2. Market Cycles Flashcards
How long is the typical commercial market cycle?
7-13 years
What should be done before construction to negate market cycle risks?
Pre-leasing/pre-selling
What are the 2 sets of factors influencing the cycle?
Economics and supply/demand market characteristics
What leads to oversupply for real demand?
Industry wide loss of caution and the human factor
When was the peak and trough in Auckland office rents?
Peak in 1988
Trough in 1992
What 4 things happen in the stage where rents rise and what is the next stage?
- Developer submits planning with demand increasing during the time lag and construction, further increasing rents
- 2nd wave development starts (copycat, lower standard)
- 1st wave completes
- Real tenant market becomes evident - speculator tenants seek real tenants
Next - rents stabilise
What 4 things happen when rents stabilise and what is the next stage?
- Construction activities decline
- 2nd wave completes
- Real tenants occupy and speculator tenants look for subtenants
- Increasing vacancy
Next - rents stagnate/fall
What 2 things happen when rents stagnate/fall and what is the next stage?
- Oversupply of buildings gradually taken up
- Demand starts to accumulate
Next - risk rents and prices
How does home residential market cycles differ from commercial?
Shorter - around 6-8 year cycle
Value stagnates instead of decreasing
What are copycat developers?
Developers that see previous developers making profit so decide to do the same thing; usually lesser quality and more speculative approach
What is the sale value of a development?
1 year’s revenue stream / capitalisation rate
What is the rule of thumb amount for good pre-leasing and what is the benefit of it?
70%. Prevents drop in profit if rents decrease
