Terry Painter, a Forbes contributor, put together an overview of how to evaluate commercial vs. residential properties during a recession and the phases of the real estate cycle. Here are the key points:
Commercial vs. Residential: In a recession, residential values react to an over supply and a lack of demand which is a product of homeowners losing their jobs and putting their house up for sale all at once. When they start to sell, the lower sales comparables lead to lower residential valuations. Commercial is different in that during a recession, NOI decreases due to lower collections and decreasing occupancy which in turn, lowers valuations.
Recession Phase: At the beginning, buyers hang on to pre-recession values initially and after about 4 months, they start facing realty and start selling for distressed pricing. Terry believes 7 months in is the perfect time to buy when foreclosures are at a peak.
Recovery Phase: Values start to increase, unemployment drops, and rental rates/vacancies level off.
Expansion: A seller’s market exists when low vacancy, higher rental prices, and construction begins. There are still good deals out there but one needs to look harder.
The Hyper Supply Phase: A period marked by many units available, rents on the decline but sales prices are remaining at a high level. This is the worst time to buy.