Introduction

Navigating private real estate (PRE) investment opportunities requires more than just a snapshot of current market conditions—it demands a clear understanding of how PRE performs throughout different economic and market cycles. Armed with a historical perspective, you can position your clients to capitalize on opportunities others might miss when they’re reluctant to invest during challenging times. Let’s explore how a well-rounded view of the real estate cycle can inform your strategy.

Understanding the Real Estate Cycle

Commercial real estate follows a cycle that repeats over time, moving through four distinct phases: recovery, expansion, hypersupply, and recession. Knowing where we are in the cycle—and where we’re heading—is essential for making smart investment decisions.

1. Recovery

In the recovery phase, demand for commercial real estate begins to increase after a downturn, leading to higher occupancy rates and rising rents. This stage is marked by economic growth, job creation, and an uptick in consumer spending—all contributing to growing demand for commercial spaces. Investors often see strong returns during this period as property values rise and new construction kicks off to meet demand​.

Key Drivers: Economic growth, job creation, increased consumer spending.

Opportunities: Investing in new developments or value-add properties can be highly lucrative. Core and core-plus strategies focusing on properties with high tenant retention and stable cash flows are also especially effective during this phase.

    2. Expansion

During expansion, supply and demand are in balance. Occupancy rates are high, rental rates peak, and the market looks optimal—at least for a while. However, this phase can be fleeting as overbuilding begins to exceed demand, signaling the potential for a shift towards oversupply. Investors often start preparing for the next phase, where the market could become less forgiving.

Key Drivers: Balanced supply and demand, high occupancy, peak rents.

Opportunities: This is a great time to consider selling properties at peak values or refinancing to secure favorable terms before the market shifts into hypersupply.

    3. Hypersupply

In the hypersupply phase, new construction outpaces demand, leading to rising vacancies and slowing rental growth. As the market cools, property values may decline, making it a challenging time for some investors.

Key Drivers: Overbuilding, economic slowdown, decreasing demand.

Opportunities: Savvy investors can capitalize on distressed asset sales or properties available at deep discounts. To weather the downturn, it is crucial to focus on high-quality properties with strong tenant profiles​.

    4. Recession

The recession phase is the most challenging, marked by low occupancy rates, falling rents, and financial stress across the market. Property values drop significantly, and new construction projects are put on hold as demand wanes.

Key Drivers: Economic downturn, high vacancy rates, reduced consumer spending.

Opportunities: For long-term investors with strong capital reserves, this phase presents a chance to acquire distressed properties at substantial discounts and to reposition assets for the next recovery phase​.

As you evaluate private real estate investment opportunities for your clients, it’s important to remember that not every property type moves through the cycle simultaneously. Property quality and location also play important roles in determining how a sector will perform at different stages.

A Look at the Impact of Different Economic Conditions

Beyond the market cycle, economic factors such as interest rates, inflation, and overall economic growth play a key role in shaping the performance of private real estate. Understanding how each factor influences PRE helps you craft more resilient strategies for your clients.

Interest Rates

Interest rates directly impact private real estate performance by affecting borrowing costs, property values, and investor returns. Lower rates tend to encourage investment by reducing financing costs, while higher rates can slow down activity and lower property values by increasing borrowing costs.

Key Factors:

• Low Interest Rates: These periods create opportunities to finance new acquisitions or developments, often resulting in higher demand and rising property values.
• High Interest Rates: As borrowing costs rise, investment activity tends to cool due to investors’ decreased appetite to take on new projects, potentially lowering property values.

Opportunities:

• Low Interest Rates: Opportunities arise to lock in favorable rates through refinancing existing properties or investing in new development and acquisitions. This period is great for capitalizing on lower costs that can help enhance property value and returns.
• High Interest Rates: With existing owners of assets facing high interest expense and unable to refinance, well-capitalized investors can take advantage of these distressed opportunities by acquiring properties with long-term growth potential at a discount.

Inflation

Inflation can have a complex effect on private real estate. On the one hand, rising inflation often leads to higher operating costs. On the other hand, PRE is often viewed as a hedge against inflation because property values and rents tend to rise along with overall price increases.

Key Factors:

• High Inflation: Property owners often pass on rising costs to tenants through rent increases, which can help maintain or grow income streams.
• Low Inflation: Stable pricing environments can lead to predictable cash flows and steady property appreciation.

Opportunities:

• High Inflation: Investment management firms focus on creating lease structures with regular rent adjustments, ensuring income keeps pace with rising costs. Every new lease is a new opportunity to refresh these terms.
• Low Inflation: During periods of low inflation it’s best to focus on property types with longer-term leases and stable tenants to secure predictable income streams. Properties in markets with strong demand and fundamentals can still appreciate in value even in low inflation environments​.

Economic Growth

Economic growth is the engine behind demand for commercial spaces, driving occupancy rates and rental income. During times of strong growth, demand for office, retail, industrial, and multifamily properties tends to rise, whereas downturns typically lead to increased vacancies and pressure on rents.

Key Factors:

• Strong Economic Growth: Job creation and increased business activity drive demand for most property types.
• Weak Economic Growth/Recession: Economic slowdowns reduce demand for commercial space, leading to higher vacancies and pressure on rents.

Opportunities:

• Strong Economic Growth: This is the time to invest in high-growth areas and property sectors like multifamily and industrial, which benefit from increased business activity and population growth. 
• Weak Economic Growth/Recession: In downturns, opportunities may arise to acquire undervalued or distressed assets, particularly in secondary markets where pricing may be more favorable. Value-add strategies become key in preparing for the next recovery cycle.

Conclusion

It’s important to note that opportunity can be found in many market conditions. The key is understanding the factors that play a part in performance, and finding the strategy that aligns with your client’s long-term goals. By paying close attention to interest rates, inflation trends, and broader economic conditions, you can better identify opportunities across all phases of the market cycle—opportunities that many others might miss.

Look for portfolio managers who incorporate deep cycle analysis into their strategy, carefully planning acquisitions, lease structures, capital expenditures, and holding periods with an eye on delivering strong risk-adjusted returns, no matter where we are in the market cycle.

Important Disclosures

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. Accordant is not adopting, making a recommendation for or endorsing any investment strategy or particular security or property mentioned in this article. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. All investing is subject to risk, including the possible loss of principal. Accordant Investments, LLC (“Accordant”) cannot guarantee that the information herein is accurate, complete or timely. Past Performance does not guarantee future results.

Accordant has not made any representation or warranty, express or implied, with respect to the fairness, correctness, accuracy, reasonableness or completeness of any of the information contained herein (including but not limited to information obtained from third parties), and they expressly disclaim any responsibility or liability, therefore Accordant does not have any responsibility to update or correct any of the information provided in this article. 

All real estate investments have the potential for value loss during the life of the investment and the sponsor can make no assurances that any investment will achieve its objectives, goals, generate positive returns, or avoid losses.