Now you might not all be fans of The Apprentice, but certainly you can appreciate all that The Donald has done for Commercial Real Estate! If you’re ever feeling like you need a motivational read, pick up one of Donald Trump’s books. I like “The Art of the Deal” and I also like “Trump - Strategies for Real Estate: Billionaire Lessons for the Small Investor“ which was written by Trump’s long time attorney, George Ross.
They said all markets have phases that they go through — some phases favor the buyer and others favor the seller. Let’s take a look at the phases in real estate market and see what we can expect.
The the first phase is the Expansion Phase. This is a time of prosperity and market growth as the name implies. People are buying, and building, and selling – the money flows freely in many directions. What eventually happens however, is that the market becomes over-built. So many people see the incredible profits being made, they all jump on the building band-wagon at once, causing huge numbers of unsold inventory to come online at the same time triggering the next phase which is the Decline Phase. The economy may begin to slow, unemployment creeps up and property movement becomes stagnant - seller’s aren’t selling, buyer’s aren’t buying. Finally, the market moves into recovery, the over-building is becoming absorbed, and the flow begins again. This is called the Absorption Phase and heralds the beginning of recovery.
Someone like George Ross, who is 80 years old, has seen markets go through these phases many times over the years and its always the same — like winter, spring, summer and fall. The phases come in exactly the same order over and over again. The only difference is how long each phase can last. A complete cycle of Expansion, Decline and Absorption can last anywhere from 8 to 12 years — no exact science here!
He is very quick to point out that The Donald loves being in the Decline and beginning of the Absorption Phases as those are truly the market in which you can make the most money.
If you read either of the books I mentioned above, you’ll read the story of when Trump bought one of his first buildings in a horrible part of town, in an economy in which New York City was in dire straits financially. The entire purchase of the Commodore Hotel was literally pieced together one tiny step at a time. Donald was able to purchase the old hotel in 1975 for $1 million! Today it is the Grand Hyatt Hotel at Grand Central Station — one of the most luxurious Hyatts in the world and worth hundreds of millions! It’s a great story with all kinds of twists and turns, but the point is this:
At the time, the real estate market in New York City was in serious Decline, which makes for a buyer’s market. The old hotel was purchased for only $1M by 27 year old Trump and he’s turned it into a thing of beauty. So Trump’s motto is to buy in the Decline Phase and during the first part of the Absorption Phase, then fix the property up and sell it toward the end of the Absorption Phase into the Expansion Phase.
Another thing to keep in mind is that one area of the country may be in a very different phase from another. Let’s take a couple of examples. Phoenix, Las Vegas, Miami and the like were in an Expansion Phase just a few short months ago. But what happened is that over-building flooded the market with excess inventory and building came to a halt. When building shuts down, many jobs are impacted. Construction workers migrate to where they can find work, construction wholesalers and retailers lay off workers, the service industries are impacted by people tightening their belts — its a chain reaction that causes the Decline Stage to trigger. Now Phoenix, Las Vegas, Miami and other areas have inventory just sitting.
On the other hand, places like Dallas, Atlanta, Denver, and Chattanooga to name a few, were in the Declining Phase several years ago. The excess inventory in those areas has been used. Over time the population continues to expand, people begin to move in and eventually, the supply of housing has reached equilibrium with demand. Now building starts are beginning to increase, and those areas of the country are in the Absorption Phase. This is a GREAT time to buy in these areas as demand is picking up and when demand exceeds supply the advantage shifts from buyer to seller. Right now, buyers who are savvy enough to read the signs in the market phase can end up making large profits very quickly!
This is an excellent time to be buying in MANY areas of the country — find areas where the over-supply of housing is declining, where job growth is increases, where existing properties are being rehabbed, where rents are beginning to rise. These are the market areas that are ready to move into the Absorption Phase — buy with both hands!!!
So take some time and find out what phase your area is in and plan accordingly. Also, find an area that is moving into the Absorption phase and network with the broker's in that area, because good things are about to happen.
Happy scouting. Go to http://nacreps.org to become a commercial property scout.
