What Are the Four Phases of the Real Estate Cycle?

Commercial real estate, much like the broader economy, moves in cycles. Understanding these cycles is important for investors, since opportunities, risks, and strategies typically shift with them. Traditionally, there are four phases:

• Recovery

• Expansion

• Hyper Supply

• Recession

These phases usually follow a continuous wave pattern, with the end of one cycle leading back into the beginning of the next.

This diagram is for illustrative purposes only.

The diagram above shows a single cycle. The end of the recession phase connects to the beginning of the recovery phase, forming a repeating wave.

Special thanks to Dr. Glenn Mueller of the University of Denver for his thought leadership in this field. Investors who want to go deeper should explore his Market Cycle Monitor*, a widely referenced resource for tracking market cycles.

Why Do Real Estate Cycles Matter?

Understanding where the market sits within the cycle can help investors identify investment opportunities and risks, particularly when phases are on the verge of shifting.

One of the unique aspects of commercial real estate is that investors can find potential opportunities in all four phases. Even a phase like “recession” — while not a pretty word — can present compelling opportunities. Still, knowing whether the market is climbing toward a peak or sliding toward a low may shape:

• Investment Strategy

• Holding Periods and Exit Timing

• Return Expectations

• Income and Appreciation Performance

• Timing of Capital Improvements

Below, we’ll outline each of the four phases and highlight the investment strategies that more commonly align with them.

Phase One: Recovery

The recovery phase is the bottom of the trough. Occupancy is low, demand is weak, and leasing velocity is minimal. New construction is rare, and rent growth is flat or still negative. Late in recovery, growth may turn positive but often lags inflation. Because conditions still feel recessionary, identifying the true beginning of recovery can be difficult.

General Strategies

• Opportunistic: Investors who move early may acquire bargain-priced properties in distress and could seek to reposition them as recovery takes hold. Holding periods often run two to four years, usually with a business plan that intends to sell during expansion once the property achieves a core-plus or value-add profile.

• Value-Add: These strategies often require patience. While early recovery may offer attractive pricing, lease-up momentum often doesn’t materialize until expansion, so business plans may require contingencies.

• Core: Recovery may be a profitable entry point for core assets, particularly those with significant lease rollover in the next two to four years. Buying a property in a prime location may allow investors to capture the strong rent growth of the next cycle through renewals and fresh lease-ups. By expansion, the property may be in a position for refinancing or sale.

Phase Two: Expansion

During the expansion phase, the market is on the upswing. Demand for space is growing, GDP has returned to normal levels, and job growth is generally strong. Occupancies improve and rents rise — often reaching levels that could justify new construction, and in some tight markets, climbing at relatively quick speed. Development activity returns, and at the crest of the wave, supply and demand usually briefly balance in equilibrium.

General Strategies

• Development: This has historically been the prime window to develop or redevelop. Strong demand and leasing momentum usually helps projects stabilize quickly, often at market-high rents.

• Core-Plus: Investors seeking relatively lower risk may acquire well-leased properties and could benefit from high tenant retention along with continued rent growth.

• Value-Add: Expansion can be a sweet spot for value-add plays. Investors may acquire underperforming properties at discounts, invest in capital improvements, and ride strong absorption as repositioned assets lease up quickly. Often these properties can then be refinanced or sold, often at full value.

• Opportunistic: While rarer in this phase, neglected or undercapitalized assets may still exist. With the right repositioning plan, they may present an interesting opportunity , though holding periods are historically shorter.

• Phase Three: Hypersupply

The balance between supply and demand in the expansion phase often tips into excess. Oversupply can result from overbuilding or from a pullback in demand as the economy shifts. Hypersupply is usually marked by rising vacancies, with rent growth typically still positive but slowing.

General Strategies

• Core: Some investors may choose to sell ahead of anticipated declines in property values, while others take a defensive approach. Holding a core property with high occupancy, strong credit tenants, and long average lease terms may be a way to ride out the downturn, particularly if lease rollover is timed to coincide with the next expansion.

• Opportunistic: In hypersupply, opportunism is often about pricing rather than distress. Owners unprepared to weather the coming recession may sell at discounts approaching recession levels. Well-capitalized buyers may step in with the intent to acquire quality assets already priced with the downturn in mind, and hold them for the next cycle.

Phase Four: Recession

Supply outweighs demand in the recession phase, usually driving vacancies higher. Rent growth turns negative or lags inflation, and operators often rely on concessions and rent reductions to help attract or retain tenants.

General Strategies

• Opportunistic: Recession can be a time to buy distressed assets at relatively steep discounts to replacement cost. Buyers may often find opportunities through special servicers and lender foreclosures — commonly referred to as “REOs.” This type of strategy may require patience and capital, with the plan to reposition once recovery begins and exit during late recovery or early expansion.

Typical Real Estate Cycle Timing

Once you understand the four phases, it’s important to recognize that cycles don’t move uniformly.

First, phases don’t usually occur in equal lengths. For example, recovery can be brief before tipping into expansion, or it can drag on for years. Expansion phases are equally hard to predict in duration. The length of a full cycle varies as well.

Second, cycles may vary by geography and/or asset class. Gateway markets often lead the turn from recession to recovery, with secondary and tertiary markets usually following later. Different asset classes also generally move at different speeds. For instance, within the same metro, suburban offices may still be in recovery while urban offices edge toward hypersupply.

Because of these differences, applying the four phases to a specific property may require layering in both geography and property type to help determine where that asset actually sits on the cycle wave.

These variations and factors help illustrate the importance of why building a diverse real estate portfolio may help balance it across cycles. Crowd Street has historically offered its members access to opportunities across property types and markets.

For more information, check out our resource center, where we publish regularly about commercial real estate and other private market assets.

* This article contains links to third-party websites. Such links are only for the convenience of the viewer and Crowd Street or its affiliates do not recommend or endorse the contents of the third-party sites.

{{This article should not be construed as an investment recommendation or advice, or as an offer to sell, or the solicitation of an offer to buy an investment. Offers to sell, or the solicitation of offers to buy, can only be made through official offering documents, such as a subscription agreement and a private placement memorandum, that are generally produced by the Sponsor of the investment opportunity (the “Offering Materials”). Before making an investment decision, potential investors should carefully review the Offering Materials. Investors should consult with a financial advisor, attorney, accountant, and any other professional that can help in understanding and assessing the risks associated with any investment opportunity. }}