What West Windsor Past Real Estate Construction Cycles Tell Us About The Outlook Today?
In the past recent years real estate has gone through many boom cycles. The working of these cycles has inevitably affected the performance of REITs through their impact on vacancy rates, rents and property valuations. Some particular features are common to nearly all these cycles including relaxation of risk standards and overbuilding by west Windsor real estate builders, investors and lenders. With similarities there are also some differences across these cycles as well.
In order to put current market conditions into historical context it is better to know about the past cycles. Some of the particular features of current cycle have raised concern such as length of the cycle, sustained rise in property prices and steady increase in construction. However, other parts of the puzzle do not fit with a sector being in danger of overheating. They include factors like a level of construction that is well below average in relation to increases in overall GDP as well as the modest debt growth and a muted rise in overall influence.
One of the most highly cyclical parts of the economy is commercial construction activity. Since the end of WWII there have been seven different periods where real estate construction fell down more than 10 % from a cyclical peak along with three other downturns with somewhat shallower declines. During a typical boom the construction rise about 40 % along with the larger increase during the longer expansions in 1960s and 1970s. During the post war periods the average length of boom cycles has been slightly less than five years. The declines in construction were steep as the bust cycles following these booms have been shorter. The average construction of new homes west Windsor downturn lasted for less than two years prior reaching to the bottom. However, the real construction activity declined by 16 % on average during these short periods. At the average peak of construction cycle, construction as a share of GDP increased to 4 % and bottomed out at an average of 3.3 % of GDP.
In the macro economy downturns in real estate cycles often coincide with recessions but there have been exceptions. In the early 1980s the construction reached at its peak share relative to GDP which results surplus of commercial properties, especially office buildings, led to 17 % plummet in construction between 1985 and 1987 even as the overall economy continued to expand. Contrariwise, the recessions of 1953, 1954 and 1960 were not escorted by a decline in construction activity. The present extension in construction of new homes in west Windsor NJ has continued for over six years and it is already longer than the average postwar boom. From its low point in 2011 real estate construction activity has increased by 38.5 %, matching the average over the prior cycles. In terms of calendar length and the increase in activity, the present cycle is looking rather mature than prior ones.
The types of properties can affect the construction trends and the aggregate figures on construction activity. As compared to the data for total construction, information on construction activity by particular property types is more limited. From broad macro trends, no property type is completely immune and the peaks and valleys in construction of homes for sale in west Windsor NJ, lodging, health care and multifamily properties follow a similar historical pattern over the past half-century. However, some episodes do stand out for specific property types. In the 1970s and 1980s at the time of baby boom generation entry into the apartment markets caused a surge in multifamily construction.
Let’s have a look now at current market; the news so far has been shocking as construction activity has turned down in recent months both in terms of absolute dollars spent and also as a percentage of GDP. In August 2017 the construction was lower by 2.6 % than 2016. The construction has slowed among retail, office, health care, lodging and multifamily properties. When the economy is still expanding it is unusual to see a deceleration of this magnitude and also at the time when construction share of GDP is below its long-run average.
The most common explanation for pullback is that the developers now are more cautious than before about starting new projects. The share price of listed REITs can serve as an indication about the future conditions in commercial real estate markets which helps damp speculative boom cycles compared to those that happened in the past. Certainly, as the REITs industry grew the construction as a share of GDP topped out at successively lower peaks.
Construction activity and construction mortgage often go hands in hand. To support investment and construction debt finance is important but excessive loaning may cause overheating. The decline in commercial mortgage debt is outstanding when longer and deeper during the 1990 to 1995 rather than during the 2009 to 2013. This in early 1990s reflects the severity of the capital crisis in commercial real estate which among others effects the most and led to the creation of a new generation of REITs to raise capital for the sector. It is better to keep in mind that the financial crisis of 2008–2009 initiated in subprime residential mortgages not the commercial property markets.