Each year, Integra Realty Resources releases its Viewpoint report, which tracks major trends and development in the commercial real estate industry. One of the data points in this report that is relevant to you as a multifamily investor is their categorization of the major cities into their respective stages in the market cycle. That is, which markets are expanding, which are recovering, which are experiencing hypersupply, and which are in a recession.
Based on the most recent multifamily market data, there is an approximate 50/50 split in markets deemed in expansion or recovery (50.8%) versus those in recession or hypersupply (49.2%).
According to IRR, “There appears to be an intriguing disconnect between the elements that renters themselves and investors are prioritizing in the stress test that is this pandemic. For while market cycle indicators seem to reflect advantage accruing to the least expensive rental markets, the cap rate data show a preference for urban properties over suburban assets and Class A over Class B apartments — and this is true across regions, as well as being consistent in the discount rate and reversion rate pricing metrics.”
Before showing you which stage in the market cycle your target market is in, let’s first define the four stages:
| Market Cycle | Expansion | Hypersupply | Recession | Recovery |
| Vacancy Rates | Decreasing | Increasing | Increasing | Decreasing |
| New Construction | Moderate/High | Moderate/High | Moderate/Low | Low |
| Absorption | High | Low/Negative | Low | Moderate |
| Employment Growth | Moderate/High | Moderate/Low | Low/Negative | Low/Moderate |
| Rental Rate Growth | Medium/High | Medium/Low | Low/Negative | Negative/Low |
These four categories are a part of a cycle, which goes like this: recovery to expansion to hypersupply to recession back to recovery:
IRR also broke each of these four categories into three sub-groups, which for the purpose of this blog post I will label as 1, 2, and 3. Using expansion as the example, markets in the 1 subgroup have the strongest expansion market factors (i.e., the vacancy rate is decreasing the most, new construction is highest, absorption is highest, employment growth is highest, and rental rate growth is highest), whereas markets in the 3 subgroup still meet the expansion criteria but not as much as the 1 subgroup (i.e., vacancy decreasing at a slower rate, moderate new construction, high absorption, moderate employment growth, medium rental rate growth).
Since this is a cycle, markets in subgroup 1 are closer to the previous market stage, and markets in subgroup 3 are closer to the next market stage. So in reality, the market cycle looks more like this:
That said, here are the market cycle categorizations for all of the major cities/markets:
Expansion 1
Expansion 2
Expansion 3
Hypersupply 1
Hypersupply 2
Hypersupply 3
Recession 1
Recession 2
Recession 3
Recovery 1
Recovery 2
Recovery 3
Each of these markets is categorized based on the following factors: vacancy rates, new construction, absorption, employment growth, and rental rate growth trends. So, one thing to think about is if you can find a submarket or neighborhood within one of the hypersupply or recession markets that have expansion or recovery factors. In other words, just because the overall market isn’t in the expansion or recovery phase doesn’t mean that you should abandon that market nor that you won’t be able to find great investment opportunities. In fact, you’ll likely be able to find more deals and have less competition when you’re not pursuing expansion markets.
Additionally, if your market is in the 1 or 3 subgroups, you’ll want to monitor those market factors to see if the market has moved to another stage. This would be a good thing if your market moved from hypersupply 1 to expansion 3, and it would be concerning if your market moved from expansion 3 to hypersupply 1.
Lastly, just because your market is in the expansion phase doesn’t mean that every deal is a good deal. You should still complete a full underwriting analysis based on your business plan and perform the proper due diligence on all prospective deals.
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Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.