local recessions are common to areas at different times for different reasons. It’s still possible to invest during his market phase, but it usually takes someone with quite a bit of experience to navigate it efficiently, and you must know the particular market you’re dealing with.
This is a very brief synopsis of introductory to market phases, but investors should understand that they exist and are important. They are definitely worth studying and understanding if you want to do well with investing in commercial real estate.
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