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BY: CHARLIE HEWLETT, MANAGING DIRECTOR; LEN BOGORAD, MANAGING DIRECTOR; AND CLARE HEALY, SENIOR ASSOCIATE
Stock markets around the globe seem to have largely shrugged off the effects of last week’s Brexit vote, recovering most of the losses experienced in the immediate aftermath of the “out” vote in Great Britain. However, this event should serve as a stark reminder for everyone involved in the real estate industry that cycles are alive and well, and more than ever, now is the time to make sure that you have a well-defined cycle strategy in place for your real estate investments/assets, your portfolio(s), and your entire enterprise.
According to the Midyear 2016 RCLCO Sentiment Survey, most real estate product types are either firmly planted in, or will soon enter, the “Late Stable” stage of the cycle. Industrial, land, and hospitality have now joined apartments in the Late Stable stage, and respondents predict that most other product types will enter this stage by this time next year. Such sentiment suggests that peak conditions may be in sight for many real estate segments.
As markets shift from the Early Stable stage to the latter portion of the expansionary phase, market participants should begin to shift their strategy to a more defensive posture and be prepared to go on the offensive at the appropriate time.
RCLCO Real Estate Cycle Chart
LAST CALL ALREADY?
We know that different segments and markets have their own cycle timing driven by their unique supply-demand equilibrium. However, capital markets are increasingly national and global, with the effect that otherwise healthy markets or segments can get caught up in a downdraft. For some real estate segments that were late to the recovery, including office, retail, and resort/second home communities, this may mean a relatively short stay on the uphill slope of the expansionary phase of the cycle. These products may not have the chance to truly “peak” before the next cyclical downturn.
Timing Of Early Stable And Late Stable Cycle Stage By Product Type
* RCLCO started tracking product cycle stages in July 2012. Apartments may have already been in the Early Stable stage prior to the July 2012 survey.
STORM CLOUDS ON THE HORIZON?
The majority of respondents to the Midyear RCLCO Sentiment Survey continue to report experiencing current positive economic and real estate market conditions. Even so, the share of respondents predicting looming Early Downturn conditions has spiked. For example, 28% of respondents are now predicting a downturn for the multifamily rental segment sometime over the next 12 months—this is up from 20% from predictions made six months ago, and up from 17% from predictions made this time last year.
Share Of Respondents Predicting Early Downturn
Conditions Over Next 12-Month Period
Rental apartments continue to be on the leading edge of this trend, but hospitality, land, condo, and retail segments have all seen a big increase in Early Downturn projections, with the percentage of respondents predicting a downturn entering the high teens and low 20 percent range for the first time. For-sale residential and hospitality saw the biggest increase in downturn risk assessment, increasing 870 basis points each. Active adult remains the category with the lowest near-term downturn risk at only 5.9%, and industrial actually saw its risk assessment go down 100 basis points to 8.5%.