Real Estate Market Cycles, Transformation Forces and Structural Change

Executive Summary. Effective real estate investing depends to a very large extent on understanding real estate market cycles, transformation forces and structural changes. The essence of real estate portfolio management is crafting strategies that reflect insights into and the appropriate differentiation between (1) the cyclic phenomena (that may be expected to recur, albeit in perhaps different forms); (2) forces that transform society's relationship to place and space; and (3) structural change that is both different from what has been before and also long-lived and profound in impact. Differentiating market cycles, transformation forces and structural change from trends that may reflect a nonrecurring, short-lived pattern of preference or activity is basic to effective real estate portfolio management.The real estate market ultimately is influenced by what happens in the overall economy, for it is the space-using needs of businesses, households and community services that create the demand for real estate. Understanding real estate cycles requires consideration of the cycles that occur in the capital markets broadly and the interaction of real estate and the broad capital markets specifically. Understanding both the new economy and the new real estate market is fundamental to addressing the relevance of the real estate market cycle.Effective real estate portfolio management is an ongoing process of monitoring markets to design investing strategies that distinguish between first-order change within the system and second-order change of the system. The challenge and opportunity are to translate the implications of market cycles and trends in the context of fundamental change that transforms property performance into operational models to forecast estimates of rents, vacancies, operating expenses, discount rates, and ultimately into calculations of present value and rates of return. Understanding and applying the understanding of market cycles, change and trends will be of increasing importance to institutional investors in future years.