It is no secret that big money can be made by investing in commercial property. What is more, many of the world’s richest investors’ property portfolios rely heavily on it. Many a first-time investor looking to make a fortune in commercial property asks the same question – when is the best time to buy? Demand is usually consistent and long-run investors keep getting richer. Still, there are high and low spikes of the industry that need explaining.
A cyclical nature of values
Recent history has shown us that commercial property values are cyclical in nature. By observing those cycles, market analysts manage to conclude how cost have fluctuated in the past, but also to predict how they will continue to behave in the future. On the other hand, the actual commercial real estate prices are the result of a series of primary factors, including the demand at a given time, general state of the economy, attached interest rates, and the amount of inventory wanting to be put to use.
The four phases of commercial property values will be explained below.
When commercial real estate prices plummet, it becomes virtually impossible to gain the necessary financing for an investment. This leads to the recession phase, during which it is extremely difficult for sellers to turn their vacant lots. In those times, the prices of commercial properties often recede below their normal market worth. As a result, foreclosures on properties present an opportunity to invest for a cheaper price. In the time of recession, investors with abundant capital or those able to access financing can hope for a rich harvest, often enlarging their portfolios significantly. The availability and low prices make this time definitely the best for investing.
As prices start to grow again and the confidence in the market rises, the commercial property enters the recovery phase. Still, in spite of the improving trend, the majority of players are still cautious to invest. Financing becomes more available as the interest rates decline. The owners often take advantage of this phase to renew and improve their properties, hoping to increase their rental income and resale values. In short, if you are looking to invest in commercial real estate, the recovery phase is another excellent period.
Eventually, the number of interested investors grows and the market starts to expand, leading to what is known as the expansion phase. The property values skyrocket and in many cases reach their spike values. High demands cause prices to rise even further. As commercial real estate news reach the headlines of global financial press, financing companies throw money at investors hoping to generate income. This is the worst time to think about buying or investing, but the best time to sell.
After the expansion phase, commercial property prices start to deflate and vacancies once again begin to resurge. The burst phase is caused by the rapid expansion in the previous stage in which market reaches an unsustainable level. The saturation of the market by both investors and properties turns many players away. The property value continues to decline and supply surpasses demand. The advice whether or not to sell and buy depends from case to case, with opportunities largely depending on their geographical area.
Looking from above, the commercial property business is a simple one. You should buy during a recession phase in order to sell in the expansion phase. Still, every other type of investment works this way. Every year an army of newcomers learns the hard way that there is no such thing as a 100% safe investment. Much success depends on dedicated research and commitment, as well as listening to those who made their fortune in this industry.
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