Can You Profit?
The cycle always works this way, in clockwise order—never counterclockwise. However, it’s different for each product. Perhaps the cycle for Class B office buildings may be different from the regular cycle. Just because you are in a slow period in the residential marketplace, this does not necessarily mean that Class B office buildings are slow.
If you have high growth residentially in any particular area due to heavy migration to the area, new industry may be coming in, causing the area to grow. Ultimately, this has some impact on the retail marketplace. Of course, this affects the small office industry, but that doesn’t always have an equivalent impact at the same time—cycles can be different. Also, cycles could be three or four years long or even ten to twelve years. Unfortunately, no one can tell you how long a cycle is going to be. But knowing the real estate cycles can help you plan accordingly.
Although there are some signals that may alert you to when a cycle is moving into its next phase, it could be different for different prices or different products, and have variable timing. But, in a Buy Low scenario, you are dealing with a high vacancy situation when there is actual high vacancy.
So, how does that affect the people who own an older building? Their vacancy rate increases even more in a period of high vacancy and perhaps they finally give up and say, “We’re done. We made our money in this building and we want to retire. We don’t want the hassles anymore.”
These are the kind of people who might be in position to sell at a reduced price. So, you are in a position where you can make maybe some excellent deals in a high vacancy area, where every property calls out — Buy Low.
There is little or no construction activity going on at this point in time, because there’s too much inventory on the market. Therefore, the supply that’s out there is being eaten up. As this occurs, you get into a situation where the vacancy goes from high vacancy to low vacancy.
Next, rents go up. As rents begin to increase, the value of property increases, because the value of property is a function of the income that the property produces. Now you are in what is called Sell High. This is when you can usually maximize profit on a property because the escalating rents are rapidly increasing in value, in the residential section as well. Usually, residential and the apartment cycles are reasonably close together.
When you get into the Sell High part of the real estate cycle, with values going up, construction restarts. However, one of the problems in this industry is that there are no construction monitors. Who can tell them to stop? Overbuilding commences because everybody wants to get into the game and that drives rent concessions. Signs start popping up again in the area on every major apartment complex —”Two Months Free or No Move-In Costs.”
Some serious competition is vying for the market of available tenants, so they start advertising incentives. Many of these landlords will try reducing rents to entice tenants.
Tip: Never reduce your rent!
By knowing the real estate cycles you can profit in any market!