Evolving Theories in Development: OverBuilding?… or Just …Building?

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Evolving Theories in Development: OverBuilding?… or Just …Building?

You don’t have to go far to find a conversation about the state of the current market. This is especially true if you find yourself (lucky enough) to work in the housing, real estate, development, investment sector of the world. People are always, understandably, concerned with where their money is going and the likely trajectory of growth (or decline) for their investment.

While it’s safe to say that much of the country has recovered from the great recession, it seems nearly everyone we cross paths with, every book featured on the shelf, every banker with the potential to lend to our company, every reporter, and every fellow developer waits in anticipation of the next recession. This state of watching, wondering, predicting and preparing has subsisted since the recovery started in 2012 and seems to keep all on edge.

Suffice to say the great recession and all that came with it in and around 2008 was traumatic for the country.  It was traumatic for people and families.  As a result, that traumatic event and all of the fallout from it, have created a complicated fear in real estate. A recent article about Carl Dranoff, candidly quotes him as saying, “Real estate is a cyclical business”—  And he is absolutely right.

The trend in this business since the early 1900’s has loosly followed the pattern of:

1) Recession = Lowering Interest Rates

2) Recovery = Looser lending requirements = # loans increase = Increased construction activity === Market cools =

3) Overbuilding = higher supply = recession.

So, there exists a common misconception that overbuilding is at play currently.  While one can concede the point that yes, there is a tremendous amount of development right now, a few important variables should be considered before labeling it “over” versus just building.

1) The recession essentially halted construction.  There were very few new units coming on the market during the recession. Consequently, after a 4-5 year drought there is tremendous demand. No one complains when it rains in the desert.

2) Recovery and building are directly proportional to the availability of capital.  More lending equals more construction which leads to us to the next and possibly the most important variable in to consider.

3) Banks are so worried about another recession that getting a loan is difficult. We learned from the mistakes of the past and due to that learning curve banks are under tremendous oversight. Oversight that makes this surge of lending that allows for the surge of building to be much different from the unregulated lending that took place prior to the recession.

So what does this all really mean?

To Raza Properties:  This means we aren’t passively riding the wave of historical real estate cycles.  We are informed, equipped, and empowered by the experience of the past. What do these novel variables mentioned above add to the real estate cycle?  One of the things that can be said is that it adds time across the board, lengthening each stage of the cycle.  But ultimately it is true, only time will tell –and that is the risk inherent in real estate, development, and investment our hope is that hard work and high quality will offer as security through uncertainty.


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