Understanding the Multifamily Market Cycle is critical to success. Markets follow a cyclical pattern similar to the economic cycle. There is a continuous expansion and contraction of the economy and a continuous expansion and contraction of single markets. Each market should be evaluated to identify where in the cycle it is.
There are four phases to the multifamily market cycle. An operator should be performing in a market in the recovery or expansion phase (if it's a short-term hold). These phases are focused on growth. The hypersupply and recession phases are slowdowns and inhibit growth. Let's take a look at specific characteristics
Recovery
Decreasing vacancy rates
Low new construction
Moderate absorption
Low/ moderate employment growth
The recovery phase is a good time to buy as things are just beginning to heat up. The recovery stage is the longest stage in the cycle. Here is how to buy at the bottom, however, timing at this stage of the cycle is unpredictable, and waiting on the next phase for prices to go up could take much longer than expected.
Expansion
Decreasing vacancy rates
Moderate/high new construction
High absorption
Moderate/high employment growth
Moderate/high rental growth.
The expansion phase is the best time to buy. This is when there is the shortest time until prices begin to rise. Buying during the expansion phase is not buying at the true bottom, but it is less risky than buying in the recovery phase which could last many years.
Hypersupply
Increasing vacancy rates
Moderate/high new construction
Low absorption
Low/ negative employment growth
Low/ negative rental rate growth
The hypersupply phase is the worst time to purchase. This phase is when investors are getting the highest offers for their properties. There are always deals to be found in any market cycle, but this cycle is the one to be most weary of. It's likely to find a wolf in sheep clothing.
Recession
Increasing vacancy rates
Moderate/low new construction
Low absorption
Low/ negative employment growth
Low/negative rental rate growth
Negative/low rental rate growth
The recession phase is when things begin to come down. This phase is when rent prices are strangled, business and job growth slows, and there is an excessive amount of construction being completed. Supply comes back strong and time on the market increases.
Most researchers believe that real estate cycles last anywhere from 10-18 years. Many believe it’s a 7-year cycle. It’s very hard to predict, and some cycles can last much longer than others. There are certain factors that can make these cycles much shorter, while other factors can make them longer. It’s interesting to note that the current cycle that we are in is the longest cycle in the past 60 years.
Absorption: the amount of space or units occupied within a market over a given period of time, typically one year. Absorption considers both construction of new space and removal of existing space and/or units. In general, absorption represents the demand for a type of real estate contrasted with supply. When demand is less than supply, vacancy increases and absorption is negative.
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