The current real estate cycle Featured

8:00pm EDT October 25, 2006
The amount of information available to real estate market analysts grows exponentially every year. Just a decade ago, the most current numbers used to predict how the market might perform were already two or three years old.

Now armed with an abundance of timely data, the real estate industry can better tell us where we are, where we’ve been and where we’re going. These statistics are the basis for real estate cycles that affect both residential and commercial markets.

“If investors know the market is going down, they tend to become more conservative, and if they know it’s going up, they likely will become more aggressive,” says John Stone of Colliers Arnold. “And if they don’t know what’s taking place in the market, they tend to sit on the sidelines.”

Smart Business talked to Stone about the current real estate cycle and how history will show buyers and sellers where the market may be headed.

What is the basic methodology of a real estate cycle?
Whether we like it or not, history tends to repeat itself in some fashion every time the market heats up, ultimately reaches a peak, cools off, settles down, and then starts all over again. The only questions are when, how much, and for how long.

What sector is leading the way into the next cycle?
Historically, the residential market — single and multi-family — has led the way into and out of most real estate cycles, and this cycle appears to be holding true to history. The office, retail and industrial markets tend to follow suit 6 to 18 months later.

Where are we in the current cycle?
According to our research, existing home sales in Florida hit its peak in June 2005 with 25,552 sales, as reported by the Florida Association of Realtors. The category has been declining ever since, with June 2006 sales of 18,089 — a decline of 29 percent. Sales of multi-family investments in Florida hit its peak in October 2005 with a record $800 million in sales, according to Real Capital Analytic. Since then, sales have declined by 35 percent, with June 2006 producing a volume of $520 million.

What forces are driving the current real estate cycle?
Every cycle has its own personality, and this one is no different. Rising interest rates routinely prove to be one of the strongest influencing factors, especially when paired with negative consumer-confidence levels that ultimately affect all sectors. This cycle appears to be following a similar course with interest rates starting to climb and 30-year mortgage rates up 60 basis points since the middle of 2005. However, rates are still at historic lows, comparatively speaking.

The rising interest rates, coupled with record high oil prices and two horrific hurricane seasons, have eroded consumer confidence, setting the stage for this phase of the cycle.

How will insurance rates influence the next cycle?
There is no question that the ongoing insurance crisis is having a chilling affect on all aspects of business, including real estate. Most in the industry agree that it will influence real estate values going forward, but no one knows how much. The insurance crisis may prove to be the single biggest challenge ever faced by our general population, regardless of a person’s level of interest in real estate. Only time will tell.

Where do the commercial sectors appear to be heading?
Office, retail and industrial sectors are still moving along with tremendous investor and user interest. The question is, How long can it hold out? The insurance crisis and general economic pressures are starting to strain even the strongest of wills.

According to cycle history, what sectors are predicted as strong markets for today’s investors?
Despite all of the challenges faced by the residential and commercial sectors, real estate in general has proved to be one of the most viable investment vehicles available, and there is no reason to think this will change any time soon. I still promote multifamily investments, due to their ability to quickly offset rising operating costs with increased rents. However, diversifying your investment portfolio is always the best advice.

How do owners and investors utilize real estate cycle information?
Most investors want to buy when the cycle is in the cooling-off phase, or at the bottom of the cycle. Owners want to sell when the cycle is near its peak. For most owners and investors, timing a sale or purchase is a combination of good planning and a little luck.

JOHN W. STONE, CCIM, is principal and director of multifamily investments at Colliers Arnold. He is the past chairman of the Colliers Multi-Family Advisory Group for North America. Reach him at (727) 442-7184 or john.stone@colliers.com.