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“Where are we in the real estate cycle?” This is the No. 1 question I am asked by family offices when it comes to real estate investing. With the proper knowledge about this cycle, family offices can prepare accordingly for what the future holds in real estate.
Historically, the real estate market runs in 18.5-year cycles, and this holds when you examine as far back as 250 years in Australia, the U.S. and the U.K. If you consider that America came out of our last recession in 2012, that should mean that we again see an economic recession around 2029.
Unfortunately, as an industry, we don’t tend to learn from our past mistakes. We went into a recession because there was excess supply from overbuilding. Why? The rates were low, and lenders kept lending to developers who kept building because that is how they make their money, and they didn’t think it would ever end. After all, properties were selling at record highs. Also, lenders had loosened lending guidelines to the point where people started to overleverage (hold too much debt). People traded properties at record highs, and everyone wanted to get into the real estate game. Well, guess what happened then.
We went into recession.
In a recession, we have record inventory. And because of that, rents in multifamily, for example, start to go down in value because there have been so many multifamily properties built, and so many multifamily properties are coming to the market. Class A (luxury) properties start to lower their rents, which affects class B properties’ rent prices. These decreases in rents decrease the value of the properties. Lenders and banks start to see defaults because many of the owners of these new and existing multifamily properties can’t make the payments on their loans because they are overleveraged, and with the decrease in rents, they have problems with cash flow.
The banks start to get very nervous, so they pull back on lending and begin tightening the purse strings. That means developers can’t get loans as they used to, so they stop building. This allows the excess inventory to burn off (which takes a few years), and then as we come out of the recession, real estate starts to pick up. But due to foreclosures and defaults during the recession, banks are very hesitant to lend again and tighten their lending guidelines. Not a lot of product is available in the market, but that is OK because we still have excess inventory that needs to burn off.
Eventually, the excess inventory burns off, and banks are satisfied with getting rid of the bad loans and foreclosures, so they start to loosen up the lending. People begin to recognize real estate is a great asset class again, and development starts to take off again. Can you see where this is going?
For the last five years, I have gone on the record as to where we are in the real estate cycle. I want to share with you where I believe we are in the real estate cycle today.
As we come out of a little downturn (and when I say downturn, I mean slight pullback), the next part of the cycle will start to take off again very soon, and we will experience more significant growth in real estate than we have since 2012. That means we will go into a recession around 2029 or 2030. Because of that, there are three critical things you should take into consideration:
1. Things are about to take off, so don’t sit on the sidelines. In fact, with the little pullback, you may be able to get somewhat of a better price today than if you wait.
2. Look to go into a cash position around the end of 2028, or make sure any investments you have can weather the upcoming storm. Be sure to check your debt levels and occupancy levels, and make sure you can cash flow through the recession. If you do that and you can get through the downturn, it won’t matter if your property value goes to zero as long as you are cash flowing.
3. Be prepared to take advantage of buying excellent properties at a discount when the recession hits. Don’t be afraid, and remember this advice: The time will come, and the opportunity will present itself to create real wealth in real estate.
Just like the circle of life, so is the circle of real estate.