The Current Growth Phase Of The Real Estate Market
The current growth phase is proving to be the Tom Brady of real estate market cycles, and it appears that there is still plenty more power to keep it going. Since hitting bottom in 2009, the current cycle is now entering year eight of its upward trajectory. Despite signs that growth is slowing, or even flat in some cases, the common view is that this prolonged growth cycle will stay the course for at least another year—if not longer.
The real estate cycle is stretching out along with the current period of economic growth. Many real estate executives believe the prolonged growth is due to the longer-than-normal rebound from the 2008-2009 financial collapse. Employment growth, for example, started out slow and has risen gradually. Low wage growth has also kept inflation in check.
The lingering question among real estate professionals is will the continued growth translate to demand for real estate space?
Outlook on Cap Rates
Another near-term question is how higher interest rates will impact pricing and cap rates, especially in this mature stage of the real estate cycle. Given the rise in interest rates that has already occurred, cap rates have likely reached their low point. At best, cap rates will be flat or slightly higher in most markets this year due to higher capital costs.
Going forward, the key to determining what happens with cap rates in individual metros and property sectors is how deep the bidder pool is and whether there continues to be strong demand from foreign buyers.