When is the Best Time to Buy or Sell Commercial Real Estate?
Are you in the market for buying or selling a commercial property? If so, when is the best time to do so? There’s no easy answer to this question, because there are so many variables you need to consider.
Successful buying or selling commercial real estate depends on several factors, including the market conditions, which are largely impacted by the health of the economy, and the type of property you are interested in selling or buying, just to name a couple of the most important ones.
However, there are a few things you can keep in mind to help you make the most informed decision possible.
Factors to Consider When Buying or Selling Commercial Property
If you're looking to sell, it's generally recommended that you do so during times of economic growth. This is when the market is strong and prices are high, and commercial real estate prices tend to go up during periods of expansion. This will ensure you get a good return on your investment.
On the other hand, if you're looking to buy, it's generally recommended that you do so during times of economic recession, or at least when the market has cooled off a bit. This is because commercial real estate prices tend to go down during periods of recession. Keep in mind, you may find it more difficult to get your purchase financed if there’s a recession going on.
One of the most important factors to consider if you’re thinking about buying or selling commercial property is the current phase of commercial real estate. Much like the moon moves through several very predictable phases, so does commercial real estate.
This predictable life cycle of distinct phases consists of Recovery, Expansion, Hypersupply and Recession.
Commercial Real Estate Life Cycle – Recovery Phase
The recovery phase in commercial real estate is when the market has recovered from a previous downturn. In order to begin the recovery phase, there must be an underlying trend of increased demand. Once this demand is established, it becomes easier for buyers and sellers to come to agreement on prices, and the market can stabilize.
For the market to reach full recovery, certain factors must come into play. These factors may include job growth, population growth, construction activity and consumer spending. Once these conditions are in place, investors and developers will begin returning to the market in search of opportunities.
The recovery phase in commercial real estate is important because it helps stabilize prices and provide an opportunity for investors who may have been waiting for the right moment.
Commercial Real Estate Life Cycle – Expansion Phase
As the market enters the expansion phase, you’ll begin to see a demand growing for more space. Typically, jobs and the GDP also show signs of growth. Other signs include increasing rents and improvement in occupancy rates.
New construction is now justified and it’s during this expansion phase that commercial real estate development returns. As the expansion phase reaches a peak, supply and demand will reach an equilibrium.
Commercial Real Estate Life Cycle – Hypersupply Phase
The hypersupply phase often ushers in significant price declines in the commercial real estate market. This phase occurs when there is an over-abundance of properties and the current market is unable to support them.
When supply far exceeds demand, it drives prices down and makes finding exceptional deals increasingly more difficult. This excess leads to declining prices and can result in bidding wars.
The good news is that eventually, the commercial real estate market will self-adjust. Property demand will increase and that will help balance out supply and demand. Unfortunately, hypersupply will ultimately lead back into a recession phase.
Commercial Real Estate Life Cycle – Recession Phase
The recession phase typically affects sales, occupancy, and investment values in commercial real estate. Sales tend to be slowest during the recession phase because businesses are less likely to purchase property.
Occupancy rates also decline as businesses choose to close down or consolidate rather than risk investing in a property that may not generate profits. Investment values also take a hit, as investors become more cautious about pouring money into a sector that is seen as increasingly risky.
The good news is that once the recession ends, sales, occupancy, and investment values usually rebound quickly as the cycle continues into the next Recovery Phase.
Conclusion
The bottom line is this – in most cases, the best time to buy commercial property is right now…if you can afford it. You really don’t need to wait until prices fall, thinking you’ll get a “better deal”. Of course, the location and condition of the property are major considerations when deciding whether you should purchase or not.
However, if it makes sense to buy a piece of property, and it’s affordable for you, then you should buy it.
On the other hand, the best time to sell commercial property depends on a number of factors, including your current financial situation, which often plays the biggest role in the decision of when to sell.
Whether you’re considering investing in or selling off commercial real estate, it will always be in your best interest to consult with a professional, like the team at Maddox Companies. Buying or selling commercial real estate is often a very complex process, and you need professional guidance to help save you as much time and money as possible.