MINDSET
SUSTAINABLE PATH
Sustainability in Real Estate Investing UNDERSTANDING MARKET CYCLES TO MAINTAIN AND GROW OVER TIME.
by Eddie Wilson
T
he idea of sustainability as applied to real estate con-
Understanding market cycles and investing appropriately is the way to true sustainability. There are four positions in a full market cycle: PHASE 1 RECOVERY Typically a period in the bottom of the trough. This usually is indicat- ed by low occupancies and a mild demand for space. PHASE 2 EXPANSION Typically a period in which the GDP is at normal levels. This period is usu- ally defined by the growing demand for space. Usually at the height of this period you will see the crest of the wave when supply equals demand. PHASE 3 HYPERSUPPLY Typically a period marked by more supply than demand can sustain with rising vacancies. This is where the wave has crested, and it is in its
decline within the market cycle. PHASE 4 RECESSION Typically you are headed toward the bottom and rent growth is close to negative growth. Here, supply always outweighs demand. If you understand where you are in the cycle, you can either invest with a strategy that takes into consideration where you currently are, or you can also invest based on the speculation as to when the market will turn. Many real estate investors are investing based on the feeling for where we have been verses where we are going. I hear phrases such as "Why not? The market is hot." I have a feeling many people said those same words in 2006. •
jures up many thoughts. Categorically, real estate invest- ments are, by definition, sustainable because of the history of the U.S. economy. Appreciation year over year has proven that real estate is truly the only sustainable investment. But real estate investing is not easy. There are two main principles to achieving sustainability that you must be aware of: 1) Real estate should be viewed as a long-term investment not a short-term gain. This theory has always proven successful in the U.S. economy. 2) You must invest with strategy based on our current position in the market cycle. In the short-term, real estate may prove to be sustainable based only on the choices of the owner. For example, even though we are in a very robust economy, I am seeing some real estate businesses still go under. Our industry has a cyclical nature and in that cycle is where you find sustain- ability. Today it is difficult to find inven- tory in the major markets. If you are a private lender, we are seeing massive rate compression and it is harder and harder to see great returns. If you are a new investor and are trying to jump into my hometown market of Atlanta, you would most likely struggle.
Eddie Wilson is CEO of Think Realty, and the American Association of Private Lenders. He is also a Think Realty Resident Expert. Learn more at ThinkRealty.com/Eddie.
MARKET CYCLE QUADRANTS
PHASE 2 EXPANSION
PHASE 3 HYPERSUPPLY
Declining vacancy New construction
Increasing vacancy New construction
Long-Term Occupancy Average
Increasing vacancy No new construction
Declining vacancy No new construction
PHASE 1 RECOVERY
PHASE 4 RECESSION
SOURCE: Mueller, Real Estate Finance, 2016
98 | think realty magazine :: september / october 2019
thinkrealty . com | 99
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