The Real Estate Cycle
as defined by the CCIM (Certified Commercial Investment Member) Institute

RECESSION: In this phase, sales activity is very slow, while prices and rents continue to decline. Decreases in property value vary by property type and location. Some areas may be hit severely by an economic downturn while other areas may only be slightly affected. Whatever the impact, the rate of decline begins to decrease and eventually bottoms out. Almost no new construction occurs.

RECOVERY: After a depression, the market stabilizes, prices begin to recover, and excess space begins to be absorbed. This process continues, and the vacancy rate begins to approach equilibrium, where supply equals demand. Recovery is usually caused by one of two factors:

1. 1. External Shock. A development outside of real estate, such as a revision of tax laws, may cause the recovery.
2. Passage of Time. The real estate cycle runs its normal course. After a recession or depression, very little or no new construction may occur for several months or years. Eventually, general economic activity begins to increase the demand for space, excess space is absorbed, and financing becomes available on favorable terms.

EXPANSION: During the expansion phase, space becomes difficult to find, rents rise rapidly toward new construction levels, and prices continue to increase. Construction activity increase dramatically, but vacancy rates remain at normal levels or lower. This phase may last for a few months or for years, depending on the activity of system components, national economic trends, shifts in basic employment,, or changes in social relationships (such as family size or space needed per worker).

OVERSUPPY: At some point in the expansion phase, the market may become overbuilt. Builders and lenders may not perceive that the market is saturated. They continue to pump capital and new buildings into the market or an external shock occurs such as an unfavorable tax law or a general economic recession. In this phase, prices begin to drop, sales activity begins to slow, and vacancies begin to increase. As these changes occur, they tend to gather momentum, and prices and sales activity begin to slow even more. New construction continues for a while in this phase for two major reasons:

1. Builders, developers, or lenders do not detect the change occurring in the market.
2. Some projects in the pipeline cannot be stopped. When these projects are completed, however, new developments and construction quickly come to a halt.