What Can Past Real Estate Construction Cycles Tell Us About the Outlook For REITs Today?
October 2017 | Calvin Schnure | REIT.com
Commercial real estate has gone through many boom/bust cycles in the past. These cycles have inevitably affected the performance of REITs through their impact on rents, vacancy rates and property valuations. There are certain features that are common to nearly all these cycles, including overbuilding and a relaxation of risk standards by builders, lenders and investors. There are also differences across these cycles, however, much as Tolstoy wrote in Anna Karenina, “each unhappy family is unhappy in its own way.”
Let’s take a deeper look at past cycles in commercial real estate, in order to put current market conditions into a historical context. Certain features of the current cycle have raised concerns, including the length of the cycle, the steady increase in construction and sustained rise in property prices. Other parts of the picture, however, do not fit with a sector being in danger of overheating. These factors include a level of construction that is well below average in relation to increases in overall GDP, as well as modest debt growth and a muted rise in overall leverage.
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