Overview:
The heart of the buy-hold-sell decision is recognizing there are two real estate market cycles that interact with each other. The first is the fundamentals cycle, including metrics such as supply and demand, occupancy rates, and rent growth. The second is the capital markets cycle —pricing responds to changes in fundamentals, expectations of future conditions, and changes in the cost of capital.
Although fundamentals do not always lead pricing, this was the case in the major downturns of the 1990s and 2008-2010. Initial signs from Hines' research indicate that the current cycle may play out that way as well, allowing investors to monitor the trajectory of fundamentals to anticipate pricing trends by sector.
Opportunities to harvest and redeploy capital arise not simply when there are two distinct cycles but when these are asynchronous across sectors.
For example, occupancy in one sector (or region or submarket, etc.) can change independent of others, or pricing declines can be more severe in one sector or market than another. Identifying these anomalies can help investors find potentially attractive investments.
